You apply for a mortgage only to be turned down because your work history is insufficient. The lender explains that you need two years of consistent work history, and you don’t quite meet this requirement. So, are you completely out of luck? Not necessarily. Read on to learn more about this rule, why it’s mandatory with most traditional lenders and how to secure a mortgage without two consecutive years of work history.
The Requirement of 2 Years of Work History for a Mortgage
In most instances, you’ll need two years of work history in the same field to be eligible for a home loan. This requirement stems from guidelines set forth by Fannie Mae and Freddie Mac regarding conventional loan products. You don’t necessarily have to work with one employer or in the same role within this time period. What’s most important to lenders is that your source of earnings is consistent and your work experience is similar if you’ve held more than one job.
Why Do Mortgage Lenders Require Work History?
Lenders want proof that you can make timely loan payments. Consequently, the lender will evaluate your credit score to determine how you’ve managed debt obligations in the past, along with your income, to ensure it’s sufficient enough to cover your mortgage payments and other monthly expenses.
Exceptions to the 2 Years of Work History Rule
Select borrowers in industries with high-earning potential, like attorneys, doctors, or technical school graduates, can sometimes count the time spent in school towards the two-year work history requirement. The same applies to seasonal, gig and contract workers who consistently receive unemployment income during off-peak periods.
In some instances, employment gaps may also be acceptable in the eyes of the lender if you can provide a viable explanation. These include hiatuses from work due to childbirth, the death of a relative, medical issues or a layoff. Some lenders will also accept hiatuses due to time away from work that was spent to further your education.
Keep in mind that recent gaps that span longer than six months could make you ineligible for a traditional home loan unless you have six consistent months of current employment.
Can You Get a Mortgage without 2 Years of Work History?
Yes, you can get a mortgage without a two-year work history, solid credit rating, sufficient down payment and adequate cash reserves as mandated by the lender.
Ultimately, it depends on the lender and loan program you select. Here are the employment guidelines for traditional mortgages:
- Conventional loans: These are the most common mortgage products amongst borrowers and require a two-year job history or more to qualify. You should also be employed at your current job for at least six months before applying to meet the eligibility guidelines.
- FHA loans: Backed by the U.S. Federal Housing Administration, FHA loans are flexible mortgage products that also require two years of employment experience and six months in your current role.
- VA loans: These home loans exist to serve members of the armed forces, both active and retired and qualifying relatives. VA loans are backed by the Department of Veterans Affairs and require two years of military service, schooling or employment experience to be considered for funding.
- USDA: If you’re looking to live in an area that’s categorized as rural by the U.S. Department of Agriculture (USDA), this loan product could work for you. It requires two years of work history but doesn’t specify a minimum number of months or years you’ll need in your current role.
Some mortgages are more flexible with their requirements. For example, a non-qualifying mortgage (Non-QM) from a flexible lender, like Angel Oak Mortgage Solutions, may allow you to circumvent the work history requirement to get a home loan. This type of mortgage offers other ways to obtain a mortgage.
What Do Lenders Consider Instead of Work History?
Borrowers who don’t have two years of work history may be eligible for a home loan based on what’s referred to as “compensating factors,” including:
Your Ability to Put a Down Payment
Expect to make a payment of at least 10 to 15 percent down for a non-traditional home loan that doesn’t require two years of work history. A higher down payment will give you a greater chance of getting approved, and you will pay less interest in the long run. You will also end up with lower monthly payments for your mortgage.
Your Capacity to Pay Off the Mortgage
As mentioned above, lenders want reassurance that you can afford to make timely loan payments and ultimately pay off the mortgage loan. So, they will evaluate your current earnings to determine if they’re sufficient. Some lenders will let you buy a house if you have some gaps in your employment history. These lenders may want to know that you are making a stable income with your new job.
Whether You Have Cash Reserves
You may need cash reserves adequate enough to cover at least six months of mortgage payments that you can use in the unfortunate event you experience financial hardship. Many lenders use this requirement to mitigate their risk when giving out mortgages.
Whether You Have Investments
Investments that are liquid or easily convertible into cash are also seen as favorable in the lender’s eyes as they are another source of funds you can tap into if needed to make your mortgage payments. Lenders place a higher value on liquid assets like stocks and bonds.
