Getting a Conventional Loan If You Have an Employment Gap
Ideally, lenders like to see a steady work history over the past two years. But real life isn’t always that tidy.
Luckily, it’s still possible to be approved for a mortgage if you have gaps in your job history.
Why Conventional Lenders Scrutinize Employment Gaps
A steady two-year employment history is one of the most important indicators that you’re likely to repay the loan.
As such, loan underwriters examine paystubs and employment verifications from your company to ensure consistent income. The income doesn’t have to be from the same job.
But if you have gaps in your employment history, even if that's typical for your profession, you can expect lenders to look closer at your loan application.
Conventional Loan With an Employment Gap Less Than 6 Months
Lenders understand that it’s normal for stable borrowers to transition between jobs in the same field. In most cases, you can get a conventional loan if you’ve had an employment gap lasting less than six months with an offer letter and first pay stub from the new job.
Then lender will need to contact your pre-gap employer to verify steady employment before the gap.
Getting a Conventional Loan With an Employment Gap Longer Than 6 Months
Things can get more complicated if your work history shows a long-term employment gap of more than six months. You will need six months back on the job after a gap longer than six months.
Lenders may, however, make exceptions if you re-join the same company and have a good explanation for the time off.
A common example that lenders may allow is taking an approved leave from your job to care for a child or ailing family member.
What Is a Letter of Explanation?
If you have a gap longer than 30 days, lenders will likely want you to provide a brief letter of explanation about the pause in employment, as well as any supporting documentation.
The letter of explanation is an opportunity to highlight favorable aspects of your gap, such as it being planned and approved through your employer or part of you advancing your career by upgrading to a better-paying position in the same field. You may also want to note that it caused no issue with your ability to meet debt obligations.
What if My Employment Gap Was More Than Two Years Ago?
Most conventional lenders (as well as those offering government-backed mortgages) are concerned with your work history over the past two years. If your employment gap was more than two years ago and your income has been stable since, you aren’t likely to run into any issues.
Did You Become Self-Employed After Your Employment Gap?
One situation where you could run into problems with an employment gap is if you’ve transitioned into self-employment.
Lenders nearly always request two full years of signed tax returns, as well as other business-related documentation, from self-employed applicants. This helps verify that their venture is reliable and produces a stable (or increasing) income level.
You may be able to reduce this requirement to one year or self-employed tax returns if the job you worked before your gap was in the same field, with similar responsibilities, as your new business.
Returning To Work With Variable Income
You could also face an issue if your employment before the gap was a regular full-time salaried role but your current income is variable.
For example, you were a full-time teacher but took time off and returned as a substitute teacher. Because substitute pay is on a per-day basis and not guaranteed, you would need two years of this income to prove stability and average income.
Gaps Because of Seasonal Work or Employment
If your employment gap is because you work in a predictably seasonal industry, you shouldn't have an issue if you can show regular, predictable gaps.
For example, you might be employed in construction in a locale where work slows or ceases during the winter months. Or perhaps you’re a tour operator in Alaska who only works during the summer tourist season.
In this situation, unemployment income may also count towards your qualifying income if it’s received regularly each year as part of your seasonal working schedule.
Gaps Because of Advanced Education or Job Training
Some borrowers have an employment gap because they were enrolled in an educational program to improve marketability in their job field. This could be getting an advanced degree or completing a job training or certification program.
Lenders will generally accept this schooling gap with transcripts or other appropriate documentation if it's evident that the experience helped your career and you’ve since returned to the workforce.
Gaps in Secondary Employment Income
Conventional lending guidelines put tighter restrictions on gaps in secondary employment. This is income from a job (or jobs) that supplements your primary source of income.
For secondary employment income to qualify, you cannot have a gap of more than one month in the past year unless the job is considered seasonal work.
Employment Gaps During the Loan Approval Process
It’s not necessarily a deal breaker, but losing your job or otherwise having an employment gap during the mortgage application process can complicate things further. That's because it's more difficult for lenders to have confidence in your ability to repay your mortgage if you aren't currently employed or are receiving temporary leave income lower than your standard earnings.
If you’re trying to get a mortgage but are facing an employment gap, take a look at our article on losing your job during the home-buying process.
How Other Loan Types View Employment Gaps
Conventional lenders usually take a more lenient approach to employment gaps than those working with government-backed programs like FHA, VA, and USDA mortgages. Still, these loans offer other advantages – such as lower credit score requirements and zero down payment options – that make them an attractive alternative in some situations.
Luckily, it’s still possible to get approved for these programs, even if you have a gap in your employment history. Here are the guidelines for each type of federally-insured loan:
FHA guidelines don’t require you to be in your current position for any set period to be eligible for a mortgage, but you may need to provide a letter of explanation for any gaps longer than a month.
This program also allows for extended gaps (six months or longer) in your job history, so long as you’ve been back at work for at least the past six months and can prove that you had stable and similar employment for at least two years prior to your gap.
Guidelines even note that multi-year employment gaps are acceptable in many cases as long as you meet these criteria.
Lenders offering VA loans will need a letter of explanation for any gaps longer than 60 days (30 days in some cases) and want to see at least 12 months of steady employment since.
Exceptions can be made for shorter periods of employment if your education or training has provided you with skills necessary to your field. This shows an enhanced likelihood that your income will continue despite a relatively short employment history.
Some examples of skilled jobs mentioned in VA guidelines include:
Computer systems analyst
You may also be eligible if you’ve recently separated from service, had a brief gap, and are now employed in a job that is similar to your profession in the military.
With USDA loans, non-seasonal workers must provide a letter of explanation for any employment gaps longer than 30 days. Short gaps, including for maternity, medical leave, and relocation, are generally accepted with proof of stable employment before and after the gap.
For extended gaps or short gaps without a suitable explanation, you'll likely need at least one year of steady income since returning to work.
Improving Your Chances of Loan Approval With Employment Gaps
Having gaps in your work history isn't ideal, but your past employment is just one factor lenders consider when approving a loan. While Fannie Mae guidelines recommend that conventional lenders document at least two years of stable income, underwriters have leeway if there are compensating factors to offset a shorter employment history.
Some compensating factors that could improve your chances of loan approval with employment gaps include:
Increasing the size of your down payment
Establishing a larger reserve fund
Taking on a qualified co-borrower or cosigner
And while lenders only look for two years of work history, it may be to your benefit to provide more if it supports the fact that your income is likely to be reliable despite your employment gap.
For example, you may have held a steady job for ten years, taken a year off to care for an elderly family member, and been back in your previous long-term position for the past 12 months. In this case, your extended work history and explanation for your employment gap may be considered compensating factors and improve your chances of qualifying.
Employment Gaps Are Usually Considered Case-By-Case
Most of the time, loan applications with significant or multiple employment gaps are considered case-by-case. Lenders know that every situation is different and can often look past gaps at their discretion.
However, not all lenders follow the same guidelines, and even some underwriters will assess employment gaps more strictly than someone else at the same company. If you run into an issue getting approved for a conventional loan because of an employment gap, the best practice is to apply with another mortgage professional with less rigorous standards.
Tim Lucas spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. Tim has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, My Mortgage Insider, and more.