Do I need two years of employment / income to get a mortgage loan?

Reader question: “Most of what I read online says I need to have at least two years of employment and income to qualify for a mortgage loan these days. I had a gap in my employment about a year ago, due to a career transition. Will this hurt my chances of getting approved for a home loan? Are there exceptions to the two years of income / employment needed to get a mortgage?”

Let me start with the short answer. Yes, there are exceptions to the two years of employment rule. In fact, I wouldn’t really call it a rule. It’s more like an industry norm or common practice. Most lenders like to see steady employment and/or income for at least the past two years. But in many cases, it’s not a deal-breaker. There are many well-qualified borrowers with job gaps within the last two years. Career transitions are not always a bad thing.

Much depends on the reasons for the gap, and overall pattern of employment. For instance, if you were in school or in the military during that time, you could be granted an exception. The same goes for gaps in employment that are the result of a job transfer or advancement. Lenders are mostly concerned with your income stability at the time you apply for the loan.

FHA Two-Year Employment Rule: A Common Misconception

Let’s start by talking about FHA loans, since they are so popular with home buyers these days. There is a common misconception that the Department of Housing and Urban Development (HUD) requires at least two years of steady employment, for all borrowers seeking an FHA loan. This is not true.

Here’s what HUD Handbook 4155.1, Chapter 4, Section D says about “income stability” for borrowers:

To be eligible for a mortgage, FHA does not require a minimum length of time that a borrower must have held a position of employment. However, the lender must verify the borrower’s employment for the most recent two full years…

It goes on to state that borrowers must explain any gaps in employment that are 30 days or longer. If the employment gap was the result of school or military service, the borrower must provide documentation to support this claim (college transcripts, military discharge orders, etc.).

This is not to suggest that only students and military members can get around the two-year employment “rule” for an FHA mortgage. It just means they’ll have an easier time getting an exception to the standard.

The HUD handbook also requires lenders to assess the “probability of continued employment.” In other words, they should try to determine the likelihood that the borrower will remain employed for the foreseeable future. To do this, lenders must review the following items:

• the borrower’s past record of employment,
• the borrower’s qualifications for the job,
• the borrower’s previous education and training, and
• the employer’s confirmation of continued employment.

When it comes to getting a mortgage loan, the probability that you will remain employed is nearly as important as (if not more important than) your employment status over the last couple of years.

Here’s another important statement from Chapter 4 of the HUD handbook. It goes on to explain that mortgage underwriters should “favorably consider” a loan applicant that changes jobs frequently within the same field, but continues to move up in terms of income and benefits. In other words, if you’ve changed jobs as the result of a promotion or advancement, it could actually work in your favor when applying for an FHA loan.

For Conventional Mortgages, Income Stability is Key

We’ve talked about FHA loans. But what about conventional mortgages, those that are not backed by the government? Do you need at least two solid years of employment and income to get a “regular” home loan? Here again, much will depend on the reasons for the gap.

According to Jacqueline Kounkel, a mortgage banker with Wells Fargo, “underwriters are looking for a likelihood of job continuance.” So, for example, if the employment gap was the result of a job transfer that suggests upward mobility (i.e., a raise), it might not be an issue. It could actually help your chances of approval. You mentioned a “career transition” in your question. I’m not sure exactly what that means, so I’m just covering all of the bases.

In the examples given above, the overriding concept is the same. Income stability usually takes precedence over job stability. Gaps in employment within the last two years might be allowable if the lender feels that (A) the borrower’s current income is stable and sufficient, and (B) there is a strong probability of continued employment.

Disclaimer: This article answers the question, Do I need two years of employment / income to get a mortgage loan? This website is provided for educational purposes only and is not meant to take the place of professional advice. The only way to find out if you are qualified for a home loan is to apply for one. Every lending scenario is different, so the scenarios described above may not pertain to all borrowers.