How To Get A Home Loan Without A Job

Aug 15, 2022 | Mortgage Guides

If you were recently laid off due to the pandemic (or any other reason), you may have questions about whether you are still eligible for a home mortgage loan. Whether employed or not, having somewhere to lay your head at night is crucial to borrowers seeking homeownership.

Since unemployment poses a multitude of challenges, it also impedes the ability to qualify for a mortgage. Today, we’ll discuss the relationship between mortgages and unemployment while also unveiling alternative options to qualify for a home loan despite being without a job. We will provide information on key requirements, as well as how different circumstances can affect a borrower’s situation.

Here’s What Mortgage Lenders Want To See On Your Application

Let’s begin by discussing what mortgage lenders want to see on a loan application. Of course, a strong employment history with a stable income is impressive, but what if you are jobless? Lenders will still assess your assets, cash reserves, and the type of mortgage you’re eligible for.

When house-hunting, there are three numbers to keep a close eye on. This includes:

  • Credit score
  • Loan-to-value ratio (LTV)
  • Debt-to-income ratio (DTI)

Without a job, you still have a chance to qualify for a mortgage by maintaining these three numbers. In case you have money in the form of investments or other sources, this can help. Here’s an in-depth look into why they are so important.

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A Good Credit Score

Just as with other loans, a credit score can be a deal-breaker. This three-digit number gauges how likely you will repay the loan within a specified time.

Most lenders have a minimum requirement for credit scores to be approved. In hopes of obtaining a conventional mortgage in 2022, aim for a credit score of at least 620. According to FICO’s scoring system, this is considered a “fair” score.

Don’t let this hinder you from targeting an even higher score that rewards you with lower interest rates. A tiny change in the interest rate could result in thousands of dollars in savings by the end of the loan term. Monitor your credit before and during your search for a new home.

An Acceptable Loan-To-Value Ratio

Loan-to-value (LTV) ratios are the loan amount divided by the property’s value. The critical factor in determining it is the down payment.

Here’s an example of how to calculate it: Say you’re applying for a house with an appraised property value of $250,000. First off, subtract the down payment amount, which, let’s say, is $50,000—leaving you with a $200,000 loan amount. Next, divide that by the total value; you have an 80% LTV.

A downpayment of 20% or more prevents the lender from requiring private mortgage insurance (PMI), which scales upward of hundreds of dollars. The more paid upfront, the less risk you are to potential lenders

A Low Debt-To-Income Ratio

Last, and perhaps the most important, is your debt-to-income ratio. More mortgage applications get rejected due to high DTI than other reasons. DTI considers how much of your income is taken up by your current expenses.

Like LTV, you want the DTI as low as possible to increase the approval odds. To calculate yours, divide your monthly expenses by your monthly income (pre-tax). Most lenders have a DTI limit between 40% and 50%.

If you’re without a job when applying for a mortgage, your alternative sources of income should be enough to keep your DTI below the cut-off. The lower the DTI, the better you can qualify for a new home regardless of employment.

The Relationship Between Mortgages & Unemployment

First things first, it’s not likely for lenders to count unemployment income toward qualifying. Industry standards require a proven income of at least two years and prove sustainable going forward the next few years.

While a steady job assures future income, unemployment limits how long you’re eligible to receive benefits. That’s nowhere near enough assurance to please lenders.

If you are newly unemployed and planning to apply for a new mortgage, you will need another source(s) of income. Not even an excellent credit score and a sizable down payment will be enough to get approved.

Alternative Ways Of Qualifying For A Home Loan

Without a job, the factor most affected is your DTI. A stable income is necessary for a home loan, so alternative ways to get around that are below.

Apply With A Cosigner

One way to qualify for a mortgage without a job is by bringing on a mortgage co-signer. A co-signer is an employed person or someone with a reliable net worth, allowing them to take responsibility for your mortgage payments if you fail as a borrower.

The role of a co-signer often goes to family members or friends. The cosigner will sign the mortgage with you, adding their proven history of financial security to the deal.

A close relationship for this role is critical because it’s a financial investment for both parties. Trust has to go both ways, or friction could strain the relationship and the mortgage agreement.

Use Other Income Sources To Cover Loan Payments

Just because you are without a job does not always mean you lack a reliable source of income. When applying for a mortgage while unemployed, lenders want to see other income streams. Other sources can include:‍

  • Social Security Benefits
  • Pension Funds
  • Trust Funds
  • Inheritance
  • Alimony
  • Disability Benefits
  • Investment Dividends
  • Rental Property
  • Annuity
  • Spouse’s Income

Unemployment benefits are insufficient to make you a homeowner as they prevent income verification. Instead, another option is a sizable savings account‍.

If You Have A New Job Lined Up, Provide The Lenders With Your Offer Letter

After being laid off, you may not waste time finding a new job, and most mortgage lenders will reward you. Indeed, even before starting a new job, lenders will accept an employment offer as proof of verifiable income. Of course, they have conditions.

For instance, your start date for the new job cannot be more than 90 days from the mortgage closing date. With that, you must also prove you have other funding to cover payments until the start date. Other than that, there should be no contingencies (e.g., background check), and you and the employer must sign the paperwork.

If you can supply all the above, you could get a mortgage and become a homeowner with only a job offer.

Bottom Line

Being laid off does not have to end your search for the perfect home. While it makes for a challenging closing process, it is far from impossible. Considering the state of our society, many people walk in these same shoes.

Unemployment interferes with the intentions of qualifying for a mortgage, but several alternative approaches can help you become a homeowner regardless of your employment status. To learn more about what home mortgage options are available to you, contact a representative from Wesley Mortgage today!

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