FHA loan employment requirements are designed to ensure that borrowers can pay their mortgages. The FHA is a government agency backed mortgage program that provides an avenue for many people to buy homes with low income that might not otherwise qualify for home loans. If you’re interested in applying for this loan, you should know about these requirements:
Employment Rules For FHA Loans
FHA mortgage employment rules are one of the most important factors when applying for home loans. FHA home loan standards require that you have been employed with your current job for at least 2 years.
In addition, the FHA minimums requirements for how long you must have been employed by a company to qualify for an FHA mortgage loan. These lender standards vary based on whether or not your employer is public or private. However, depending on the industry and position, it will be anywhere from 90 days up to 24 months.
Minimum Employment Standards
The Federal Housing Administration’s employment standards are in its FHA loan handbook, HUD 4000.1. It includes the following requirement for verifying a borrower’s employment history:
Mortgagors and mortgage servicers must not acknowledge or use records. This includes the borrower’s income, assets, credit score, or employment of borrowers transferred through equipment held by unidentified parties who owe a commitment to the short term loan services.
Additionally, the lender cannot take any third-party validations managed by the borrower or interested groups. This is essential to remember when applying for a mortgage via the FHA.
FHA lenders need you to disclose your employment record with contact information. You can give them the means to contact your previous employers. However, they cannot provide that information except a standard reference you offer, which they will verify with tax records.
Documenting Employment History
The FHA loan rules for documenting employment records are the same as conventional loans, except for how long the borrower has worked at a job.
As a general rule, you must provide your lender with:
- A pay stub or W-2 form from each workplace you’ve been employed in the past two years; and
- For current employers, an offer letter stating your expected annual income or proof of current salary.
In addition, HUD 4000.1 requires the lender that the mortgagee must document the income of the borrower and employment record. Also, they should confirm the accuracy of the amounts of income being reported. Finally, decide if the income can be regarded as effective income.
According to the FHA loan rules for employment length, the lender must document the borrower’s most recent two years of work history. This is done by obtaining a copy of their pay stubs, W-2 forms, and other income verification documents.
Suppose the borrower has changed jobs more than three times in the past 12 months or has changed careers. In that case, the mortgage lender should perform further actions to confirm and record the stability of the borrower’s employment income.
Moreover, your mortgage lender may need extra documentation, such as tax records and other paperwork. This is to prove some or all the information given. The lender standards at each financial institution can vary, so you should speak with a loan officer to know more about the specific requirements of your chosen financial institution.
Employment Requirements For FHA Loan
The FHA loan employment requirements can vary depending on your employment type. The following outlines what’s required for each type of employment:
The lender will need to know your standard hours and pay rate if you work hourly. This is because FHA loans are based on a calculation called compensation.
On the other hand, workers with variable hours often need a 2-year history to qualify for a mortgage. The FHA requires mortgage lenders to calculate a 2-year average of earnings. This is obvious in borrowers who are in the retail industry. They may have more time during the holiday season and shorter during quiet times. Instead of qualifying them on either period, the mortgage lender utilizes the 2-year average.
However, let’s say you obtained a pay raise last year. Then you might be able to qualify for a bigger loan and loan modification. But if you haven’t, the mortgage lender may use the 12-month record. In that case, you’ll need VOE (verification of employment) and your pay stubs over the previous year to prove that you have received a raise.
Part-time employment is acceptable for FHA Loans, but you must demonstrate to the lender that your part-time work history is consistent and continuous. It may be risky if a lender sees gaps in employment in your part-time work history. The best way to prove consistency and continuity is by demonstrating a 2-year history of working at the same job.
Part-time work can be riskier than full-time employment because there’s no guarantee of continuity with one’s own business or seasonal jobs. While full-time employees are more likely to be employed with the same job and company over their lifetime. Part-timers will switch jobs frequently, making them riskier regarding financing.
There are some additional FHA loan employment requirements for self-employed borrowers. You must have a minimum of one year of history in your current business, and you should also be able to demonstrate a record in the industry. For instance, suppose you’re opening up a new restaurant. In that case, your lender will want to know that you have some experience running restaurants before they’ll let you borrow the money. The same line goes for other types of businesses. If yours is something new, make sure that the company and its owner(s) have some experience with similar ventures.
Do You Need A 2-Year Employment History For FHA Loans?
Yes. FHA loan employment requirements require employment history, but it doesn’t mean you have to work at the same job. The lender wants to see that you have been working consistently for the last two years and have continued employment into the future. If there was a period of unemployment during this time. Then it’s alright as long as it was brief and not due to disciplinary or performance issues on your part. You can also show employment gaps through self employment income or other payment types. These may be commissions or bonuses from your employer or proof of payday loan.
Do FHA Loan Rules Allow Job Change?
Yes, FHA loan rules do allow job change. However, if you have frequent job changes, like more than twice a year. Then your employment record will be closely examined by the FHA, and your FHA loan application might be denied. Fortunately, there are still ways to get a loan even if you have been denied an FHA mortgage or have a high debt-to-income ratio.
The FHA has this requirement because they want to see some benefit from your new job that will improve your finances, helping you get out of debt faster. It also shows they have a low risk of defaulting on their financial responsibilities and foreclosure prevention. So if you’ve been unemployed for a long time, it may not be such a good idea to switch jobs too often without any real reason.
Are Employment Gaps Acceptable In The FHA Loan Requirements?
While you may have gaps in employment history, they must be short. The FHA only allows breaks in the workforce of up to 6 months, and if you leave work for longer than this, you will be required to wait until you are back at it for 6 months before applying for this loan.
If you don’t have a 2-year employment record (or if it’s less than 2 years), there’s no way that lenders or investors can measure your consistency in the workforce. Some exceptions like seasonal jobs or jobs with frequent layoffs or terminations may impact this requirement.
The employment requirements for FHA loan are a little easier than conventional loan lenders. Regardless, you need to be careful in documenting the employment history. If you have gaps in your job history or changes, explain them well enough for the lender to approve your FHA loan application.
Finally, if you are interested in buying or selling a home with FHA financing and need help navigating the process, HOMES by ARDOR is here to help. We pride ourselves on being able to assist our clients with all types of loans, regardless of their experience level. Please contact us today if you want more information about how we can help you with your real estate needs.
Kris Reid is the CEO of Ardor SEO, a company that helps real estate professionals get more leads and customers to predictably grow their business.
Over the years, Kris acquired extensive knowledge of SEO and its practical applications in various industries, with the main focus on real estate.
In 2021 Ardor launched the Icons of Real Estate Podcast to share proven strategies from the top producing icon agents with the real estate community.
After obtaining the real estate license in 2022, Kris joined eXp Realty and launched Homes by Ardor, the platform that was built to be the fastest way to buy or sell a house. Homes by Ardor also provides leads for its partner companies and realtors.