The Greenhouse
by Pine

Will a gap in your employment hinder you from getting a mortgage?

It all depends on the lender and their specific guidelines.

Here's how to maximize your chances of getting approved.

Are you considering a career change or taking a break from work? That's great! But before you do, you should know how a gap in employment may impact your mortgage application process in Canada.

After all, your employment history is one of the key factors that lenders consider when determining your eligibility for a mortgage. But the impact of a gap in employment on your mortgage application can vary depending on several factors, including the length of the gap, the reason for the gap, and your overall financial situation.

First and foremost, lenders want to see stability and consistency in your employment history. A gap in employment can raise red flags and lead lenders to question your ability to repay the mortgage loan.

However, all hope is not lost! Lenders understand that life happens, and sometimes a gap in employment is unavoidable. In these cases, they may look for alternative sources of income such as rental income, investments, or government benefits. So, a gap doesn’t necessarily mean you can’t get a mortgage.

How big of a gap is acceptable?

Well, the truth is, there's no set rule for how big of an employment gap is acceptable when it comes to applying for a mortgage in Canada. It all depends on the lender and their specific guidelines. Some lenders may be more lenient and overlook a gap of a few months, while others may require a steady income history for a certain number of years.

However the bigger the gap, the more of a red flag it might be for lenders. They may question why you weren't employed during that time and whether or not you'll be able to make your mortgage payments. A general rule of thumb, for most lenders is, a gap in employment of less than six months is usually not seen as a major concern. On the flip side, if your time off  is longer than six months, it may be more difficult to get a mortgage, as lenders will view this as a significant risk factor. 

So, if you have an employment gap on your record, it's a good idea to be prepared to explain it and show proof of any alternative sources of income during that time, like unemployment benefits or freelance work.

How can I increase my chances of getting my mortgage approved?

While most criteria is still in place–think about having a good credit score, your debt ratios, and being able to qualify with the mortgage stress test–there are a few steps you can take that may help improve your chances to get approved for a mortgage, even if you have a gap in your employment 

1. Be honest

When applying for a mortgage, it's important to be transparent about your employment history, which means including any gaps in employment. Lying about your employment history can lead to more serious problems down the line, so it's always best to be upfront and honest with your lender.

If there’s a specific reason for your gap in employment, such as medical leave, a family emergency, or career change, be sure to explain this to your lender. Providing context can help mitigate any concerns your mortgage lender may have. Explain the reasons for the gap and how you have been keeping yourself busy during that time.

2. Show examples of stability

If you have a gap in your employment, it's important to show stability in other areas of your life, such as your residency, financial standing, and credit history. This will help convince lenders that you are a low-risk borrower even if you have a gap in your employment. You can do this by having a consistent address over a period of time, demonstrating a steady savings history, and maintaining a good credit score.

First, consistent residency is a strong indicator of stability. Maintaining the same address for several years can show lenders that you have a stable lifestyle. If you've moved, try to demonstrate that these moves were beneficial, such as a relocation for a better job or improved living conditions.

Second, a solid financial standing beyond your income can reassure lenders. Regular contributions to a savings account or investment portfolio, for example, can illustrate financial discipline and forward planning. Even if your income was interrupted, these habits show you have mechanisms in place to weather financial storms.

Third, maintaining a good credit score is essential. Regularly paying off credit cards, student loans, car loans, or any other financial obligations on time can give lenders confidence in your financial responsibility. Even during an employment gap, ensuring these obligations are met can greatly bolster your standing in the eyes of lenders.

Fourth, if you are self-employed or work freelance, presenting a consistent workload or client base can display stability. If you can show that, despite some fluctuations, you have a steady stream of work or a stable group of clients, lenders may feel more comfortable.

Fifth, your educational background and professional skills can also play a part. If the employment gap was used to further your education or learn a new skill set, sharing your achievements and how they make you more marketable can be beneficial.

Finally, demonstrating emotional stability can be helpful. This can include things like long-term memberships in community organizations or clubs, consistent volunteering, or other indications of your commitment to your community. These aspects of your life might not directly influence your financial capacity, but they can help paint a broader picture of stability and reliability.

Remember, the key is to help the lender understand that an employment gap doesn't necessarily equate to instability or increased risk. Through various facets of your life and financial behavior, you can still illustrate that you're a reliable candidate for a mortgage.

3. Save for a larger down payment 

You may want to consider saving up for a larger down payment if you have a gap in your employment. This will lower the amount you need to borrow and can also help offset any concerns that the lender may have about your finances. It can also improve your chances of getting approved for a mortgage while demonstrating your financial stability. 

Aim to save as much as you can for a down payment, and consider asking family–if possible–for help if needed, like a gifted down payment. 

