Getting a Mortgage Without a Perfect 2-Year Work History

A dependable income is a must for getting a mortgage. Lenders want evidence that you'll be able to repay a loan, so typically they like to see a steady two-year work history with a stable or rising income.

But that doesn't mean any kind of job change or employment gap will sink an application. Here's what to know about qualifying for a mortgage if your work history is a little outside the box.

What the ‘two-year rule’ actually means

The two-year rule for employment history comes from the underwriting guidelines for conventional loans set by Fannie Mae and Freddie Mac. Exact requirements can vary for other types of mortgages. This rule isn’t about being in one job for two years, but instead demonstrating a consistent track record when it comes to your income.

Job or career change

You don't have to stay in the same job, or even in the same career, for two years to get a mortgage. What’s important is showing a consistent level of income. As long as your income remains steady or increases, switching jobs before you apply for a mortgage shouldn't hurt your chances.

However, a change in the type of pay, such as a recent move from a salaried position to a commission-only or self-employed role, would make qualifying tougher. To count self-employed, commission or overtime pay, a lender usually wants to see a full two-year history of that type of income to get a reliable average.

Another complication would be a job change during the mortgage application process. If that happens, call your lender right away. With a conventional loan, you can typically produce a pay stub from the new job, a job offer letter and a verification of employment (VOE) letter to move forward. However, with a government-backed loan, you’ll need 30 days of pay stubs before you can close.

Employment gap

It's best if your mortgage application reflects no employment gaps in the last two years. But life can be bumpy. Perhaps you were laid off, went back to school, took parental leave or needed to take care of a sick family member. Or maybe you became either temporarily or permanently disabled, which could involve receiving short-term or long-term disability benefits.

A lender may ask for an explanation and documentation to back it up, but a gap of up to six months isn't a deal killer. Be upfront and honest with your lender.

New job out of school

It’s possible to qualify for a mortgage if you just started a job after completing your schooling. Education can count as work history, whether it’s a doctoral program or trade school.

Requirements vary by loan program. Your chances of success will be higher if your job is related to your degree. To have the best shot at convincing a lender, be prepared to provide:

• Your diploma or transcripts showing the time you spent in school

• A job offer letter

• At least one or two pay stubs demonstrating 30 days of employment

Part-time, seasonal and contract work

Part-time, seasonal and contract work can all count toward a two-year employment history. You’ll still have to demonstrate consistency around your income as well as a budget that can support buying and making payments on a home, though.

This generally means showing the lender a solid two-year history of stable cash flow. For example, this might include:

• Two years of history at a part-time job (or multiple part-time jobs)

• Two consecutive years of seasonal work, preferably at the same company

• Steady contract work over the past two years within the same industry or field

It can also be helpful to show that your income has steadily increased each year. Having additional savings as a safety net can help to convince a lender, too.

Self-employment

Self-employment isn't a roadblock to a mortgage as long as you can prove a history of steady income from your work. In general, lenders look at anyone who works as a freelancer, contractor or gig worker as self-employed. Business owners that own at least 25% of their business are also considered self-employed.

For self-employed borrowers, lenders generally want to see two years of business tax returns, year-to-date profit and loss statements and sometimes business bank statements. Exact requirements can vary depending on your type of business.

In some cases, you might be able to get away with less than two full years of self-employment history. If your most recent business and personal tax returns show at least one full year of self-employment income for your current business, you could still qualify for a mortgage under Fannie Mae guidelines. You’ll also need to show that you were earning a similar (or higher) income prior to being self-employed and that you had comparable responsibilities.

Retirement

For retired applicants, lenders consider income from sources such as Social Security and pensions, rather than employment. Retirees can also qualify using "asset dissipation" — the drawing down of savings and retirement accounts. This may require additional verification and may have tax implications. Be sure to consult with a financial advisor and mortgage professional to understand your situation.

Compare lenders

Regardless of your work history, compare at least a few lenders to find the best combination of rates, fees and customer service. And if you have questions about whether your recent employment meets the mark, reach out to mortgage professionals to discuss your options.

Lenders consider multiple aspects of your financial picture, including credit, down payment, DTI, and income, so understanding where you stand on all fronts will help you find the right loan for your situation.