After weeks or months of searching for the perfect home and negotiating the right price, the last thing on your mind is losing your job just before the closing. It happens more often than you might think: A couple of weeks or even a few days before closing, shocking news of layoff comes from your employer and now the family is one salary down on income. A wave of questions flood your mind: Will the bank go through with the loan? Do you even need to tell the bank about loss of employment? Will you still be able to afford the monthly mortgage on your new home? What should you do now? Let’s consider a range of circumstances because the answer to these questions depends on several factors, including your comfort level.
Do You Have to Tell the Bank About Job Loss?
Yes! Absolutely. You must tell your lender about job loss as the lender is likely to discover it anyway. Lenders verify employment often up to the day before transfer of funds for closing. If you don’t tell them, your former employer will when answering the call. Also, it’s likely that you were asked to sign a document for the bank that requires you to tell them if any significant changes in employment or income occurs prior to closing. Not disclosing loss of employment could be mortgage fraud on your part. Once you tell the lender, they will work with you to determine if you can still get the loan or if it will be denied. Make sure your purchase contract includes a protection clause that gives you the right to the return of your earnest money if financing falls through.
Do You Have Other Sources of Income?
To clarify the loan process, employment is not a requirement for getting a loan. After all, many retirees sell and buy homes. The heart of securing a loan is that there is continuous, reliable income to pay the monthly mortgage. For most people, that source of income is a full-time job. If one person’s income is enough to cover the mortgage, then the bank might still approve the loan. Or if you or your spouse has another source of income, such as an inheritance or rental income from other property, then that additional income may count toward the criteria that is needed for the loan. Work closely with your lender to determine what is feasible.
What Other Options Might Save the Deal?
You could ask someone to co-sign the loan (depending on your loan type). Most people opting for this route would likely ask parents or another family member in a financial position to do so. This would make the co-signer equally responsible for monthly payments if you did not have the funds. A second option is to quickly find another job with a similar salary. This is difficult to do, but depending on a person’s field and demand for their skills, some can pull it off. Note that some banks require you to be in a job for at least 30 days or more in such circumstances, so even this option is not a slam dunk. Also, you’re dependent on how long the seller is willing to delay a closing before exercising their right to terminate the deal. Check your purchase contract. There is a section that allows you a certain number of days to secure financing prior to the seller being able to terminate the contract. A seller might cut you some slack if your lender only needs to delay the process by a short time beyond the contractual timeframe, but this is not a guarantee.
Will Saving the Deal Raise the Risk of Financial Distress?
Even if you can still afford to buy the home, will you have enough left over outside of mortgage payments to pay other bills for an extended period of time? You have to consider how much cushion you have in savings, what you’re willing to drain from savings on your mortgage payment, and factor in your other living expenses as well as monthly maintenance costs on your new home. Can you predict approximately how long it will take for you to get a new job and is that a comfortable timeframe? Remember that defaulting on a loan through missed payments (or mounting debt on other financial obligations) can destroy your credit and financial profile for years to come.
Other Things to Consider
Some people facing this unfortunate situation might opt to back out of the deal and get qualified for a smaller loan, thereby starting a new home search for a less expensive home. Others might wait until they’ve secured a new job and have met a lender’s requirements for time spent in that job before starting the search again. If faced with job loss, try to maintain a balance of what is most practical for your financial situation with any emotional attachments you have to a home.