In conjunction with saving for a larger down payment, it's crucial to understand that this financial strategy works in several ways to enhance the lender's confidence. A significant down payment reduces the loan-to-value ratio, which is a key factor in a lender's risk assessment. Essentially, the more equity you have in your home from the outset, the less risky the loan appears to the lender. This is particularly advantageous if your employment history might otherwise raise flags.

A larger down payment also reduces your monthly mortgage payment, making the loan more affordable in the long run. This could be a reassuring factor for lenders, as it reduces the likelihood of default. In case of future income disruptions, your lower monthly payment might be easier to manage, providing an added layer of security.

Additionally, the ability to save a substantial amount for a down payment demonstrates strong financial discipline and stability. It shows that despite an employment gap, you have successfully managed your finances and accumulated savings, indicating that you are less likely to face difficulties making mortgage payments.

Remember, while family gifts can certainly assist in increasing your down payment, lenders will likely require documentation to verify that the money is indeed a gift and not a loan. This usually involves the family member providing a gift letter stating that the money does not need to be repaid.

Finally, consider combining your larger down payment strategy with other proactive steps. For example, work on improving your credit score, reducing your overall debt, and demonstrating income stability in your current job. All of these combined can paint a more comprehensive picture of your financial stability and resilience, thus increasing your chances of mortgage approval, even with a gap in employment.

4. Provide proof of other income

If you have been doing freelance work or consulting jobs during your employment gap, be sure to provide proof of this income to the lender. This can include contracts, invoices, and payment receipts. Providing proof of alternative income can help increase your chances of getting approved for a mortgage as it demonstrates that you still have a stable source of income.

It's essential to understand the need for providing comprehensive and well-documented information. Lenders are generally interested in consistent, reliable income—whether it comes from a traditional job or freelance and consulting work. However, they often scrutinize non-traditional income sources more closely. Therefore, the more documentation you can provide, the better.

In addition to contracts, invoices, and payment receipts, consider offering bank statements showing consistent deposits from your freelance work. If you have ongoing agreements with clients, provide those as well. They can demonstrate future expected income and further underscore your financial stability.

It's also beneficial to present a record of related business expenses. It provides a more realistic picture of your net income, which is the amount lenders are primarily interested in. Proper tax records for your freelance work are also vital as they offer a third-party, legally validated summary of your income.

If your freelance work or consulting jobs are in the same field as your previous full-time employment, emphasize this continuity. This can give lenders greater confidence in your professional stability and your ability to earn income consistently.

Moreover, you may have other sources of income beyond freelance or consulting work. Rental income, dividends from investments, social security payments, or spousal or child support could all supplement your income. Be prepared to provide documentation for these income streams as well.

In essence, your goal is to depict a holistic and stable financial picture. By effectively documenting all your income sources, you can substantiate that, despite an employment gap, you still have the financial resources and reliability to meet your mortgage obligations.

5. Find a co-borrower or guarantor

 If you have a friend or family member with good credit and a stable income, they may be willing to cosign on your mortgage. This can help increase your chances of getting approved, as the lender will have a second source of repayment if needed. However, it's important to keep in mind they become equally responsible for the mortgage and its payment. Be sure to choose someone you trust and make sure they’re fully aware of the responsibilities involved.

When considering a co-borrower or guarantor, you're adding another layer of assurance to the lender that the mortgage will be paid reliably. While this can significantly improve your chances of mortgage approval, it's also important to understand the nuances and potential implications of such a decision.

Choosing a co-borrower with a robust credit history and stable income can help you qualify for a larger loan or better terms. Their financial strength can help compensate for your employment gap, presenting a joint financial profile that's more appealing to lenders. Additionally, if your co-borrower has a longer or more stable employment history, lenders might be more inclined to consider this income stability favorably.

Remember, the choice of a co-borrower should not be taken lightly. They are not just a passive participant in the process but an active partner in the mortgage. Ensure that the co-borrower is fully aware of their obligations and willing to make the payments if you are unable to do so.

In some cases, you might consider a guarantor instead of a co-borrower. A guarantor doesn't have a share in the property title but agrees to be liable if you default on your loan. This can also be an attractive proposition to lenders but, like with a co-borrower, the guarantor needs to understand the risks involved.

A robust and open conversation about all potential outcomes is crucial before entering into a co-borrowing or guarantor agreement. Both parties need to be comfortable with the arrangements and prepared to handle any potential issues down the line.

In essence, involving a co-borrower or guarantor is an effective strategy to increase mortgage approval chances when you have an employment gap. However, it is a significant commitment that requires careful consideration, understanding, and agreement from all parties involved.

Your employment gap isn’t always a deal-breaker 

In conclusion, a gap in employment can impact your ability to get a mortgage, but it doesn't necessarily mean that you won't be able to get approved. With the right approach and preparation, you can improve your chances of getting a mortgage and achieve your goal of home ownership. If you have any questions about the approval process or are ready to apply, one of Pine’s mortgage agents would be delighted to speak with you.

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