Obtaining a mortgage loan insured by the Federal Housing Administration is a meticulous process. Lenders examine all aspects of a borrower’s credit profile to determine the likelihood of repayment of the loan. First-time buyers and similar experienced owners can benefit from understanding the nuances of employment underwriting guidelines and income stability, as these are some of the most important factors in qualifying. Familiarize yourself with the difference between conventional and FHA mortgage Employment Gap Policy before applying for a loan for the purchase or refinancing.
FHA, an agency of the Ministry of Housing and Urban Development, provides loans from approved lenders. FHA insurance protects lenders in the event of owner default, repaying their losses. The lender’s insurer assesses the “four Cs” of the borrower’s credit: credit history, ability to repay, cash and collateral. To determine if a borrower is able to make monthly payments on time, the insurer analyzes the history of their job and the income it generates, also known as an effective income.
Lenders must check the job for the last two complete years. Borrowers must provide a written explanation of employment gaps that cover one or more months. When using an automatic guaranteeing system for initial loan approval, Open FHA technology to all lenders, or TOTAL, mortgage scorecard determines the requirement. A TOTAL recommendation note “Accept” or “Approve” requires explanations for deviations greater than 180 days in the last two years, while a “Refer” Note requires explanations for deviations greater than 30 days.
The difference between conventional and FHA mortgage does not reject a loan based solely on the presence of significant employment gaps. Automatic endorsing that marks in a transfer to a direct authorization, or DE, underwriter for manual review means the file represents a higher risk to the lender. The selling agent must carefully analyze the reason for the deviation. If the borrower is deemed eligible, the lender must explain to HUD in writing why the history of the borrower’s employment gap is not likely to compromise their ability to repay the loan in the future.
In the end, the FHA considers income stability superior to job stability. A borrower with employment gaps but returned to work in the same line of work over the past two years can still qualify if they advance in earnings or benefits. This progress increases the likelihood of continued employment.
Acceptable reasons for extensive employment gaps include time to take off to raise children or if the borrower was at school or the military. They must support these last claims with college transcripts or discharge papers. After an extended absence, the borrower must be returned to work for at least the most recent six months and must document a working history of two years before the absence.
The Federal Housing Administration (FHA) is a program administered by the Federal Ministry of Housing and Urban Development (HUD). The program does not finance loans – it insures real estate loans. The FHA allows qualified buyers to obtain home loans with lower down payments intended for home purchases.
If a lender lends 100 percent on a home, the buyer does not have any financial investment in the property, making the loan riskier for the lender, he is the lender, not HUD, who initially finances the loan.
Those who qualify for an insured FHA mortgage include individuals, non-profit organizations and government agencies. The borrower must have a number and legal residence social security status valid in the United States. Citizenship is not a requirement to qualify as an FHA buyer. Eligible purchases include a condominium, affixed prefabricated house with land, detached house or an apartment building of one to four units.
The function of an FHA loan is to finance home purchases. Yet it is possible to use them to buy land, such as in a construction loan or a mobile home with the purchase of land. Guidelines specify loan distributions and generally include time limits for completion of land use planning. This prevents borrowers from using an FHA loan to buy land without immediate intention to develop it.