Losing your job is one of the most stressful life events you can experience. And there’s never a good time to suddenly find yourself unemployed. But what happens if you lose your job when you’re in the middle of buying a home? Should you give up on your plans to secure a mortgage? Not necessarily. You have options, and it’s important to review them carefully before making a decision.
Should you tell your lender about your job loss?
Yes. You are required to let your lender know if you lost your job as you will be signing a document stating all information on your application is accurate at the time of closing. You may worry that your unemployment could jeopardize your mortgage application, and your job loss will present some challenges. But honesty and transparency are necessary and important when working with your lender. The faster you tell your lender about your situation, the sooner they can help you map out a plan.
Can you move forward with your application without a job?
Some applicants decide to go ahead with the application process even though they no longer have the same employment. In some cases, they are able to show they have fairly stable income through other work or other sources of income.
But even if you can show income stability, you need to be prepared for some hiccups. Not having the same income level as when you applied means lenders will review your application with increased scrutiny. And your chances of securing a loan are lower. While every situation is unique, you can expect one of three results:
- Your application could be delayed.
- Your application for a smaller amount could be accepted.
- Your application may be denied.
Steps you can take if you lose your job while buying a house
If you lose your job, it’s important not to lose hope as well. There are measures you can take to keep your application on track. The faster you take action, the greater your chances of a positive outcome. Here are five steps you can take if you find yourself unemployed.
1. Pause your application
The most important thing to do after you lose your job is contact your lender. Explain your situation and ask about the options available if you wish to move forward. Then ask your lender to temporarily pause your application while you follow the steps below.
2. Secure a new job
Launching an aggressive job search is critical. Securing new employment should now be your top priority. Start by updating your resume and any online profiles, then begin spreading the word that you’re seeking immediate employment. Here are some tips to help you boost your chances of landing a job quickly:
- Reach out to all your contacts. Let your friends, family members, neighbors and social media contacts know you’re seeking employment.
- Highlight your ability to begin work immediately. This can be a major selling point to employers who need someone to hit the ground running right away.
- Be open to new career fields. Don’t limit your search to jobs identical the one you were just in. Branching out may help you find a job sooner. However, one thing to keep in mind is that lenders generally require you to be in a similar line of work if you recently changed jobs. They may also expect you to be back at work for a minimum amount of time.
3. Reduce your loan amount
Your odds of being approved for a large mortgage or jumbo loan without a job are slim. However, your lender might be willing to approve a smaller loan amount. This will require you to come up with a bigger down payment or to buy a home with a lower price tag.
4. Look for alternative income sources
Alternative income sources can breathe life into your application, especially if you’re paid on a fairly regular basis. Some lenders will consider all sources of income with stability and continuity (PDF). One of the most popular ways to generate alternative income is to perform contract work, also referred to as gig work.
According to the U.S. Bureau of Labor Statistics, there are 1.6 gig economy workers in the United States. Examples of gig work include freelance jobs, ride-sharing and contract work. While it’s not considered full-time employment, the IRS treats gig work just like office work or a skilled labor job. With gig work, you may be able to start earning money faster.
What happens if you cancel your loan application?
For some applicants, the strategies above may not have a positive impact on their loan application. If you find yourself in this camp, you have the option to cancel your loan application. While cancellation might be your last resort, it can save valuable time and legwork for both you and your prospective lender.
If you’re thinking about canceling your application, you may wonder what consequences there may be. The good news is your mortgage application is not a binding contract. You’re free to cancel at any time. However, not all application-related fees are refundable. Depending on your lender's policies and the timing of your cancellation, you may face one or more of the following:
1. Lost application fees
Loan applications take time to process and review. There are also costs your lender must absorb to process your application. These fees are typically part of your loan application fee, which is usually not refundable. Additionally, some lenders charge a financial penalty for canceling a mortgage application.
2. Credit implications
Canceling your application will not impact your credit score. However, if you decide to apply for new loans in the near future, your credit score might take a hit.
3. Loss of earnest money
Depending on how far along you are in the application process, you may have a small deposit in escrow. Commonly known as earnest money, this deposit typically ranges from 1% to 3% of the purchase price. Earnest money shows the seller you’re serious about buying their home while allowing you time to secure financing. If you suddenly decide to cancel your application, the seller is entitled to keep the earnest money.
4. Other application-related costs
While many lenders offer a variety of free application-related services, there are other costs that are typically not refundable. Some common examples include home appraisal fees and rate lock fees.
Should you cancel your mortgage application?
Losing your job during the mortgage application process is stressful, but you have a variety of options and it’s important to consider all of them with care. Talk with your trusted advisor before proceeding. Together, you can review your options so you can make an informed decision.