Don’t be surprised if your lender wants to know why you took time off work

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Published Date 3/15/2024

You got the money together. Your credit score is admirable. And you now know the price range in which to start your house search. But your lender is telling you there is a hitch in your mortgage giddy-up. You had a gap in your employment record.

Employment gaps can be tough to explain, especially on a mortgage application. “If you’re going to depend on a lender to help you buy a home, your employment history is one of the most scrutinized parts of your application,” says Realtor’s Jeanne Sager. “Any gaps in your employment history can affect your getting approved for financing.”

Sager asks — do lenders really need to know about that time you were laid off because your former company went under? How about that period you spent out of work while you were going back to school?

The answer is a big fat YES. Mortgage companies have a right to receive your full financial story, warts, and all. They are, after all, the ones who are putting (in most cases) the most skin in the game. “Stability is important to lenders, as they want to know lending you money is a low risk,” says Sager. “After all, if you default on a mortgage, a lender is left holding the bag. Having a steady income to repay a loan is a major factor in securing a mortgage.”

Lenders begin by looking (at a minimum) for a two-year history of employment, asking for company names, addresses, and phone numbers, as well as your position at the company, current and past incomes, and dates of employment. They hope against hope that your history shows consistent employment that offers no red flags. What might those red flags be? Their biggest employment history concerns include those dastardly gaps we mentioned, frequent job changes, having been employed for less than two years, and large changes in income (both increases and decreases). They also tend to look at whether you have remained in the same field of work. For instance, going from being a rocket scientist to fulfilling your dream of being a massage therapist might concern them.

While any of the issues mentioned above could result in a mortgage application denial, one red flag on your application isn’t necessarily a deal killer. “Lenders know that companies fold, new mothers go on maternity leave, and some people are employed with temporary contractual jobs,” says Sager.

Lenders have to be sensitive to all the ways people make their money, reviewing each case on an individual basis and making judgment calls based on what they find. That’s why being able to explain the gaps articulately helps. Perhaps you took time off to complete a degree, raise kids, care for a family member, or treat an illness.

Any significant increase in income should also be explained. Did you quit that corporate job to open an online store? Lenders look at gig-working folks scrutinizing at least two years of self-employment to verify that you can make it on your own and still pay your bills on time. And they won’t just take your word for any of this. They’ll want more information to verify that you’re worth the risk, including past tax returns and recent pay stubs or copies of paychecks. “A lender may even ask for past rental agreements or previous mortgage payment information, as the amount you were regularly paying in house expenses could help you make your case that you can regularly pay a mortgage,” says Sager.

It does not matter whether you have a friendly mortgage broker. It’s their underwriter who plays the kingpin here, and it’s important to note that lenders have to follow the rules. “They are bound by the Ability-to-Repay and Qualified Mortgage Rule, a federal law passed by the Consumer Financial Protection Bureau in 2014,” says Sager.

In the wake of the financial crisis of 2008-2009, when all those houses went into foreclosure, banks raised their capital requirements, safeguarding not only their interests but those of the consumer as well. So if your mortgage rep is asking for more documentation for those gaps in income, take it seriously. It may make the difference between looking for a house now or waiting another year.

Realtor, TBWS

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