Qualifying for a Mortgage with Employment Gaps: A California Borrower’s Guide

Some home buyers in California worry that having gaps in their employment might prevent them from qualifying for a mortgage loan. But that’s not always true. In many cases, it’s possible for borrowers to qualify for a mortgage loan in California, even with gaps or breaks in their employment history.

There’s quite a bit of flexibility when it comes to the employment verification for home loans. The most important thing is that you have stable income at the time you apply for the loan, along with the financial capacity to repay the debt. It also helps to have a good credit history and a manageable level of overall debt.

Getting a Mortgage in California with Employment Gaps

When you apply for a home loan in California (or anywhere else for that matter), the bank or lender will review your financial and employment situation. Among other things, they want to ensure that you have the financial means to repay the loan going forward.

When it comes to qualifying for a mortgage loan, there’s a general rule regarding two years of employment. This means that banks and lenders will review your employment and income situation for at least the past two years.

If you had a gap in employment that took place more than two years ago, it might not even be looked at. In that case, it wouldn’t necessarily prevent you from qualifying for a mortgage loan in California.

However, if you’ve had a break or gap in employment within the past two years, the bank or mortgage lender will probably take a closer look at it. But that doesn’t necessarily mean you’ll be disqualified. It’s entirely possible to qualify for a mortgage loan in California, even with employment gaps within the past two years.

A lot depends on the length of the gap and the reason for it. Millions of Americans found themselves laid off during the pandemic, due to forces beyond their control. Mortgage lenders understand this and weigh their considerations accordingly. So you won’t necessarily be “penalized” for a short-term layoff within the past two years.

Similarly, a short-term break in employment probably won’t cause you any trouble when it comes to getting a mortgage loan. If you were out of work for only a couple of weeks, and have otherwise held steady employment, you could still be a good candidate for a mortgage loan.

A Letter of Explanation Might Be Needed

If you have a gap in your employment within the past couple of years, you might have to write a letter of explanation to document the reason for it. “Letters of explanation” are a common requirement when it comes to mortgage underwriting. This is the underwriter’s way of requesting additional information or clarification from the borrower.

It can also be a good sign. A letter of explanation means that you are still being considered for mortgage approval, but the underwriter just needs additional information. So it’s not necessarily the end of the road. It might just be a bit of extra paperwork on the path to loan approval.

You could also support your cause by providing documentation that shows the employment gap was due to forces beyond your control. For example, if you were caught up in a companywide layoff during the pandemic (or some similar scenario), it probably wouldn’t count against you in terms of mortgage approval.

Having Stable Income Is What Really Matters

A lot of the requirements for mortgage loans in California trickle down from Fannie Mae and Freddie Mac. These are the two government-sponsored corporations that buy home loans from lenders and sell them into the secondary mortgage market.

Both of these organizations mention employment gaps within their official guidelines. But they don’t provide specific rules and requirements for lenders. Instead, they encourage lenders to review the borrower’s complete financial and employment situation, in order to make an informed lending decision.

They also require lenders to evaluate borrowers for “stable” income. In fact, that word is used frequently throughout the Fannie Mae and Freddie Mac mortgage guidelines.

For example, the Freddie Mac website states the following:

“The Seller must determine that the Borrower’s income is stable and likely to continue at the level used to qualify for at least the next three years. The Seller must analyze all income documentation while taking into consideration the characteristics of the employed income (e.g., employment source, income type, and stability of the employment history, including any gaps in employment).”

Bottom line: Having a short or explainable gap in your employment won’t necessarily disqualify you for a mortgage loan in California. If the bank or lender determines that you have stable income and employment, and that you’re able to manage the monthly payments, you could still be a solid candidate for financing.