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I’m unemployed. Can I still buy a house or refinance my mortgage?

Craig Berry
The Mortgage Reports contributor

Can you get a mortgage on unemployment?

Bad news first. If you were recently laid off due to the COVID pandemic, or otherwise, your unemployment income can’t be used to qualify for a mortgage.

But don’t give up on your home buying plans just yet.

It’s possible to buy a house 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 once you’re back on your feet.

Check your home buying eligibility today (Dec 1st, 2020)

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Unemployment income and mortgages

If you’re currently on unemployment, 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 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:  

  • Paycheck stubs
  • The last two years of W2 forms
  • Or, if self-employed, the last two years of income tax returns
  • Potentially, 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 number of weeks most states allow someone to be eligible for unemployment benefits is 26 weeks. 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.

Applying with a co-borrower can make things easier

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, credit reports, credit score, and assets to gauge their ability to make the monthly mortgage payments.

Another option may be a non-occupant co-signor. While co-signors generally can’t help 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 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:

  1. The offer letter must have no conditions or contingencies of employment, such as “dependent on clear background check”
  2. The start date listed in the offer letter must fall within 90 days of the mortgage closing date
  3. The letter must clearly state your rate of pay and your starting date, and be signed by you and your new employer
  4. You must provide evidence that the home you are purchasing will be your primary residence
  5. You must provide evidence that the home you are purchasing is either a detached single-family residence, townhome, condo, or Planned Unit Development
  6. 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 all these conditions are met, you could get a mortgage and buy a house with only an offer letter in hand — before you’ve even returned to work.

Verify your mortgage eligibility (Dec 1st, 2020)

What about refinancing?

Generally, the same income rules for home buyers also apply to homeowners who wish to refinance.

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 or FHA loans.

These government-backed mortgages have access to Streamline Refinancing — a low-doc refinance loan 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.

Seasonal workers and contractors may be able to use unemployment income to qualify

For seasonal jobs such as landscaping and construction, it’s possible for unemployment income to be considered.

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 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 that they received jobless payments consistently for at least two years, this may be considered when applying for a mortgage. 

But there’s an 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.

Don’t write off your home buying plans because you lost your job

Low interest rates continue to break records, making home affordability more and more attractive than ever.

While unemployment income can stifle your plans, all hope is NOT lost.

Even if the coronavirus pandemic adversely impacted your income and employment, that doesn’t mean you can’t still take advantage of mortgage rates in the 2s and 3s.

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.

Verify your new rate (Dec 1st, 2020)