In today’s competitive seller’s market, homebuyers need to bring their A-game. From start to finish, a buyer should be ready to act quickly and to keep their credit and documentation current. Preapproval is essential before making your purchase offer and frequent communication with your loan officer is important. Keeping your loan officer informed of changes can prevent closing delays.
If you lose your job, inform your loan officer right away. There are many details that affect loan approval and your loan will need re-assessed even if you have a new job lined up already. Do not try to hide anything. Your lender probably plans to perform a verification of employment (VOE) shortly before closing. Inaccurate information on your loan application (even if it used to be accurate) will probably result in the cancellation of your approval.
If You’re Preapproved and Still Looking
It is important to communicate your change in employment status to your loan officer even if you haven’t found a house yet. If your lender still approves your loan under the new circumstances, great! It may also be approved with changes. If so, you may need to inform your Realtor. Changes like loan amount, payment amount, interest rate, and time to close affect your home search.
If You’re Under Contract
Did you lose your job after signing into a purchase contract? Things can get tricky here but remember that your loan officer and Realtor are on your side. They want to see you purchase a home you love and will do what they can to help you get to the closing table. Your team of real estate professionals will do everything they can to make things work under the new circumstances (assuming you still want to close despite your job loss). If you job loss/change will result in relocation or would otherwise deter you from wanting to move forward on your home purchase, tell your Realtor right away. Purchase contracts are legally binding and it is important that you handle things properly and legally or you will risk losing your earnest money deposit.
Sometimes when a borrower experiences a job loss during the time between the accepted offer and the closing, an additional borrower is added to the loan. This could be a spouse, non-spousal occupant, or a non-occupant borrower. Another term for non-occupant borrower would be “cosigner.” If the added borrower’s credit is favorable and they present a low debt load, their income may be used as capacity for repaying the loan until the original borrower finds new employment. Eventually, the original borrower might consider refinancing the mortgage back into a single-borrower loan. These situations are case-by-case, and your loan officer can advise on whether adding a borrower to your home loan is a good solution for you.
If it is simply not possible for you to continue with the purchase of your home after a recent job loss, your team of real estate professionals will advise you on next steps.
Knowledge is helpful when it comes to the housing market. (That’s why so many professionals get involved in a single transaction.) It helps to know the basic underwriting guidelines for different mortgage products in case something unexpected happens. When assessing an applicant’s capacity to repay a loan on time, one of the factors that the lender considers is debt-to-income ratio (DTI). The DTI is calculated by dividing all documented monthly income by the monthly debt payments, including loans, credit cards, utilities, child support, and any other recurring obligations.
The following parameters are not set in stone. The underwriter does have some discretion when assessing whether a borrower presents a good risk for the lender. However, basic guidelines do exist and most loan decisions are made within those parameters. Lender, insurer, and government-sponsored enterprise (GSE) criteria are a good place to start when it comes to assessing your own likelihood of getting approved and staying approved for a home loan.
Conventional – Conventional guidelines apply to the GSE loans (Fannie Mae and Freddie Mac). According to the Fannie Mae Eligibility Matrix for single-family homes, maximum DTI can range from 36% to 45% depending on the applicant-borrower’s credit score and the loan-to-value ratio of the subject property. A higher credit score could result in a higher DTI threshold. Jumbo conventional loans (those with a higher than typical purchase price) have similar DTI requirements to regular conventional loans.
FHA – FHA requirements are a bit tighter than conventional guidelines when it comes to DTI. Most FHA products max-out at a 43% ratio. According to the FHA Lender’s Handbook, Chapter 4, Section F, a higher ratio of 45% may be acceptable if certain “compensating factors” can be verified by the underwriter.
VA – According to The VA Lender’s Handbook, Pamphlet 26-7, Chapter 4, a DTI “ratio greater than 41 percent requires close scrutiny.”
In-House Products – When a lender makes loans that are not underwritten to conventional or government standards, the DTI maximum is set at the discretion of the lender and their underwriting team. If the mortgage grantor plans to broker your loan on the secondary market (i.e. sell the loan as an investment based in the interest potential) then underwriting thresholds may be at the discretion of one of their secondary lending partners.
Qualifying Without W-2 Income
If you lose your job after loan approval, you may be able to qualify without a co-borrower if you can document alternate sources of income. Some borrowers present non-traditional income from the start. In either case, here are some atypical income sources that a lender might consider.
Self-Employed Income – Self-employed income is unique and requires special underwriting consideration. Most loan programs call for two years of complete business and personal tax documentation for self-employed borrowers.
Investment Income – Significant income from things like regular dividends and interest may be considered if properly documented and expected to continue.
Assets in Place of Income – If your assets are sufficient to stand up as collateral against the subject property, some lenders might qualify your application without documented income.
Letter from a Future Employer - Do you have a job offer? A letter from your future employer combined with documentation to verify guaranteed income could suffice for underwriting purposes.
Disclose, Disclose, Disclose
It is important that job loss, change, reduction in income, or any new information pertinent to your loan be disclosed to your loan officer. Borrowers benefit from being upfront about potential dealbreakers rather than having them discovered right before closing. Putting your home search on hold might be painful, but finding yourself buried under a mortgage payment you can’t afford is even worse. Keep in frequent, honest communication with your loan officer and Realtor to ensure that your financial future stays on track.