How Employment Gaps Impact Mortgage Applications, Part 1

There are several factors that will play a role in how lenders view your mortgage application, and one such factor is employment history. Lenders need to know that their approved borrowers have a stable income and a history of such an income, and significant issues in this area may lead to concerns with your application being approved.

At Altius Mortgage and our partners at Mortgage Ogden, we’re happy to offer a wide variety of home loan programs and services, including for first-time homebuyers who have not been through the process before and might require some guidance. In this two-part blog series, we’re going to look at everything you need to know about employment gaps or other issues with your employment history that may impact your mortgage application, including the ranges at which gaps become an issue and what you can do about such concerns in your history.

General Employment Gap Ranges

In most cases, such as the general definition used by the FHA and other housing programs, any extended absence from employment longer than six months is considered a red flag. If you leave one job and take a three-month absence period before obtaining another, this usually won’t be an issue; if you are gone a full year without any sort of employment, on the other hand, expect it to come up.

Now, it’s important to note that lenders are looking at the past two years – before the gap in question. Some assume they only go back two years from the present day, but this is often not the case. So if you have a gap in your employment that ended 18 months ago, expect a lender to go back to that point and then two years prior from there.

As we’ll detail later on, situations like temporary disability, intent and ability to return to work will all be considered by lenders in many cases.

Related Red Flags

Employment gaps are one significant income-related issue that may come up during mortgage applications, but not the only one. Some others include:

• Frequent job changes: If you change jobs more than three times in the 12 months before your application, this could be a red flag.
• Major line of work change: If you changed your entire career recently, lenders will want to look into this.
• Major income change: Either a big windfall or a major drop in income could both be issues to lenders.

Explanation Themes

As we noted above, there are situations where lenders will be more understanding toward an employment gap or one of the other issues we raised here. This is best accomplished with legitimate documentation explaining why the issue took place – maybe you were on maternity leave, for instance, or temporary disability leave. Especially if you have passed through the gap and are now properly employed, lenders will generally look favorably on truthful, documented, legitimate reasons for a work absence.

For more on dealing with employment gaps or other income-related issues during a mortgage application, or to learn about any of our mortgage lender services, speak to the staff at Altius Mortgage today.