If you have been off work for longer than a month in the past two years, a mortgage lender may ask for a letter explaining the gap in employment.
This is not something to be worried about. It’s simply the lender complying with lending rules so it can close your loan.
Here is a sample mortgage letter of explanation (LOE or LOX) for your gap in employment.
- Sample letter explaining gap in employment for mortgage loan – template download
- What is the lender looking for in my employment gap LOE?
- How long of an employment gap can I have?
- Returning to work
- Employment gaps for school, training, or military service
- Employment gap letter of explanation FAQ
- Employment gap LOEs are just part of the process
Sample letter explaining gap in employment for mortgage loan – template download
>>Download the PDF here (requires PDF editor to edit)
What is the lender looking for in my employment gap LOE?
Lenders are required to make their best judgment on whether your current income will continue for the next three years.
The best indication of the future is the past. If you have unexplained history of long gaps in employment, it could hint that you will again take a leave of absence in the next three years.
The lender is looking to build their case that you will stay employed for the foreseeable future.
Your letter should indicate that your employment gap was a one-time event that is not likely to re-occur.
For example, you took a year off to be a stay-at-home parent. But now, the kids are in school so you are returning to work.
Or, a parent got sick and you took time off to care for them, but they are now recovered.
Whatever your reason for being unemployed for a time, you want to make a case that you had solid employment before the gap and now you’re back to work permanently.
How long of an employment gap can I have?
I have personally seen cases of employment gaps lasting five to seven years or more. This is acceptable as long as it makes sense.
A woman who has two children two years apart may choose to be a stay-at-home mom for seven years until the younger child enters school. This applicant, though, must prove solid employment before the gap and six months in the new job.
However, having a seven-year unemployment because you’re “looking for work” probably won’t fly. This makes you look flaky, like you could quit your new job again at any time.
Here are guidelines for each loan type. Keep in mind that you may hear different rules from various lenders, but that’s probably because they create their own additional “overlays.” If your lender won’t approve your scenario, find another lender.
Conventional: Fannie Mae requires six months in the new job after an employment gap longer than six months. Borrowers with gaps shorter than six months may qualify with an employment offer letter for their new job and their first pay stub. Freddie Mac states that it does not even require a letter of explanation for a gap, but the lender is permitted to request one. Both agencies require proof of stable employment before the gap. This might be completed with a verification of employment from the previous employer or other documentation proving a two-year employment history prior to taking time off.
FHA: For gaps longer than six months, you must provide a letter of explanation and be back to work for at least six months. Keep in mind that six months’ employment must have passed before the lender pulls the FHA case number, a step that typically happens when you apply. Ask your lender not to pull a case number yet until you’ve hit the six-month mark. The lender also has to verify two years of work history prior to the employment gap. Have your former employer’s HR department contact information available.
USDA loans: USDA is the toughest of all when it comes to employment gaps. Gaps longer than 30 days require a letter of explanation unless the employment is clearly seasonal. You need 12 months of employment history after a gap longer than 30 days. Additionally, school or training does not count toward your employment history as it does with other loan types.
VA loans: No explanation letter is required for gaps less than 60 days if you receive an “approved” recommendation from VA’s computerized system (the lender runs this for you). Gaps longer than 60 days other than for school, training, or military service must be explained. Depending on the lender, you may need anywhere from 30 days to 12 months back on the job, depending on the length of the gap.
Returning to work
Generally, you need to be re-entering full-time, salaried employment after a job gap. The lender may not be able to use your income for qualifying purposes when returning to a part-time or self-employed position. A new two-year work history will probably have to be established.
Employment gaps for school, training, or military service
These types of gaps are typically acceptable. They may not need an explanation letter and may count toward employment history.
The exception is USDA loans. USDA no longer considers school as part of your employment history. You still must have one year of actual work history after schooling to qualify.
Employment gap letter of explanation FAQ
You can have any gap of employment, but you must re-establish various lengths of work history for each loan type. For conventional, you must have six months of employment after a six-month gap. For FHA, you also need to be back to work for six months. USDA loans require a 12-month history after a gap longer than 30 days. VA loans may require from 30 days to 12 months of re-established work history to qualify, depending on the lender. You may need just an offer letter from your new employer and your first paystub for shorter work gaps.
Lenders must make a case that your income will continue for the next three years. The best indicator of future income is how you have held down a job in the past. Someone with regular employment gaps for no apparent reason will likely have employment gaps in the future, potentially causing loan repayment problems.
Lenders want to see that the employment gap was a one-time event for a logical reason, and that it is not likely to re-occur. They also need to see documentation of solid employment before the absence and that you are back to work in a similar career field.
Employment gap LOEs are just part of the process
Don’t hate your lender for asking for a letter of explanation. They are simply trying to fulfill their requirements and get the loan closed.
Providing the letter, plus documentation, will get your loan closed fast so you can move on to other things.