FHA loans are a common choice for first-time homebuyers and those with less-than-perfect credit. These loans are insured by the Federal Housing Administration and feature lower down payments and more lenient qualification requirements. However, stability of employment and verification of income are still important parts of the approval process. When it comes to FHA loans, what employment is required? How to understand what lenders look for and meeting lender’s expectations is covered in this article.
Basic FHA Loan Employment Requirements
Qualifying for an FHA loan requires showing you have a steady work history. These are the basic requirements:
- Minimum Employment Length: Lenders generally want to see two years of employment with the same company or in the same sort of work.
- Relevant Industry Experiences: Job hopping can be viewed negatively unless the changes were due to growth in the career or better pay.
- Full-Time vs. Part-Time Work: Part-time income is permissible as long as it has been stable for two years.
How Do You Calculate Income?
Lenders prefer borrowers who have stable and verifiable income. Here’s what they assess:
- Proof of Income: W-2 forms, pay stubs, or tax returns help confirm your income.
- Recurring Income: The more stable the income stream, the better, even for variable pay such as commissions and bonuses.
- Industry Change: If you are making a significant industry change, you may want to provide more explanation. Lenders love to see your job history within the same field.
Self-Employed Borrowers
However, there are a lot of self-employed workers, and they qualify for FHA loans. Requirements include:
- Two Years of Tax Returns for Self-Employed Borrowers: Self-employed borrowers need to submit their federal tax returns for the previous two years.
- Profit and Loss Statements: Lenders might request year to date profit and loss statements to evaluate your company’s financial health.
- Income Assessment: Average income is taken over the last two years and declining income trends are more critical.
Gaps in Employment
Employment gaps are not automatic disqualifiers for FHA loans, but they need to be well explained:
- Acceptable Gaps: Gaps due to education, medical leave, or other valid contemporaneous reasons may be considered acceptable by lenders if you are back in a stable profession.
- Documentation: A letter of explanation and supporting documents can explain gaps in your work history.
- Post-Gap Employment: A stable employment history for a minimum of six months after a gap may also assist in satisfying lender requirements.
Special Cases
Some working situations need extra consideration:
- Seasonal Workers: Seasonal job income may count, as long as you have two years in the position and steady earnings.
- Military Personnel: Active-duty service members may be required to submit their deployment orders or other recent documentation of stable employment.
- Contract employees: Verification of contract income through contracts, invoices, and tax returns.
Advice on How to Meet Employment Criteria
When you’re in doubt about your employment for FHA loan, follow these tips:
- Do not change jobs: do not change jobs during the period of applying for the loan.
- Documentation should be easily understandable: Provide up-to-date and exact employment and income information.
- Explain Unusual Circumstances: Submit a separate letter delineating any gaps in employment or changes.
- Engage an Expert: A mortgage broker can assist with lender requirements.
Conclusion about FHA Loan Employment Requirements
Employment history is one of the biggest components to qualifying for an FHA loan. Knowing these criteria and fulfilling them can increase your chances of approval for loans. If you are self-employed, part-time or have employment gaps, preparing and gathering documentation are the most important tasks to do ahead of time. If you have the proper information and tools available, getting approved for an FHA loan can be easy sailing.
