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 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

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.

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.