Can I Use Unemployment Income to Qualify for a Mortgage?

How to protect your finances during unemployment

Although we are living in extremely uncertain times, it is still important to protect your finances to ensure you are secure when you return to the workforce. Some steps you can take to help protect some of your assets include:

Types Of Home Loans For Those Who Are Unemployed

Of course, there are also specialized home loan types available for individuals who are unemployed as well. 

Asset Depletion Mortgage

An asset depletion mortgage presents a way for you to qualify for a home loan by leveraging a substantial amount of assets, rather than relying on income that you might receive by way of steady employment. It essentially leverages your liquid assets as a lone or additional source of income to show that you possess enough funding to pay for the mortgage, and day-to-day living expenses, allowing you to qualify as a borrower. Mind you: Your assets are only used up-front to illustrate that you have the ability to make the monthly mortgage payments − you don’t have to cash them in the moment you sign on the dotted line.

No Income Verification Mortgage

There are also certain types of nonqualifying mortgages that do not require you to present income verification. These loans may be a good option for those who are self-employed or have seasonal income, although they may come at higher interest rates, and with additional terms and conditions attached. Note that Rocket Mortgage® does not currently offer these types of mortgages.

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What happens if you cancel your loan application?

For some applicants, the strategies above may not have a positive impact on their loan application. If you find yourself in this camp, you have the option to cancel your loan application. While cancellation might be your last resort, it can save valuable time and legwork for both you and your prospective lender.

If you’re thinking about canceling your application, you may wonder what consequences there may be. The good news is your mortgage application is not a binding contract. You’re free to cancel at any time. However, not all application-related fees are refundable. Depending on your lender’s policies and the timing of your cancellation, you may face one or more of the following:

1. Lost application fees

Loan applications take time to process and review. There are also costs your lender must absorb to process your application. These fees are typically part of your loan application fee, which is usually not refundable. Additionally, some lenders charge a financial penalty for canceling a mortgage application.

2. Credit implications

Canceling your application will not impact your credit score. However, if you decide to apply for new loans in the near future, your credit score might take a hit.

3. Loss of earnest money

Depending on how far along you are in the application process, you may have a small deposit in escrow. Commonly known as earnest money, this deposit typically ranges from 1% to 3% of the purchase price. Earnest money shows the seller you’re serious about buying their home while allowing you time to secure financing. If you suddenly decide to cancel your application, the seller is entitled to keep the earnest money.

4. Other application-related costs

While many lenders offer a variety of free application-related services (PDF), there are other costs that are typically not refundable. Some common examples include home appraisal fees and rate lock fees.

Seasonal Workers and Contractors

If you’re a seasonal income earner or contractor, Gelios said you will need to qualify based on the income you make in the periods when you work. “For example, if someone makes $45,000 in their working season, this income would be calculated over the past 12 months; if no income was earned the year prior, then that income would be calculated over 24 months.”

Using the 24-month formula above, if you earned $45,000 a year, on paper, it would show you making $22,500 a year.

It’s also helpful if you can demonstrate the seasonal work has a strong likelihood of continuing in future years.

“Again, any income from unemployment [in the two-year period] could not be used in qualifying for a mortgage, since lenders look at whether or not the source of the income is steady and how strong is the potential of future income—although future income is not calculated,” Gelios said.

The gig economy is growing, but these types of workers may not always have the documentation required by traditional lenders. “It might be worth it for self-employed borrowers to look at private lending options, as private lenders have more flexibility in their qualifying guidelines and may offer lending products unique to those who are self-employed,” Gravelle said.

How to document unemployment income for a mortgage

There are some extra hoops to jump through if you want to use unemployment income when applying for a home loan. Have the following documentation handy for your lender:

  • Two years’ worth of tax returns. Unless unemployment income appears on your federal tax returns, it can’t be used for a mortgage.
  • Employer verification of your job history. Your employer may be contacted to verbally confirm that you’ve worked at least two years in a seasonal job. Some lenders may request a written verification of employment.
  • Confirmation you’re likely to be hired again next season. Lenders may contact your employer to give a thumbs up on future work to ensure the income will continue.

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.

Related Resources

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How To Buy A House With Low Income: Tips And Strategies To Help You Become A Homeowner Home Buying – 8-minute read Molly Grace – May 23, 2022 Becoming a homeowner doesn’t have to be an impossible dream. Learn more about the programs and strategies that can help you buy a home on a low income. Read More

How Much Income Do I Need To Buy A House? Home Buying – 6-minute read Victoria Araj – May 23, 2022 How do you know if you have enough income to buy? We’ll take a look at the process through a lender’s eyes. Read More

Your Ultimate Guide To Home Loans For People With Disabilities Home Buying – 11-minute read Victoria Araj – May 23, 2022 Read our guide to grants, mortgages, modification loans and home loans for people with disabilities, including must-know tips, programs and rights. Read More

What Qualifies as Income?

Now you know that lenders don’t consider unemployment benefits to be qualified income. But what would they consider? “Lenders look for sources of income from employment, investment dividends paid regularly, Social Security checks, or any other form of steady income coming in,” Gelios said.

And there are also other types of income that may qualify you. “Alternative income sources, such as lawsuit settlement payments, alimony, and inheritance, also count,” Gravelle said.

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Documentation Youll Need To Apply For A Purchase Mortgage Or Refinance

There’s a lot of documentation that’s required when you apply for a mortgage or refinance, and it’s a good idea to get this paperwork together early and look for additional information that could help you qualify for a new purchase mortgage or a refinance. These documents include:

  • Account information
  • Tax returns
  • Bank statements
  • Recent pay stubs
  • Proof of insurance
  • Proof of unemployment
  • Financial details of your co-signer (if there is one)
  • Proof of any additional income, like freelance work or investment income

Talk To Your Lender

Talk to your lender about your desire to get a purchase mortgage or refinance while unemployed. Can they offer any alternatives, like a new repayment plan? Do they know of programs geared toward people in your situation, like, for example, programs designed to help first-time home buyers? You may also want to speak to your lender about a mortgage refinance or other alternatives, like a mortgage repayment plan.

It’s worth noting that if you go on a repayment plan, this is generally after a forbearance. We’ll discuss how those work a little later.

Choose A Refinance Plan That Works For You

If you’re able to secure mortgage refinancing with your lender, make sure the new mortgage rates and monthly payments work for your situation. It’s helpful to use a mortgage calculator to confirm that the new payments work within your budget.

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 Bottom Line: You Can Get A Mortgage Or Refinance Without A Traditional Job

Acquiring or refinancing a mortgage when you’re unemployed is tricky, but not impossible. And if you don’t qualify for refinancing, there are other options to consider, depending on the type of mortgage you already have. Read more about refinancing a mortgage. Ready to apply or have questions? Get started with your mortgage application or give us a call at (888) 452-0335 today!

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