There are several factors that mortgage lenders take into consideration when deciding whether to give you a home loan. These include your credit score, debt-to-income ratio, cash reserves, and income. Specifically, lenders want to make sure you earn enough money to keep up with your mortgage payments once you sign that loan. And in many cases, that means not only providing proof of income via pay stubs and tax returns but also getting a letter from an employer confirming that you're an employee in good standing.
But what happens if you start out the mortgage application process with a steady job and a healthy paycheck but then lose that job a few weeks later? Unfortunately, layoffs can happen when we least expect them, but if you're in the process of trying to buy a home, you could easily get burned as a result of bad timing.
That said, if you get laid off mid-mortgage application, all may not be lost. And in some cases, it may not even hurt you at all.
What to do if you're laid off mid-mortgage application
You might think you can sweep the fact that you've lost your job under the rug while you're in the midst of finalizing a mortgage -- but don't. Lenders typically verify your income not only early on in the process but once again closer to the time of your closing. As such, there's a good chance your lender will find out anyway, so you're better off being honest.
Now, whether the loss of your job hurts your ability to close on that mortgage will depend on what the rest of your finances look like. If you have a lot of money in the bank and you're able to make a really sizable down payment on your home -- say, 50% of your home's purchase price -- your lender may be willing to overlook the fact that you're currently out of work.
Also, if you're applying for a mortgage jointly with a spouse and he or she still has an income, that may be enough to move forward with your application. The same holds true if you'll be getting a large severance payout or already have a side job of your own that brings in some money.
In many cases, though, losing your job will mean having to hit pause on the mortgage process until you're employed again. In fact, some lenders may require you to be at that new job for a certain period of time -- anywhere from one to three months, or possibly even longer -- before making your mortgage official.
This may be frustrating, but if that's the situation you're in, talk to your seller and explain the circumstances. Your seller may be willing to give you some leeway, especially if you've made a good offer on the home in question and have given a substantial earnest money deposit to affirm your commitment to buying the home.
Ultimately, losing a job mid-mortgage application is not a great thing to have happen. But if it does happen, take a deep breath and remind yourself that you won't necessarily lose the chance to buy the home you have your heart set on. The key is to come clean with your lender, assess your options, and do your best to find a new job as quickly as possible.
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