As businesses closed in response to the coronavirus pandemic, nearly 40 million Americans have filed unemployment claims since mid-March. The unemployment rate spiked to nearly 15% in April (from 4.4% in March) before falling slightly the next month.
With so many people out of work, more potential house hunters may be asking themselves, “Can I buy a house while receiving unemployment?”
The answer might be discouraging: It is very difficult to buy a home when you’re unemployed. However, in certain circumstances, you might be able to make it work.
What the homebuying process can look like on unemployment
With mortgage rates near historic lows, it can be tempting to house hunt even if you’re out of a job. However, qualifying for a mortgage while on unemployment is exceedingly difficult.
That’s because lenders are, in most cases, required to verify that the borrower has the ability to repay the loan under the federal ability-to-repay rule. Mortgage companies must take into account a customer’s income, assets, employment situation, credit and monthly bills. The idea is that a person’s income needs to be enough to make the monthly payments.
This is an issue for people who are unemployed and not receiving a paycheck. Unemployment benefits generally do not qualify as income for the purposes of qualifying for a mortgage.
Government-sponsored entities Fannie Mae and Freddie Mac, which package conventional loans for sale, do not permit workers who have been furloughed or laid off to be considered actively employed. Neither Fannie Mae nor Freddie Mac allow unemployment benefits to be counted as income for the purposes of qualifying for a mortgage unless the applicant has established a history as a seasonal worker. This could be someone who works in a job where they are always out of work for the summer or winter (like a construction worker). People who have unexpectedly lost their jobs due to the COVID-19 pandemic would not qualify.
Further, in an uncertain market, Fannie Mae and Freddie Mac may require stricter credit standards, larger down payments and more thorough income verification to ensure the loans they sell are high quality.
Although you are able to house hunt — albeit with fewer in-person showings and open houses — actually qualifying for a loan will be next to impossible.
In some circumstances, however, you might be able to qualify for a mortgage with income you receive from somewhere other than a job.
The following sources of income can be counted on your mortgage application. If they add up to enough, you might qualify even if you’re currently unemployed.
Retirement benefits/pension
Trust income
Disability income
Foster-care income
Rental income
Interest and dividends on investments
Alimony or child support
VA benefits
If you submitted your mortgage application before you lost your job, make sure to notify your lender as soon as possible. The mortgage may or may not move forward, depending on your assets, credit and other sources of income.
Renters beware
Like a mortgage lender, landlords will also want to make sure you can afford the monthly payments before offering you a lease on an apartment. They will often run a credit check through one of the major credit reporting agencies to look for your credit score, payment history, employment and any evictions or lawsuits. Others will ask for your employment information and then confirm it. While every landlord or property management company will have its own set of criteria for screening tenants, unemployment may be a reason to deny you a lease.
5 ways to make yourself more attractive to lenders
If you’re unemployed, you’ll need an especially strong application in other areas to qualify for a mortgage — or you’ll want to find an alternate way to pay for the property you’re looking to buy.
Make an all-cash offer: If you’re unemployed and have the financial wherewithal, you might consider skipping the mortgage process altogether and offer to buy your new home with cash. Sellers tend to value cash offers more highly, and you won’t need to go through credit underwriting. If you’re selling a previous house, you may have enough equity to pull this off by downsizing. However, few buyers have the resources to make this work.
Find alternate sources of income: Income from a part-time job can be counted on your mortgage application while you’re hunting for new full-time employment. However, keep in mind that even part-time work can affect your ability to qualify for unemployment benefits, depending on how much you earn.
Pay down debt: A key metric lenders look at is your debt-to-income (DTI) ratio, or how your earnings compare with your monthly obligations. The lower your debt, the less income you’ll need to be on solid footing. If you’re buying with a spouse or partner, lenders will look at the lowest of both your credit scores, so you may also think about paying off your spouse’s debt, even if it was incurred before your marriage.
Bring in a co-borrower: If your spouse still has his or her job, their income might be enough to qualify for the home you wish to buy. You may also choose to buy a home with a friend or future roommate with a better financial picture. Lenders will consider your income together but will typically use the lower of the two credit scores in their calculations. You will also want your co-borrower to know that they are on the hook for making mortgage payments if you fail to do so.
Ask for a gift: If your parents or other relatives are in solid financial shape, consider asking them to “gift” you money for a down payment. In some cases, this will be enough to satisfy a lender. However, the gift may raise red flags with your lender. You may need to provide a “gift letter” signed by the benefactor that states the money is a gift and not a loan.
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