I Just Took a Pay Cut. Should I Still Get a Mortgage?
by Maurie Backman | Published on Oct. 9, 2021
Here's how to navigate the home buying process when your income takes a hit.
Buying a home is a huge undertaking. Before you make an offer on a house, you'll need to run some numbers to make sure you can afford it.
But what happens if you're forced to take a pay cut during the house-hunting process? Should you move forward with your plans to get a mortgage or put them on hold until your earnings go back up?
How a pay cut could impact your mortgage
There are different factors that mortgage lenders take into account when deciding whether to approve a home loan candidate. These include a borrower's:
- Credit score
- Debt-to-income ratio
- Funds available for a down payment
If your income goes down just when you're about to apply for a mortgage but you're strong in all of the other categories above, then you may still qualify for a home loan. However, you may not get approved for as high a mortgage as you'd otherwise be eligible for.
Mortgage lenders use income to determine how much of a home loan to give out because they want to make sure borrowers earn enough to keep up with their payments. And if your pay cut means you can't take out a high enough mortgage to buy the sort of home you want, then you may want to put your plans on hold.
That said, if your pay cut isn't all that substantial -- say, you've lost 5% of your paycheck as opposed to a more drastic percentage like 30% -- then you may find that you're able to qualify for the same mortgage you wanted initially. Similarly, if you're applying for a mortgage jointly with another borrower, it may be that your combined incomes are enough to help you qualify for the loan amount you're after. So in that case, there would be no reason to delay your plans to buy unless you're just not comfortable taking on an extra expense when your income has gone down.
Compensating for a pay cut
Of course, just because your pay goes down at your main job doesn't mean you need to take a pay cut on a whole. If you're able to pick up a side hustle to compensate for the income you've lost, you may be able to move forward with your home buying plans as if nothing happened. And while holding down a second job may not be so easy on a long-term basis, if you expect your pay cut to be temporary, then it could end up being manageable to work a second job for a few months.
As a home buyer, your goal should be to not only qualify for a mortgage, but also to purchase a home you can afford to keep up with. If your pay cut doesn't impact your ability to do either, then there's no reason not to proceed with your original plans. But if you're worried that losing out on some of your pay will make it harder to get the mortgage you want or cover your expenses of homeownership, then waiting is the better bet. You can always pick up where you left off once your income is restored.
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