In this episode, we covered gaps in employment. In some time in their life, most people will probably have a gap in employment. The reason why gaps are even defined or talked about is that underwriters are looking to see the sustainability and likelihood of you continuing to make an income.

What are some typical gap scenarios?

Typically, a gap scenario is going to come up when someone’s either lost their job and they’re on the market looking for the right fit. People’s situations can vary greatly. If you’re an executive in a corporate job it can take you a year to find the right job, but if you’re looking for entry-level employment, it can take a few months.

And it’s not always job loss. We work with a lot of working class people. We have a lot of mothers and fathers that have stayed home to take care of the kids, are now entering the workforce, and have been working for a couple of months and call about applying for a loan or refi. So, let’s look over the three main loan programs: conventional, FHA, and VA.

Conventional Loans

If someone has had a gap in employment for a long time, say 10 years, and they just got back into the workforce a month ago we would put them into a conventional loan. Neither the FHA nor the VA would allow for this situation. Conventional is going to be flexible because they’re going to be able to look at someone’s situation case by case. The only reason you wouldn’t like conventional is if your credit score isn’t very good. So as long as you have decent credit, conventional is the way to go.

FHA Loans

So, the biggest difference between FHA and conventional is that in the case of FHA if there’s a job gap over six months a two-year work history will be needed. Now it doesn’t matter when that two-year work history was. It can go back 10 years, but it needs to be two years of consecutive work. FHA is where a lot of our first-time homebuyers or lower credit score borrowers will fall. To qualify for the loan you will have to have been with your current employer for six months and the borrower would need to have two years of consecutive work history prior to any job gaps.

VA Loans

The VA is the strictest of all three. It requires borrowers to have at least a 12-month history on the current job if there are any job gaps over 60 days within the last two years.

To Summarize

• All programs are fine with job gaps less than 30 days

• Fannie Mae technically does not have any job gap maximum allowed limit like Freddie Mac. Technically a borrower can be out of a job for years and come back to the workforce along with a letter of explanation and would be okay. Only full time hourly or salary is allowed in these cases.

• With Freddie Mac if the gap is greater than or equal to six months, a letter of explanation from the client is required explaining the circumstances surrounding the gap in employment. Freddie needs a 12-month work history in the last 24 months. Only full time hourly or salary allowed in these cases.

• With FHA loans job gaps over six months are an issue. They are doable if the borrower has been with current employer for six months and they have a consecutive 2-year work history prior to any job gaps.

• VA loans require the borrower to have a 12-month history on their current job if there are job gaps over 60 days with the last two years. As well, an explanation letter is needed and only full time hourly or salary is allowed.

If you have any questions about this or if you have any questions you’d like us to answer on our podcast, you can email your questions to team@azmortgagebrothers.com or give us a call at (602) 535-2171. Be sure to ask us for a free quote on your next mortgage. We’ll personally work with you and help you through the whole process.

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Thanks for listening and reading the Mortgage Brothers Show. Let us know if you have any questions you’d like us to answer on this podcast. You can email your questions to Tom@AZMortgageBrothers.com or Eddie@AZMortgageBrothers.com.

Be sure to ask us for a free quote on your next mortgage. We’ll personally work with you and help you through the whole process.

Signature Home Loans LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Signature Home Loans NMLS 1007154, NMLS #210917 and 1618695. Equal housing lender.

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