January 17, 2021

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FHA Loan Questions: Employment Gaps

We get many comments and questions about FHA home loan rules in our comments section. Here’s one of the most recent. “I have some money saved up, however I have not been employed for 2.5 years. I would like FHA loan if possible. My main issue is all my money is cash and not in the bank, and I have NO employment history for the past 2 years.”

Basically it seems that the reader is asking whether an FHA loan is possible without a job. This is a complex issue-FHA loans permit the lender to consider public assistance, for example, as income.

The source of income must be verifiable by the lender and deemed likely to continue. However, in the case of this reader question, there is no income at all mentioned. What do FHA loan rules in HUD 4000.1 say about income/employment as a requirement of loan approval? The answer is found on page 186:

“The Mortgagee must document the Borrowers income and employment history, verify the accuracy of the amounts of income being reported, and determine if the income can be considered as Effective Income in accordance with the requirements listed below. The Mortgagee may only consider income if it is legally derived and, when required, properly reported as income on the Borrowers tax returns. Negative income must be subtracted from the Borrowers gross monthly income, and not treated as a recurring monthly liability unless otherwise noted.”

The lender is required to document two years of employment, though that two years may be with different employers. The lender will require pay stubs, tax documents and/or other paperwork that shows the borrower’s income as it is now or has been in the past. Where there is no job or income to document, the lender would have no way to establish a borrower’s debt-to-income ratio.

While it is true that some borrowers pay for a home in cash, in this case the reader wants to take out an FHA mortgage loan using only cash reserves to secure the loan. Could this be permitted?

It seems unlikely, but if a borrower had cash reserves (and no income) that covered the loan to the lender’s satisfaction that is a situation that might be “theoretically possible” depending on lender standards. However the lender would need documentation of this and a way to prove those cash reserves exist. In “real world” FHA loan situations, it seems likely that a prolonged and current lack of employment would work against a borrower in most cases.

That said, FHA loan rules DO provide guidance to the lender for “cash on hand” which refers to cash a borrower has that is held “outside a financial institution”. IF the situation described by the reader is acceptable to the lender, FHA loan rules state that in many instances the lender would be required to “verify that the Borrowers Cash on Hand is deposited in a financial institution or held by the escrow/title company” with additional documentation required for that source of funds.

“The Mortgagee must verify and document the Borrowers Cash on Hand by obtaining an explanation from the Borrower describing how the funds were accumulated and the amount of time it took to accumulate the funds. The Mortgagee must also determine the reasonableness of the accumulation based on the time period during which the funds were saved and the Borrowers:

–income stream;
–spending habits;
–documented expenses; and
–history of using financial institutions”.

Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:



Joe Wallace - Staff Writer

By Joe Wallace

March 23, 2016

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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