We’ll explain what you need to get approved for a mortgage while unemployed, and also what you’ll need to show when you become gainfully employed again.
Buying a Home While Unemployed
Although you can’t purchase a home using unemployment income, it is possible to get a mortgage while you’re unemployed. According to Jason Gelios, a Realtor at Community Choice Realty in the Detroit area, there are other types of income that could be considered. “Income such as investment dividends, Social Security income, and having a co-signer or any other type of income coming in from a non-traditional source, are some of the options,” Gelios told The Balance by email. So why wouldn’t unemployment benefits be considered? “This money is not considered to be qualified income for mortgage borrowers because it is short term,” explained Jeff Gravelle, chief production officer at NewRez, a mortgage lender based in Fort Washington, Pennsylvania. “In order to get a mortgage while unemployed, you would need to have at least one person on the loan application who is able to provide proper financial documentation that proves qualification,” Gravelle told The Balance by email.
Debt-to-Income Ratio
After you get back on your feet and revisit the possibility of purchasing a house, it’s important to get all your financial ducks in a row first. You’ll need a stable income history and a good credit score. Learning how to budget for long-term unemployment can help you stabilize your finances between jobs so you can keep your DTI ratio in check. To calculate your DTI ratio, add up all of your monthly debts, such as car loans, credit cards, and student loans, then divide this total amount by your gross (or pre-tax) income. A 43% DTI ratio is often the highest such ratio that lenders will accept.
What Qualifies as Income?
Now you know that lenders don’t consider unemployment benefits to be qualified income. But what would they consider? “Lenders look for sources of income from employment, investment dividends paid regularly, Social Security checks, or any other form of steady income coming in,” Gelios said. And there are also other types of income that may qualify you. “Alternative income sources, such as lawsuit settlement payments, alimony, and inheritance, also count,” Gravelle said.
Buying a Home After Being on Unemployment Income
After you’ve secured a new job and you’re back on your feet following a period of unemployment, you’ll have a much better chance of securing a loan. “Your best bet for landing a conventional mortgage is to apply when you’ve returned to work and can show proof of stable income,” Gravelle said. At that point, you will need to provide the following, including:
Original pay stubsW-2 formsTax returnsBank statementsInvestment account statementsProof of Social Security numberDriver’s license
“If a borrower has any unemployment within the past two years, that will be treated as a gap, with the current income being calculated over the course of the past two years,” Gelios said.
Qualify Based on an Offer Letter
Even if you haven’t started your new job, you may be able to qualify based on an offer letter. “Some qualifiers exist for this type of proof of income. For example, the letter may have to show that the borrower will be employed within 90 days of obtaining the mortgage,” Gelios said. It will also need to show how much the income will be and how it’s going to be paid out; for example, salaried or hourly.
Seasonal Workers and Contractors
If you’re a seasonal income earner or contractor, Gelios said you will need to qualify based on the income you make in the periods when you work. “For example, if someone makes $45,000 in their working season, this income would be calculated over the past 12 months; if no income was earned the year prior, then that income would be calculated over 24 months.” Using the 24-month formula above, if you earned $45,000 a year, on paper, it would show you making $22,500 a year. “Again, any income from unemployment [in the two-year period] could not be used in qualifying for a mortgage, since lenders look at whether or not the source of the income is steady and how strong is the potential of future income—although future income is not calculated,” Gelios said. The gig economy is growing, but these types of workers may not always have the documentation required by traditional lenders. “It might be worth it for self-employed borrowers to look at private lending options, as private lenders have more flexibility in their qualifying guidelines and may offer lending products unique to those who are self-employed,” Gravelle said.
What Mortgage Lenders Do Not Accept
Not all income is acceptable to lenders. The following are not considered qualifying sources of income:
Illegal incomeIncome not listed on tax returnsProjected incomeDraw income taken in advance of anticipated commission earningsCapital withdrawalsIncome that cannot be verified
Gelios agreed. “A mortgage can be obtained for just about any income level, as long as the monthly DTI is not exceeded.” So, even if your monthly income was only $2,000, as long as your DTI didn’t exceed 43%, you could be allowed a monthly payment of $1,140.
