FHA Underwriters, Remember the Two Year Rule

Written By: Glenn Michaels, Op-Ed Writer

When underwriting FHA mortgage loans you must first determine what “effective” income is.  FHA requires all borrowers to show a minimum of two years of employment. There are exceptions to the rule and below we will go over the exceptions:

If a borrower is on their job for at least six (6) months and was previously in school or the military the two (2) year requirement can be waived. Everyone is quick to obtain from the borrower a copy of their diploma or a copy of their degree to provide evidence of schooling. If you provide the diploma/degree then you did not fulfill the FHA requirements to provide evidence of schooling. To properly provide evidence the borrower must provide a copy of their school transcript.  A borrower that states that they were in the military, you need to obtain the borrowers discharge papers and their DD – 214 form. If the borrower is still in the military we need the borrowers DD – 214 form.

As a prudent underwriter you should check the transcripts to observe what and when the borrower attended school and what they do for a living. Yes, it is not uncommon that people engage in jobs that have nothing to do what the borrower studied, mainly make sure the dates of study satisfy two years.

If a borrower took an extended gap in employment to raise a child the borrower can satisfy the two years of employment a little differently.

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The borrower must write a gap letter of explanation, signed and dated. The current employment must be for six (6) months or more and provide evidence that the borrower was employed somewhere for two years prior to staying home to raise their child. The employment can be foreign or domestic, but two years must be proven.

Recently I was underwriting a mortgage file that contained a borrower with less than two years of employment. The borrower was a stay at home dad. The borrower was employed on the current job six (6) months or more but there was no evidence of the two year employment prior to taking leave to raise the child. The mortgage loan was conditionally approved subject to providing that two year history of employment prior to taking the leave of absence.

The loan officer in an attempt to satisfy this condition submitted a copy of the borrower’s passport with the dates the borrower was out of the country. This evidence did not provide evidence that the borrower worked for two years somewhere for two years prior to taking the leave of absence.

Domestic income is relative easy to prove. Records can be obtained from the borrower, the current/former employer, the IRS and by social security. The income from a foreign country is harder to substantiate in some cases. In some countries employers issue pay advices and if the borrower kept the pay advices then we have evidence of employment. A letter from a former foreign employer could also be accepted if the writer indicates that the borrower was employed for 2 or more years and what the borrower was paid.

Remember the two year employment rule and you should not have problems with your institutional investors and/or HUD.


About The Author

Glenn Michaels - As an NAMP® Opinion Editorial Contributor, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. 


Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.