Property Requirements
The property you’re considering should also meet the lender’s guidelines.
Your Credit Score
You’ll likely need a good credit score to qualify for a home loan without meeting the two-year work history requirement. You can improve your credit score by paying off your debt and making on-time payments. Most lenders display their credit score requirements, and you may have more leeway if you use alternative financing.
Your Debt Ratio
Your debt-to-income ratio, or the amount of monthly debt obligations compared to your earnings, should also be acceptable to the lender. Ideally, you want this figure to be at 43 percent or lower. However, some lenders accept DTIs as high as 50 percent, depending on other factors, like your income or creditworthiness. Increasing your monthly income and lowering your monthly debt payments will improve your ratio. Refinancing existing debt is one option for people who want lower debt-to-income ratios.
Your Other Assets
Other assets you have in your possession, including investment accounts, may help your approval odds, so be sure to provide the applicable documentation if requested. Lenders will feel more confident if your assets can cover the monthly mortgage payments. These investments can also allow you to make a higher down payment, which will improve your chances.
Other Proof of Income
Prepare to provide any income documentation if required by the lender to substantiate your past and present income. This includes W-2s, bank statements, tax returns, 1099s or any other documents that reflect earnings and could be helpful to the lender when computing your income.
What Alternative Documentation Can You Use Instead of 2 Years Work History to Get Approved for a Mortgage?
Some lenders will consider alternative documentation if you do not have enough years of working at a part-time job or a full-time job. One backup route is a bank statement mortgage. The lender will review your bank statements to see how much money goes into your account each month and how you spend your funds.
Using bank deposits instead of tax forms also helps entrepreneurs and self-employed workers who use several tax deductions to reduce their taxable income.
An asset-based loan is another excellent option if you have an extensive portfolio. Lenders will prioritize the total value of your investments over your income. Banks, credit unions, and online lenders giving out these loans want to feel confident that borrowers can make monthly loan payments by selling some of their assets.
Documents containing information about your bank accounts and investment accounts can help you get one of these loans. Creditors will not consider illiquid assets like real estate when determining if you qualify for an asset-based loan.
Real estate investors looking to buy a property can provide documentation on the property’s projected monthly rental income and the monthly mortgage payment. Lenders can use these numbers to calculate a property’s debt service coverage ratio. This strategy only works for real estate investors looking to buy an investment property. Most financial institutions will only give out a DSCR loan if the property has a debt service coverage ratio of 1.25 or higher.
How to Qualify for a Mortgage Without 2 Years Work History
It’s possible to get a mortgage even if you do not have two years of work history. Most lenders will request higher down payments to compensate for less job experience. You can also qualify for a mortgage if you expand your search to non-conventional mortgages like asset-based and bank statement mortgages.
You might also get a mortgage if you were in the military or an active student during the previous two years. You will have to document this information, and lenders will want to know about any employment gaps.
Where to Get a Mortgage Even without 2 Years of Work History
When you’re ready to move forward with securing a mortgage, consider Angel Oak Mortgage Solutions. It’s a full-service mortgage lender that provides innovative solutions to borrowers from varying financial backgrounds. You can explore both traditional and non-QM home loans – the latter could be ideal if you’ve had trouble getting approved with other lenders.
Current offerings include Bank Statement Home Loans for self-employed individuals, Jumbo Home Loans if you’re looking to purchase a luxury or higher-valued home, Investor Cash Flow Loans for real estate investors or Portfolio Select Home Loans if you’re recently experienced an adverse credit event, like a foreclosure or bankruptcy.
There are also traditional loan products, including Conventional Home Loans, that could be a good fit. Or you can consider a government-backed mortgage product, like an FHA Home Loan, USDA Home Loan or VA Home Loan, if you’re seeking a more flexible option to make your homeownership dreams a reality.
Inquire today about Angel Oak Mortgage Solutions’ offerings by visiting the website and completing a simple online form.
Frequently Asked Questions (FAQs)
Many lenders will want to see your previous work history when reviewing your mortgage application. It’s an essential component, and many lenders require two years of work history. However, some lenders will consider other factors when assessing your loan application.
It is possible to get a mortgage after one year of working. While work history is a component of the application process, some lenders accommodate aspiring homeowners with less experience.
