Job Loss Before Closing: How Your Mortgage is Affected?
A mortgage loan approval gives you the go-ahead to start shopping for a house.
Although a pre-approval isn’t required, it is recommended.
The pre-approval process involves providing a mortgage lender with your tax returns from the past two years, paycheck stubs, W-2s, bank statements, and the lender will also check your credit history.
Keep in mind:
Getting pre-approved doesn’t guarantee closing.
It only means you’re likely to be approved upon completion of the underwriting process.
So any changes to your income, employment, or credit before closing could jeopardize the mortgage.
Now, you may be worried about how your home purchase is affected.
Here’s what to do (and not do) if you become jobless after a mortgage approval.
Should You Tell Your Lender?
Yes, tell your mortgage lender immediately if you lose your job.
Since the lender has already verified your income and employment, you might reason that it’s best to keep quiet about your job loss.
Maybe you’re confident that you’ll find new work quickly, or maybe you already have a new job lined up.
Either way, hiding this information from your mortgage lender does more harm than good.
Not disclosing a serious change in circumstance is considered mortgage fraud. And even if you don’t disclose this information, your lender will likely learn of the job loss on their own.
It’s not unusual for underwriters to re-verify employment and income a few days before closing, just to make sure you’re still employed.
If you don’t have a job, or if you’re working at a new company, this can delay closing or the lender might cancel the mortgage altogether.
On the off chance that your lender doesn’t find out about your job loss, going through with a mortgage sans a regular job or steady income can be detrimental to your personal finances.
There’s no way to know when you’ll find steady work again.
So you could potentially run into payment problems, thus damaging your credit and putting you at risk of foreclosure.
The best alternative:
Notify your lender as soon as possible, and then discuss options to keep your closing on schedule.
Steps to Take If You Lose Your Job After a Mortgage Approval
The bottom line is that your lender can’t proceed with closing unless you provide another income source.
Losing a job doesn’t necessarily mean that you can’t buy the house, but you’ll need to take specific steps to make this happen.
1. Maintain a good credit history
After a job loss, it’s important that you maintain a good credit score. Or at the very least, a credit score that meets your lender’s minimum requirement.
Late payments and missed payments can decrease your score, which can jeopardize your mortgage loan or result in a higher interest rate.
Using your savings to keep bills current helps maintain your score. But you also risk spending money you’ll need for your down payment and closing costs.
One option is to contact your lenders and creditors to see if you’re eligible for a “skip payment option.”
If so, you’re allowed to skip payments for a certain number of months without penalty.
This way, you can keep your cash in the bank and protect your credit score.
2. Explain the nature of the job loss
Depending on the nature of the job loss, you could possibly still purchase the property, although your lender will likely delay closing.
If you’re furloughed, which is a temporary leave of absence, your lender might not immediately cancel the mortgage, since you could return to work before your scheduled closing date.
If you’re still unemployed as your closing date approaches, the bank will likely cancel the mortgage at this time.
If you’re laid off from your job—which is often permanent— your lender may have no other choice but to cancel the mortgage.
3. Get a new job
On the other hand, if you’re fortunate enough to find new work relatively quick, this might be enough to save your mortgage.
Understand, though, the lender may require that you’re on the job for at least 30 days before closing.
In addition, your new job must be in the same field as your previous job, and your income must remain roughly the same or increase.
The lender will request copies of your recent paychecks stubs, and confirm employment with your new employer.
4. Ask the lender to re-calculate your income
Getting approved for a mortgage doesn’t “only” require income from an employer.
Other income sources are acceptable, too.
So if you lose income after a job loss, other income sources can help you qualify for the loan. This can include alimony payments, child support payments, disability income, and retirement income.
As a side note, if you use income from child support or alimony, you must have received these payments for at least six months before applying for the mortgage.
Also, payments must continue for at least three years after closing.
5. Apply for a smaller mortgage loan
After re-calculating your income using other sources, your lender might still approve a mortgage, yet offer less than the original amount.
Your only option in this scenario is to cancel the original purchase (and lose your earnest money deposit) and look for a cheaper property.
Or, continue with the purchase, and put down a larger down payment to compensate for the difference.
Again, you’ll have to assess whether it’s wise to spend a large chunk on your savings while you’re out of work.
If you need to come up with extra cash, one option is to use gift funds for a larger down payment. Many home loan programs allow borrowers to use gift funds for their down payment and closing costs.
Your lender will need information about the donor, though. This includes their relationship to you, the amount of the gift, and the donor must submit a letter stating that they don’t expect repayment.
6. Find a cosigner for the loan
Another option is to get a cosigner for the mortgage loan.
This might include a family member who’s in a financial position.
They’ll also need to meet the lender’s minimum credit score requirement.
Before going this route, though, make sure you both understand the risks associated with cosigning a loan. This person’s name will appear on the mortgage loan, so they’re equally responsible for the mortgage payment.
At this time, you must have a high enough credit score and income to qualify for the mortgage on your own.
Refinancing only makes sense if you secure a low mortgage rate, and if you’re okay paying closing costs again.
Losing your job after getting a mortgage approval can be devastating.
It might take weeks, months, or longer to find new work, in which case your mortgage lender might cancel your loan.
The important thing is:
Notify your lender as soon as possible, keep your credit in good standing, and try to find new work as soon as possible.