If you have a gap in employment, you may be worried that you will not be able to get a home loan. Knowing how long a gap is going to cause problems is important when you go into the loan buying process. Lenders may also take into account why the gap in employment happened.
Most lenders will require a two year employment history, some may ask for longer. An employment gap from many years ago, thus, is not likely to be an issue. They do also look at how long the gap was.
How Long is Too Long?
An extended absence is generally considered to be six months or more. This definition is used by the FHA, and thus is commonly used by lenders. In other words, a gap of less than six months may not significantly impact your loan application, whilst one of a year will likely cause problems.
Lenders will look at the two years before the gap to see if your employment was stable up until that point. Temporary disability is considered to be a gap, but lenders will look at your intent and ability to return to work. This also goes for maternity leave and similar.
What Else is a Red Flag Regarding Employment?
Lenders will also consider frequent job changes to be a problem, generally defined as changing jobs more than three times in the prior 12-month period or changing lines of work.
However, they will have less of a problem if your job changes are to better jobs (higher income or better benefits) or if you have gone back to school to properly train for a new position.
A large change in income in either direction could also be seen as a red flag. If you get a windfall, then a lender may worry that you will try to take out a loan beyond your ability to repay.
Finally, if you are self employed, they will want to see two years of income to make sure that you have steady income, and they are likely to approve based off of lower levels of income rather than "flush" months.
What Should You Do if You have an Employment Gap?
If you have a gap in employment of six months or more, then you need to be ready to deal with the gap. Here's what you should do:
- Explain, with documentation if possible, why the gap happened. For example, perhaps you went back to school to get a Masters degree and discovered you couldn't handle studying and working, so you took four months to focus on your degree. Maternity leave, having to care for an elderly family member, or the abrupt failure of your employers' business are all good explanations, especially if you are now in a good position.
- Prove that you have been paying your rent or prior mortgage on time. On paper concerns about income can often be mitigated by demonstrating that you paid rent at the same level as the mortgage payments consistently for several years. This can be particularly helpful if you are self employed, work temporary jobs, or are in seasonal work such as agriculture or construction.
- If possible, avoid changing jobs before applying for a mortgage. Obviously, this is not possible if you are relocating or similar. If you do change jobs, ask your employer for a role change letter if it was an internal change, or provide a copy of your offer letter if you are relocating and have a new job.
- If you lost a job recently and can prove you were not fired for cause, providing that proof can help as it tells the lender that you are more likely to find a new job.
A gap in employment does not necessarily mean you can't get a loan, but you do need to be ready to explain the gap and prove to a lender's satisfaction that it does not make you a bad risk. Having records that prove you are paying your rent on time and explaining why the gap happened can both go a long way towards pleasing a lender.