Can I get a mortgage on unemployment?
Bad news first. If you were recently laid off (because of the pandemic or for any other reason) you can’t count unemployment benefits as income for a mortgage application.
But don’t give up on your home buying plans just yet.
It’s possible to buy a house or refinance very soon after returning to work — or even before you start a new job if you have a strong offer letter.
If you keep your finances in order while unemployed, this brief period out of work shouldn’t stop you from buying a house or refinancing once you’re back on your feet.
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Unemployment income and mortgages
If you’re currently receiving unemployment benefits, your lender most likely won’t be able to use your unemployment income towards qualifying for a home loan.
The reason? It comes down to the way lenders calculate and verify income.
The basic mortgage standard is this: Lenders are required to document at least two years of verifiable income from a steady source.
Your lender must also determine that the source of income is likely to continue into the future, typically for at least three years.
In order to document the past 24 months, home buyers usually need to provide several documents:
- Pay stubs
- The last two years’ W2 forms
- If self-employed, the last two years’ income tax returns
- Bank statements
Someone who’s newly unemployed might have a steady work history. And they might have the savings required for a down payment.
But a lender won’t be able to verify their future income.
In fact, the maximum amount of time most states allow someone to be eligible for unemployment benefits is 26 weeks at a time. That’s six months, not three years.
For these reasons, unemployment income can be used for everyday expenses. But it cannot be counted when qualifying for a new mortgage.
Buying a home after being on unemployment income
Now, here’s the good news. If you’re currently on unemployment, you probably won’t need to establish a new two-year job history after returning to work.
In fact, you might not have to wait at all before applying or re-applying for a mortgage.
Whether or not your loan application goes through at that point will depend on a number of factors:
- How soon you anticipate going back to work
- Whether you have income from other sources, such as a temporary or side job
- How you handled your finances while unemployed (i.e. were your other loan payments made on time?)
- Whether your credit history is free of late payments or delinquent loans
- The size of your down payment
Here are a couple of strategies that can help push your mortgage application through quickly after you get back to work.
Apply with a co-borrower or co-signer
If your application includes a co-borrower, it may be easier to get a mortgage after unemployment.
Your lender can consider your co-borrower’s income, debt-to-income ratio (DTI), credit reports, credit score, and assets to gauge their ability to make the monthly mortgage payments.
Before applying, have an honest conversation about your co-borrower’s debt load. You’ll need to co-borrow with someone who has the income, credit score, and DTI to qualify for a mortgage.
Someone with a lot of credit card debt or a big load of student loans may not help your application.
Another option may be a non-occupant co-signor. While co-signors generally can’t make up for poor credit, they can be especially helpful to fill income voids on a mortgage application.
Qualify for a mortgage based on an offer letter
If you were laid off or furloughed as a result of the coronavirus, but you’ve received a job offer, there may another option for you.
Most lenders will accept an employment offer letter, and even allow you to close on your loan without actually starting the job.
Employment offer letters are generally considered if they meet six basic criteria:
- The offer letter must have no conditions or contingencies of employment, such as “dependent on clear background check”
- The start date listed in the offer letter must fall within 90 days of the mortgage closing date
- The letter must clearly state your rate of pay and your starting date, and be signed by you and your new employer
- You must provide evidence that the home you are purchasing will be your primary residence
- You must provide evidence that the home you are purchasing is either a detached single-family residence, townhome, condo, or Planned Unit Development
- You must be able to demonstrate that you have sufficient reserve funds to pay mortgage payments, real estate taxes, and homeowner’s insurance during the time between closing and your start date (typically as much as three months’ worth), as well as an additional three months’ worth of reserves
If you meet all these conditions, you could get a mortgage and buy a house with only an offer letter in hand — before you’ve even returned to work.
What about refinancing on unemployment?
Generally, the same income rules for home buyers also apply to homeowners who wish to refinance their existing mortgage loans.
If you currently have a conventional loan — one backed by Fannie Mae or Freddie Mac — and you’re unemployed, you’ll likely need proof of new employment and future income before you can refinance your loan.
The only possible exception is for homeowners with VA loans or FHA loans.
These government-backed mortgages have access to Streamline Refinancing — a low-doc mortgage refinance program that doesn’t require the lender to re-verify your income or employment.
Many mortgage lenders will verify income and employment anyway, as they want to know you’ll be able to make your loan payments.
But if you can find a lender offering Streamline Refinancing with no income or employment verification, you might be able to refinance into today’s low mortgage rates even while unemployed.
The exception: Seasonal workers and contractors may be able to buy a house on unemployment
For seasonal jobs such as landscaping and construction, it’s possible for lenders to document unemployment income when you apply for a home loan.
That’s because these professions may have a history of regular income from unemployment during their off seasons.
Here’s an example: Seasonal workers generally do a job, the job is completed, and then they’re laid off. When a new project comes up, they’re re-hired.
During the time between projects, the seasonal worker applies for and receives short-term unemployment income.
In this instance, their seasonal unemployment income may be used for mortgage qualifying.
However, it must still adhere to the two-year history rule. If a seasonal worker can document they received jobless payments consistently for at least two years, this may be considered when applying for a mortgage.
There’s one important caveat worth noting.
Unemployment compensation cannot be used to qualify the borrower unless it is clearly associated with seasonal employment that is reported on the borrower’s signed federal income tax returns.
And, the lender must verify that the seasonal income is likely to continue.
Additional considerations for unemployment income
Second only to your credit score, your income plays a major role in the home loan process.
Even though unemployment income may be averaged and counted towards a mortgage qualification in rare cases, there are some important points to remember.
While unemployment income may be averaged over the last two years, as well as year-to-date, your lender must verify income from a current job in the same field. That means you must be employed at the time you apply.
Mortgage borrowers may NOT count unemployment if they are currently unemployed.
Additionally, if you’re currently receiving unemployment, your lender may not count the previous job’s income or unemployment income until they can verify that you have a new job.
Other forms of income for a mortgage loan
Ordinarily, lenders can’t count unemployment benefits as income. But they may let you qualify when you bring proof of disability benefits to the table.
For this to work, your monthly payments from disability — whether they come from your own long-term disability insurance policy or from Social Security — must be scheduled to continue for at least three more years.
You can also use alimony or child support payments from a former spouse as income on your mortgage application.
Once again, you’d need to prove the monthly payments are scheduled to continue for three more years. You may also need to show proof that you have been receiving the payments regularly during the past two years.
Make sure your loan officer knows in advance whether you plan to use disability, child support, or alimony as income — especially if the lender’s pre-approval process didn’t ask what kinds of income you plan to document.
And be sure to search for closing cost or down payment assistance programs in your area. These can help lower your loan amount, making it easier to qualify.
Don’t write off your home buying plans because you lost your job
Low interest rates are making home affordability more attractive for many Americans — whether they’re first-time homebuyers or existing homeowners who want to move or refinance.
While unemployment income can stifle your homeownership plans, all hope is NOT lost. Speak with a few mortgage lenders about your specific situation.
There’s still time to join millions of other homeowners who’ve already taken advantage of an incredibly hot real estate market.