A temporary or permanent loss of employment in the middle of applying for a mortgage to buy or refinance a home can seem like a nightmare scenario. If you're losing a paycheck, you've got enough to worry about. Let's get you through this.
After you've recovered from the initial shock (but not too long), call the lender and tell it exactly what's happened.
If you’re purchasing a home. Without a steady check in your future, you probably don't want the added burden of a new loan. Having the job loss occur while getting the loan — although painful to no end — may feel like fortunate timing after a few months.
If you're refinancing. Even a refinance with a lower payment is likely to be at risk of closing with an employment interruption. There's little chance that your loan will "slip through the cracks" without the lender becoming aware of your employment situation.
Lenders will verify your employment days before you sign the paperwork.
Depending on your situation, here are some scenarios and how they may play out.
If your job loss isn’t permanent
Explaining your new employment circumstance to your lender requires letting it know if the job loss is permanent or temporary. Lenders are looking for a reliable future income.
If your employer has promised a return to work within a specified time or has committed to future plans to rehire you at a particular time, provide the lender with a letter from your employer stating that.
"Generally, with furloughs, the key initial consideration is whether the borrower is still receiving income," Chris Birk, director of education with Veterans United, said via email.
He adds that if a borrower's income is reduced while on furlough, then the loan application could still move forward "as long as they can meet ability-to-repay and other guidelines with that reduced level of income."
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A borrower who can’t qualify with the reduced rate of pay would need to pause until their income rebounds, Birk said. And those furloughed without pay would need to put homebuying on hold until they’ve returned to work, he adds.
And, in most cases, unemployment income can't be counted toward mortgage qualification.
"For example, seasonal workers with a history of receiving unemployment income may be able to move forward, but those scenarios are evaluated on a case-by-case basis," Birk said.
“In most cases, unemployment income can't be counted toward mortgage qualification.”
While Veterans United specializes in loans to borrowers with military affiliations, Birk says such lender policies are usually the same for varying loan types, including VA and conventional loans, though he can't speak to what other lenders might do.
If you're self-employed
If you are self-employed, lenders will verify that your business has been open and publicly operating. In a case where your business has closed, even temporarily, it's likely that lenders will not use your previously reported income to qualify you for a mortgage.
If you have a commission-based job or are working reduced hours
Perhaps you make your living on sales commissions and still have a job, but earnings have taken a tumble. Or you may be working fewer hours or taking a cut in pay. If it's not an expected seasonal ebb and flow, the lender may balk at the lack of income stability and decline to close your previously approved application or qualify your loan to the lower earning level.
Lenders aren't likely to average your income during the dips but may if they see that earnings have leveled out.
If it's a joint application and one borrower is still working
If one of you is out of work, but the other is still employed, you may have to adjust your home search to reflect your lowered borrowing power unless you can still qualify with the single income. It's something else to discuss with your lender.
If one income won't qualify for the home you seek, you'll need to forfeit your purchase agreement, find another home that fits your new budget and restart the mortgage process.
Or wait until both of you are back on solid financial ground.