A reader asked us a question in the comments section recently about FHA loan rules for employment verification. “I just got denied a FHA loan because I had a gap in employment for only 3 months. I wanted to know does having a gap for only 3 months qualify me for getting denied?”
It’s important to remember that FHA loan standards found in HUD 4000.1 (the FHA single family loan rule book) are not the only standards that are recognized or enforced when the lender is processing a home loan application.
FHA loan rules, state law, lender standards, and even things that are considered “customary” in the local housing market may all play a part in FHA loan approval and processing. So what’s found in HUD 4000.1 is a good starting point, but does not mean the last word on the matter is found within those pages.
Having said that, let’s look at what HUD 4000.1 says about gaps in employment and frequent changes of employment:
“If the Borrower has changed jobs more than three times in the previous 12-month period, or has changed lines of work, the Mortgagee must take additional steps to verify and document the stability of the Borrowers Employment Income. The Mortgagee must obtain:
- transcripts of training and education demonstrating qualification for a new position; or
- employment documentation evidencing continual increases in income and/or benefits.”
So it’s clear that in cases where there have been frequent changes of employment, the lender needs some added verification that the borrower is a good credit risk. What about gaps in employment?
“For Borrowers with gaps in employment of six months or more (an extended absence), the Mortgagee may consider the Borrowers current income as Effective Income if it can verify and document that…the Borrower has been employed in the current job for at least six months at the time of case number assignment; and…a two year work history prior to the absence from employment using standard or alternative employment verification.”
The “three month gap” mentioned in the reader question would technically fit within the FHA loan standard (not longer than six months) but the question does not mention whether the two year work history factor is an issue or not.
Could lender standards require such a work history even for shorter gaps in employment?
That is entirely possible, and permitted under the rules of the FHA single family mortgage loan program. Lenders can require stricter standards as long as those standards are applied according to the law.
There are two things possible with situations like the one mentioned in the reader question-the lender may have more stringent standards in this area, or there are other factors that may have present that cause a lender to deny an FHA loan application such as the “two year work history” requirement seen in the HUD 4000.1 quote above.
We can’t speculate as to why the lender decided to deny this particular loan, but borrowers should know that FHA loan rules aren’t always the final word on the matter.