How Unemployment Affects Your Ability to Buy a Home

Since the Coronavirus Pandemic first struck, U.S unemployment rates have climbed to heights not seen since the Great Depression. This has dealt a hammering blow to the hopes of many who dreamed of becoming homeowners. Suppose you’re one of the millions of Americans now going through temporary unemployment. In that case, you may be wondering how this will affect your ability to buy a home – either now or in the future. What is essential to understand is that while the situation may look dire, unemployment does not mean ending your homeownership dreams. However, it does mean a reassessment of when you can do so.

Here we outline how unemployment can affect your home buying ability, what you can do to mitigate the effects, and how you can bounce back again.

Can You Buy a Home When Unemployed?

In short, no. Not when you need financing anyway. Anyone who has lost their job while home hunting would be well advised to put everything on hold. Such a loss of income would be bad business for mortgage brokers and banks. Unless your spouse or partner has enough income to shoulder the mortgage on their own, it’s doubtful that your loan will be approved.

Even if the job loss comes mere days before closing a deal, that would still be enough to jeopardize it. One option might be to find a co-signer in this scenario, provided your bank will allow for this. But that still raises whether it would be financially prudent to do so. Weekly unemployment checks will not help either, as this is considered temporary income, which can’t be used to qualify for a mortgage.

Fortunately, so long as you have a mortgage contingency in your contract, you’ll be able to back out of the deal without losing your deposit. At this point, you could try to get approved for a smaller loan and start a new search for a less expensive home. But this will mean adjusting your living expectations after having already set your heart on a certain style of living. Another option is waiting until you’ve secured a new job and improved your lending prospects.

How Long after Unemployment must You wait Before You can Buy Again?

Even if you find a new job right away, that still won’t be enough to satisfy a mortgage lender. That’s because lenders want a steady employment history before approving a loan. How steady? That depends on the lender, but the usual requirement is six months of employment at your current job and two years of continuous employment. Any break in employment older than two years shouldn’t affect your lending prospects.

How Unemployment Affects Your Credit Score

It all depends on how you handle your finances while unemployed. While being unemployed will not directly affect your credit score, it will have knock-on effects. Taking on too much debt and failing to pay your bills on time will negatively impact your credit score. When it comes time to apply for a mortgage again, the bad news as a low credit score will limit your borrowing ability and lead to higher interest payments. Generally speaking, credit scores between 630 and 739 are considered good, while scores between 629 and 520 are considered fair. Anything less than 520 falls into the bad credit range.

This presents a tough choice for anyone who has recently become unemployed. A lower income can lead to more debt and strain your debt-to-income ratio. Both factors will erode your credit score and climb back to stable financials.

How to Mitigate the Effects of Unemployment

This is easy, but you must stay on top of any debts you accumulate while unemployed. At the very least, you should try to pay the minimum required payment on all monthly debt obligations. To help with this, you should reach out to all your creditors (landlords, credit card companies, utilities) to determine your options to lessen your debt obligations. You may be able to reduce some of your debts by setting up a payment plan. Refrain from tapping into your 401(K) unless as a last resort, and apply for unemployment benefits. Do whatever it takes, and stay on top of those monthly payments.

If you can’t make a bill on time, contact your creditors to let them know. While there’s no guarantee that they’ll have a solution, it’s still better than just letting the bill slide. An honest conversation with your creditors may lead to a new payment plan.

How to Bounce Back from Unemployment

Even if your credit score does go down while unemployed, it’s not the end of the world. That said, it will take some time to recover. Once you’re safely employed again, you should start rebuilding your credit immediately. Expect this to take anywhere from six months to one year before you’re in the green again.

Develop a solid plan to pay down your debts and save for a down payment. Oddly enough, this may involve taking on new debts. Provided you can pay them off on time each month; this will build your credit history and reestablish your trustworthiness as a borrower. A poor financial record can be wiped clean with just a few months of timely payments.

Lenders don’t care about poor financials that are more than two years old. So long as you can show a steady financial record and continuous employment for the last two years, your past will not stay with you. You can recover even from bankruptcy with enough time and patience.

Final Thoughts

For anyone currently experiencing temporary unemployment, be it from COVID-19 or something else, your homebuying prospects may look bleak, but they’re far from final. Take whatever steps to mitigate the effects of unemployment, and don’t lose sight of your homebuying dreams. Even if it feels absurd to do so at such a time, stay up to date on the housing market. You may have some waiting ahead, but that gives you plenty of time to learn, prepare, and eventually buy when you’re ready again.