My Salary Dropped Right as I'm Applying for a Mortgage. Now What?

by Maurie Backman | Updated July 19, 2021 - First published on March 17, 2021

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Here's what to do if your income takes a dive right when you're about to get a mortgage.

There are several criteria you'll need to meet in order to get approved for a mortgage. You'll need to have a decent credit score, a reasonable debt-to-income ratio, a steady income source, and a high enough wage to cover the mortgage you're looking to take out. But what happens if your salary goes down right as you're about to apply for a home loan? It could happen if your hours are reduced or your employer implements pay cuts. Here's what you need to know.

Do you still earn enough to cover your mortgage?

Whether or not a lower salary kills your chances of getting a mortgage depends on your income relative to the loan amount you're looking to take out. Say your $80,000 salary drops to $70,000. If $70,000 is enough to qualify for the mortgage you're asking for, that decline shouldn't be an issue. Similarly, if you're applying for a mortgage jointly with someone else, your combined income may be enough to cover your loan amount, even if your salary is now lower than what it was a few weeks ago.

Ways to compensate for a lower salary

If a reduction in income makes it so you're no longer eligible for the mortgage amount you were hoping to borrow, you still have some options. First, you can see if it's possible to make a higher down payment on your home. If you do so, you won't need to borrow as much money, so your lender may be comfortable moving forward.

Another option is to see if you can instantly boost your income with a second job. If you can prove to your lender that your side gig has the potential to be ongoing and stable, that could be enough to seal the deal.

If those tactics don't work, you may need to adjust your home-buying budget and aim for a less expensive home -- one that a smaller mortgage is enough to cover. Or, you could hold off on your home search, save up some money, and then apply for a mortgage again once you have a larger down payment.

What if your salary cut is temporary?

A permanent reduction in salary could hurt your chances of getting a mortgage. But what if that reduction is temporary? What if your hours are being slashed for the time being, but you expect to be back to full-time work in a few months' time? If that's the case, a letter from your employer confirming that may be enough to sway a mortgage lender to move forward with a home loan. So it's definitely worth a try.

You never know when your income might take a hit out of nowhere, and unfortunately, that scenario could hurt your chances of getting a mortgage. But that doesn't mean you're guaranteed to be denied a home loan because your income has been slashed. Before you assume the worst, talk to different lenders and see what options you have for qualifying for a loan based on a lower salary. Between your lender's flexibility and your own flexibility (for example, buying a less expensive home and borrowing less), you may find a solution that works.

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