Unemployment and the Hopeful Home Buyer

Image of a person with a marker in their hand looking out a window with sticky notes on it. Captioned: Unemployment and the Hopeful Home Buyer

The coronavirus pandemic of 2020 led to a rise in unemployment. Many hopeful home buyers watched the derailing of their plans — if not a full-fledged train wreck. Some have been forced to wait until they’re employed again before applying for a mortgage. But not everybody is in a position to wait. Some will still be able to qualify for a loan, albeit a smaller loan, after an income drop. And those who were laid off or furloughed may ask:  

Do Unemployment or Stimulus Payments Count as Income When Applying for a Mortgage?

The short answer is no.

Of course, where law and finances converge, there’s always a long answer, too. In this article we look at situations where unemployment payments might help, where they don’t help, and how to get back on the track from a period of joblessness. The thread you’ll see running through this article is the regularity of the income a mortgage company wants to see before it approves an applicant.

Typically, Unemployment Payments Aren’t Regular, Stable Income.

If it’s not income that will reliably help you pay down debt over many years, money that comes from the government does not help a home shopper qualify for a mortgage loan. That’s also why earnings from a business you closed won’t count: those earnings are no indication of what you’ll have in the future to pay off your loan. Lenders have the legal responsibility to decide that the borrower is showing reasonable proof of the ability to handle a 15- or 30-year obligation.   

Unemployment compensation can be a regular event, though, for people who work in the leisure and construction sectors where employees are laid off between seasons and contracts. For these applicants, a mortgage representative may request a company’s confirmation that it expect to rehire the home buyer in the next work cycle.

Do You Have a History of (Two Years or More) Seasonal Unemployment?

If unemployment benefits constitute your sole income stream, or you cannot show future likelihood of employment, getting a mortgage loan approval will probably not be possible at this time. But Freddie Mac, Fannie Mae, and government-backed mortgages count unemployment income in these circumstances:

  • Fannie and Freddie: Conventional loan applicants must show proof of collecting unemployment benefits for at least two years, and have verified future employment. Maternity leave or short-term disability leave for medical reasons should not impact the loan application. If you decided to start up your own business or take contract jobs, and can show successful self-employment for at least one continuous year after working earlier in the same field, you may qualify for a conventional mortgage. In the wake of the shutdowns, self-employed workers need to come up with extra documentation.
  • Federal Housing Administration (FHA-backed mortgage loans): The applicant must show proof of collecting unemployment benefits for at least two years, and “there must be reasonable assurance that this income will continue.”
  • Department of Veterans Affairs (VA loans): Mortgage loan eligibility can regard unemployment payments as income. The applicant must show proof that unemployment benefits are “a regular part of the applicant’s income due to the nature of his or her employment (for example, seasonal work).”
  • Department of Agriculture (USDA loans): Proof is only necessary to show income received for one year, although the USDA encourages lenders to review the previous two-year employment history.

The above criteria will not answer the whole eligibility question, though. Also needed is the minimum credit score, down payment, and acceptable debt-to-income ratio. That means your income, during the part of the year you do work, must reach a certain level. If it does, you can qualify based on your blended regular and unemployment income, taking into account your yearly average over two years or more. As a rule, expect your mortgage broker to ask you for tax returns for the past two years, including the declaration of unemployment on the federal returns, and the employer’s verification of past work and future expected work.

Government Stimulus Payments Do Not Count as Reportable Income. 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided federal mortgage support, and also supplied emergency cash injections to U.S. businesses and taxpayers, to offset a nationwide wave of job market losses. In Spring 2020, the federal government issued $1,200 in stimulus payments to most people, $2,400 to married couples, and $500 for each child under age 17. Since May 2000, there have been other financial assistance proposals. At the time of publication, we are still waiting to see what comes.

But here’s what you need to know now: the stimulus payments are not taxable, and don’t count in taxpayers’ 2020 taxable income. And your general rule for mortgage applications is this. If you can’t report it as income, you can’t count it for a mortgage.

Just Getting Back to Work?

Lenders usually insist on two years of continuous employment, yet this is situation-specific, so talk with several mortgage specialists if you hit a wall on the first try.

After finding a new job, many people resume their home searches when they’ve been in their new roles for at least six months. Past unemployment shouldn’t rule out eligibility, and for people who are going back to work in the same field they were in, recent unemployment payments may count as qualifying income.

Breaks in employment occurring more than two years ago shouldn’t affect loan eligibility at all. If your credit score dipped during a period of unemployment, create a record of on-time payments month after month and you’ll soon see the number rise again. Like your credit score, your debt-to-income ratio should rebound when you’re drawing employment income again.

Do You Have Other Income Sources to Qualify?

Some people have income that’s not tied to an employer. This could come from a retirement account, social security, a court settlement, royalties, a life insurance policy, a trust or inheritance, or investment properties. People who earn rental property income (not just Airbnb) can use it; apartment and room leases constitute regular income.

Some mortgage lenders accept non-employment income if the applicant has substantial savings, and a good credit score without heavy debt. If the applicant is a big spender, different story. The lender wants to be sure the borrower has a good credit record, is a motivated saver, and is well positioned to pay the loan back.

Already Own Your Home and Concerned About Layoffs?

Applying for unemployment benefits may help, if your state offers unemployment mortgage assistance to homeowners who receive unemployment payments. If your state cannot help and believe you are headed for difficulty making your monthly mortgage payments, other resources are available:

  • Fannie Mae and Freddie Mac offer pandemic-related unemployment mortgage assistance to homeowners whose loans they back.
  • If you pay private mortgage insurance (PMI), ask your lender if the policy can offer some assistance to you at this time.
  • If you have trouble talking with your mortgage representative about relief, get free advice from the federal government by calling 888-995-HOPE.

If foreclosure is imminent:

There is also insurance for this situation. Your insurance agent or state realtors’ association may offer loan coverage help through mortgage unemployment insurance. This does not help self-employed or contract workers, and it can have a number of limitations, so talk with your mortgage provider and ask for details about the terms and conditions.

Life Is Uncertain. Protect Your Debt-to-Income Ratio.

During periods of unemployment, conserve cash if you can. Avoid racking up credit, as you’ll need to guard your debt-to-income ratio if you plan to buy a home in the near future. To calculate this ratio, divide your total monthly debt payments by your monthly income before taxes. The idea is to keep the debt down to 43% or less of your gross income. That ceiling will be a deciding factor when you’re ready to apply — unless you have other financial strengths to convince a lender that you’ll be able to faithfully repay your mortgage loan.

Meanwhile, no matter what your current situation is, talk with a mortgage specialist active in your area. There is some leeway in the application process, so don’t assume unemployment rules you out as an applicant. If it does in your case, a good mortgage expert can give you pointers to help get you back on track as soon as possible.

Photo credit: Magnet.me, via Unsplash.