FHA income and employment rules

FHA loans offer a low down payment option for those who have less than perfect credit or higher levels of debt. They’re also good for first-time home buyers who might have thinner credit histories. But to qualify, it helps to understand FHA income and employment rules. Let’s touch on the ins and outs.

What is an FHA mortgage?

FHA mortgages are backed by the Federal Housing Administration, a division of the Department of Housing and Urban Development (HUD). The direct guarantee of the federal government allows lenders to make loans with credit standards that are less strict while maintaining a lower down payment to support affordable housing.

Who FHA loans are for

FHA loans are good for clients who have the following characteristics:

• First-time home buyers: Down payments are often a challenge if you’re buying your first home because they aren’t selling a previous home to come up with the funds. FHA loans offer down payments as low as 3.5% of the purchase price.
• Rebuilding or newer to credit: Whether you’re newer to credit or are working to get your score back up after past dings, FHA loans can make a lot of sense. If you have a down payment of 10% or more, you may be able to get into a home with a credit score as low as 500. Many lenders, including Rocket Mortgage^®, require a qualifying score of at least 580 with a 3.5% down payment.¹
• More existing debts: FHA allows for slightly higher levels of existing debt, enabling you to qualify for a higher monthly mortgage payment than many other loan types if you need to stretch the budget a little more to get a home that works for you.

FHA employment requirements: Overview

The FHA guidelines most traditional lenders operate under come from the FHA Single Family Housing Policy Handbook. The current edition is 1,871 pages long, so we’ll just touch on the most important points for clients. Let’s start with employment.

Employment history guidelines

Employment history matters any time you’re getting a mortgage because that’s the biggest or sole source of income for many people. Lenders generally like to see that you have a job and are likely to keep it when determining what resources you have to make a mortgage payment.

In general, when looking at your employment history, the lender will go back at least 2 years.

Employment and income verification (VOE) process

When lenders verify income and employment, they may do so through partnerships with a third-party service or they may get written confirmation from your employer. It may happen when you apply and again prior to closing.

The income itself may be verified through standard forms like W-2s, 1099s, pay stubs, and tax returns.

Lender standards vs FHA minimums

The FHA sets minimum standards for the loans it purchases from lenders. Lenders may have their own stricter standards for the loans they originate. These are called overlays.

While there’s a government guarantee, lenders are also judged on the default rate. Apart from this, everyone involved wants you to be able to stay in your home for a long time. Lenders want to be sure you can handle the monthly mortgage payment you sign up for.

Handling employment changes and gaps

In an ideal world, everyone would have worked at the same business for the last 2 years prior to applying for an FHA loan, but the world isn’t that simple. Let’s run through several scenarios.

Employment gaps and what they mean

Let’s begin with a basic definition of a gap in employment. The simplest definition is when you’re out of the workforce for a sustained period of time. The length that’s going to be considered a gap will depend on the type of mortgage you’re qualifying for. Gaps and the reasons for them can matter to lenders because they look for stability.

The FHA 6-month employment rule

One of the main FHA rules has to do with gaps in your employment history of 6 months or more. If there’s such a gap in your employment history, the lender must also verify the following:

• You have to be in your current line of work for at least 6 months prior to your completed application.
• You have to have a 2-year work history prior to the absence.

Multiple jobs in 12 months

If you have changed employers more than three times over the course of a year, the FHA requires additional info showing one of the following:

• Training or education transcripts showing qualification for a new position
• Documentation showing continual increases in income or benefits

These guidelines don’t apply if you work for a temp company or in a union trade where you are regularly changing jobs.

Getting an FHA loan with a new job

If you’re starting a new job, getting a raise or promotion, you have to begin getting your new rate of pay within 60 days of closing on the mortgage. Lenders would verify this with pay stubs or something from the employer in writing.

Exceptions and special situations

There are scenarios in which modifications to the rules apply touching on both gaps in employment and overall employment history.

Self-employment requirements

If you’re self-employed, the FHA likes to see that you have been for at least 2 years. You can get approved with a year of self-employment, as long as you worked in the same industry previously. Income is only considered stable if you have no more than a 20% decline over the time frame being analyzed.

All schedules of a tax return and profit and loss statements going back up to 2 years may be looked at if you’re self-employed. Your lender may go through specific steps to verify the existence of the business.

You’re considered self-employed if you have a business ownership interest of 25% or more.

Disability and parental leave

When it comes to employment history, lenders and the FHA consider you employed if you’re on parental leave or things like workers’ compensation disability payments. You can even qualify with this income if the amount covers the mortgage payment.

Active-duty military service

Military service counts toward employment for the time you’re considered on active duty.

Recent graduates and students

Recent graduates and students with jobs are just entering the workforce. But they may be able to handle a mortgage payment based on income. For that reason, FHA allows school to be considered part of work history.

Raising children/caregiving

Under the Family and Medical Leave Act (FMLA), qualified workers can take up to 12 weeks of unpaid leave to take care of a child or other immediate family member with a serious health condition. You would remain employed, so it’s not a lapse in job history.

Medical leave

FMLA also applies to personal medical leave if you’re unable to work based on a health condition. You have 12 weeks of job protection.

Seasonal employment

Income from seasonal employment can be used as long as you worked in the same industry for the past 2 years. Additionally, you have to show a reasonable likelihood that you’ll be hired the next season.

Income rules for FHA loans

FHA also has certain income rules that must be followed. Let’s briefly dig in on some of these.

Income stability and acceptable sources

Acceptable sources of income depend on your situation. The important thing is that there’s a level of consistency in the income that can be relied upon. The following is a nonexhaustive list of some common income sources:

• Employment (full-time, part-time, or seasonal)
• Retirement funds
• Social Security
• Disability
• Trust

Do FHA loans have income restrictions?

FHA loans don’t have any income limitations in order to qualify. This is a distinct advantage over USDA loans and some conventional mortgage options.

Documentation checklist

The type of documentation needed is going to depend on the mortgage you’re attempting to qualify for, but a good general rule is to think of things in groups of two:

• 2 years’ worth of W-2s and/or 1099s
• Last 2 years of tax returns
• Last two pay stubs
• Last 2 months of statements for any accounts used to qualify

What lenders verify and when

Lenders verify income and assets at application. To the extent that you qualify with employment income, they’ll verify your employment at application and then again just before closing to make sure nothing has changed.

FAQ about FHA income

Now that we’ve touched on many of the basics, let’s close by answering a couple more questions that you might have.

What are the employment rules for the FHA loan?

The FHA requires lenders to look back over the last 2 years prior to application to determine your employment history. They’re looking to determine both the stability of your employment and the income that goes along with it.

What is the FHA 6-month employment rule?

The 6-month employment rule says that if you have a gap in your employment of 6 months or more, you have to be employed in your current job for at least 6 months. In addition, there has to be 2 years’ continuous work history prior to the gap.

Can I get an FHA loan without 2 years of employment?

The 2-year employment rule applies, but school and active-duty military service count as employment.

Does FHA have income restrictions?

The FHA doesn’t place any limitations on how much income you can make.

The bottom line: Navigating FHA employment and income rules

When qualifying for any mortgage, a lender is going to want to see an employment history that provides evidence of stability in your income. FHA has a rule that says for every 6-month employment gap, you have to show 2 years of continuous work history beforehand. Temporary leave and time in school or military don’t count as gaps.

If you’re ready to get started, you can apply online.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.

¹ To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.