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The experience of losing a job is stressful in its own right, but if you're in the middle of the mortgage process, a layoff can create unintended and serious complications.
In the best-case scenario, the lender may simply delay the closing process or approve you for a lower amount, but depending on the situation, your loan application may be denied.
What Happens if You Lose Your Job Before Closing on a Mortgage?
A mortgage loan is a significant financial commitment for both you and the lender. As a result, your ability to make monthly payments is a critical factor in the lender's decision to approve your loan application.
If you lose your job before closing on the loan, a few different things can happen:
- Delay in processing your loan: If you're receiving stable income from another source, or you have a co-borrower whose income is sufficient to meet the lender's requirements, the lender may decide to continue with the loan process. Because the terms have changed, however, there may be a delay in closing.
- Get approved for a smaller amount: Another outcome for people who may still have sufficient income is to get approved for a smaller loan amount. That said, if you're already under contract for a home, you may not have enough financing to complete the sale. You could put more money down if you have it, but depending on your job prospects, it might make sense to hold on to as much cash as possible.
- Have your loan denied: If your income is no longer sufficient to meet the lender's requirements for a mortgage, the financial institution may simply deny your application.
Keep in mind that if any of these happen and you're under contract to sell your current home, you may not be able to back out of it without legal repercussions. And if you've already finalized the sale of your home, nothing can be done to change it.
Steps to Take if You Lose Your Job
If you get laid off at any point during the mortgage process, it's important that you act quickly to handle the situation with your lender. Steps include:
- Contact your lender. When you close on a mortgage loan, you sign a document stating that the information on your application is still accurate, so it's inadvisable to try to hide your job loss. Reach out to your lender immediately to explain the situation.
- Pause your application. Your lender will provide you with some potential options when you call. Resist the urge to cancel, though, because you may lose the application fee, earnest money and other fees you've incurred during the process. Before you make any decisions, ask the loan officer to pause your application.
- Look for a new job. As soon as you can, start looking for new employment. New jobs can present a risk during the mortgage process, but if it's in the same industry you were working in before and has a similar salary, it shouldn't be as big of an issue for your lender.
- Look at other sources of income. If you have a side hustle, retirement savings or other sources of stable income, they may help you avoid having your loan denied outright. If your co-borrower has sufficient income, they could proceed to apply for the loan on their own. If you're applying alone, adding a co-borrower with sufficient income could help.
- Consider reducing your loan amount. If you haven't found a home yet, you'll have some flexibility to look for a less expensive house than you originally wanted. You may also consider a larger down payment, but don't ignore your immediate financial needs to make the deal go through.
- Look into other housing options. If your lease agreement is up, you're under contract to sell your current home or you've already sold your house, making sure you have shelter now is a top priority. Consider short-term housing options or even long-term lease agreements if you think it'll take a while to get back on your feet financially.
Can You Change Jobs While Buying a House?
It is possible to change jobs while you're in the middle of the mortgage process, and it may even be worth it if the new position offers a higher salary or better benefits. That said, switching jobs can impact your approval odds.
Having a steady employment history is crucial, so the lender may want to understand the reason for the change and obtain more detailed information about your past employment and income.
If you're advancing in your career or you've moved to a similar job with a different company within the same industry and your salary hasn't changed much—or it's increased—you may not have too much trouble. But if you're switching to a different career entirely or your income has dropped significantly, it could throw a wrench in your plans to buy a home right now.
Make Sure You're Credit-Ready for a Mortgage
The importance of having a steady income during the mortgage process cannot be overstated. But it's also critical that you maintain good credit. It's possible to get approved for a home loan with a FICO® Score☉ in the low 600s or even the 500s with some loan programs. But a score in the mid-700s or higher can help ensure that you get access to the best mortgage interest rates and other terms.
With Experian's free credit monitoring service, you'll get access to your FICO® Score and Experian credit report, along with alerts when changes are made to your report. Review your credit file to determine whether you can make improvements, and continue to monitor your score to spot potential issues as they arise.