What is an FHA Mortgage?
FHA loans are subsidized mortgages with a low down payment and flexible credit requirements. They can be used to purchase single and multi-unit homes, approved condos and townhomes, and even mobile and manufactured homes.
Candidates for FHA Loans
Generally, you’ll qualify for an FHA loan if you have at least a 580 credit rating and enough savings or gift funds to cover at least a 3.5% down payment.
Lenders will usually want to see that your debt obligations (including a proposed monthly mortgage payment) make up no more than 43% of your monthly income.
You’ll always need to provide basic income verification as part of your FHA loan application, including:
- 30-day paystubs
- W-2s for the last 2 years
FHA qualification requirements allow for many different employment and income scenarios.
Let’s take a deeper dive into FHA loan employment requirements for 2020.
Employment Gaps and What They Mean for You
No matter which home loan you apply for, your lender wants to know that you have a good chance of making your mortgage payments on time month to month. They’re looking for steady, reliable income.
Sometimes, frequent job changes are a red flag for lenders, since they can demonstrate income instability.
Job gaps don’t necessarily prevent you from meeting FHA loan employment requirements, but certain scenarios trigger the need for additional documentation:
|Scenario||FHA loan rules state:||Additional documentation required:|
|More than 3 jobs changes in 12 months||Unless you are employed by a temp agency or work in a field where you have a variety of employers (like a union tradesperson), FHA will want some additional documents in this scenario.||Training or education transcripts demonstrating employment qualifications, or documents that verify an increase in income and/or benefits with each job change|
|A period of unemployment longer than 6 months||You can still get an FHA loan with a long job gap as long as you can verify that you're able to maintain stable income.||Proof that you are currently employed and have been employed for at least 6 months, AND proof of employment stability for at least 2 years prior to the period of employment|
|Less than 2-year work history||The FHA generally requires borrowers to have a 2-year work history in a given field. You can still qualify if you have worked in your field for less than two years, but must show development in that field.||Proof that you were enrolled in relevant training or education program in the last two years, or proof that you were enlisted in the military in the last two years, or in some cases, lenders may accept an employer letter verifying that you were hired as a result of skills you gained through previous employment|
Disability and Maternity Leave
FHA loan employment requirements allow for scenarios in which the borrower has to miss work temporarily due to a disability, family leave or maternity leave.
In these temporary leave scenarios, the borrower must prove that:
- They intend to return to work
- They have the right to return to work
- They qualify for the mortgage after any leave-related income reduction is accounted for.
If you will return to work before the first mortgage payment is due, pre-leave income is counted. If not, the underwriter can only count income that is received during leave.
Getting an FHA Loan With a New Job
It’s not uncommon for homebuyers to wait until they land their dream job to start the house hunt. More income means a bigger home buying budget, after all. If this applies to you, there are some FHA loan employment requirement particulars you should be aware of.
These requirements highlight an important distinction between effective income and future income. Effective income means income that you are actually receiving at the time of your loan application.
The easiest way to use income from your new job is to wait to purchase a home until you have paystubs covering a full 30 days. That way, there’s little room for doubt that your effective income is stable and reliable.
In cases where that isn’t possible, you can still qualify for an FHA loan by proving that:
- You can qualify using your current or previous income; or
- You have a non-revocable contract for future employment
In any case, your employer will need to provide a verification detailing your new pay, including any raises, commissions, or housing allowances.
How to Get an FHA Loan if You Are Self-Employed
In order to get an FHA loan using self-employment income, you must be able to prove that you own at least 25% of your business. Sole proprietorships, corporations, LLCs, s-corps and partnerships can all be considered.
Self-employed borrowers will usually need at least 2 years’ tax returns to prove that their income from self-employment is stable and reliable.
If you’re self-employed, be prepared to provide the following:
- 2 years' individual tax returns
- 2 years' business tax returns
- Profit and loss statements prepared by a tax professional
- Balance sheets
An underwriter will use these documents to calculate your net taxable income. Any business losses you report on your taxes cannot be counted toward your mortgage qualification.
Getting approved for an FHA with less than 2-years’ history of self-employment can be tough. You may be able to supplement that history with related employment, as long as it’s in a similar field and you don’t have employment gaps, but your approval will largely depend on your lender’s specific guidelines.
Lender Standards and How They Differ from FHA Minimums
While the FHA sets minimum standards for FHA loan employment requirements, it’s up to the lender to actually approve and fund your home loan. Be aware that some lenders may require documentation above and beyond what the FHA requires.
The FHA does not impose minimum income requirements. Borrowers who can verify adequate work history and enough income to comfortably afford the new mortgage payment on top of their existing debts should have no trouble getting an FHA loan.