How To: Explain a Gap in Employment on a Mortgage Application

Explaining employment gaps, especially on a mortgage application, can pose challenges. Your job history is heavily scrutinized by lenders when assessing your application, and any breaks in employment can impact your chances of securing financing. But do lenders truly require detailed explanations for every employment gap, whether due to layoffs or educational pursuits? According to experts, the answer is a resounding yes.

Mortgage lenders prioritize a comprehensive understanding of your financial history, including any gaps, to make informed lending decisions. Here's why your employment background matters and tips on effectively addressing any employment lapses with your potential mortgage lender.

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How detrimental is a gap in employment on a mortgage application?

When reviewing a mortgage application, lenders carefully assess your employment history to gauge your ability to meet monthly payments and fulfill your loan obligations. Stability is paramount for lenders, as they aim to minimize risk in lending. After all, if you default on your mortgage, the lender bears the financial burden. Having a consistent income stream is crucial for securing a mortgage.

Typically, lenders prefer to see a two-year employment history, including details such as company names, addresses, phone numbers, positions held, incomes, and employment dates. We cannot stress enough the importance of maintaining a history of steady employment without any alarming factors.

However, certain aspects of employment history can raise concerns for lenders, potentially complicating the mortgage approval process. The biggest employment history concerns for lenders on a mortgage application include the following:

• Gaps in employment
• Frequent job changes
• Having been employed for less than two years
• Large changes in income (both increases and decreases)

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What if your employment history has a red flag?

While certain issues in your application could lead to a mortgage denial, having one red flag isn't necessarily a deal-breaker. Lenders understand that employment situations can vary, whether due to company closures, maternity leave, or temporary contracts. “We have to be sensitive to all the ways people make their money,” says Barbara Carrollo-Loeffler, director of consumer and residential lending at Provident Bank in Jersey City, NJ.

Lenders review each case on an individual basis, and they make judgment calls based on what they find. That’s why being able to explain the gaps helps.

“You can explain you took time off to complete a degree, raise kids, care for a family member, treat an illness, etc.,” Huettner says. “You should also explain any significant increase or decrease in income.”

For self-employed individuals, lenders typically require a minimum of two years of self-employment history to assess financial stability.

Lenders may also request additional documentation, such as past tax returns, pay stubs, or even past rental agreements, to verify financial credibility and assess risk accurately.

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What the law says

Whether or not you have a friendly mortgage broker, it's worth noting that lenders are obligated to adhere to regulations. The Ability-to-Repay and Qualified Mortgage Rule, enacted by the Consumer Financial Protection Bureau in 2014, mandates that lenders assess a borrower's ability to repay a mortgage. This law aims to ensure responsible lending practices by requiring lenders to make a reasonable determination of a borrower's financial capacity. As part of compliance, lenders must engage a third party to verify employment history.

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Conclusion

Navigating employment gaps on a mortgage application requires careful consideration and transparency. Lenders scrutinize job history to assess your ability to meet financial obligations, emphasizing the importance of stability and consistency in employment. While red flags like gaps in employment or frequent job changes can raise concerns, lenders understand that employment circumstances vary and review each case individually. Effective communication and providing explanations for any discrepancies can help mitigate concerns and improve your chances of mortgage approval. Adherence to regulations such as the Ability-to-Repay and Qualified Mortgage Rule ensures responsible lending practices and protects borrowers' interests, underscoring the importance of thorough verification of employment history by lenders.