Here’s a scenario that happens to more people than you might guess. As a couple, you’ve spent several months hunting for your dream home. Finally you find the perfect four-bedroom, two-and-a-half bath, two story house. You negotiate a price that gets accepted and continue through the process of sealing the deal. A couple of weeks or even a few days before closing, whopping news of layoff comes from your employer and now you and your spouse are one salary down on income. All of the sudden a wave of questions flood your minds: 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. So 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. That’s not a mess that you want to risk. 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 a bit, 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?
If you don’t have additional income to help save your loan and the deal, you still have some options. You could get 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?
If you’re in the position to secure the loan and save the deal by any of the means discussed above, there’s still the personal question of whether it’s prudent with regard to your finances. The same rules and questions apply if you’re a single person out of work. 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. Certainly it’s hard to go backwards once you’ve had your heart set on a certain style of living. Others might wait until they’ve secured a new job and have met a particular lender’s requirements for time spent in that job before starting the search again. Where you live is more than a practical choice. It’s combined with strong emotions and desires. 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.