Getting a Mortgage - What If I Lose my Job?

A home mortgage loan is a legal contract. It is your responsibility to make your payments on time and according to the terms of your mortgage, regardless of your financial situation. With that being said, life happens. You could be laid off, fired or make a poor business move and lose your source of income at any stage of your mortgage loan. When that happens, it’s still your responsibility to honor the terms of your home mortgage loan. But when it comes to handling unemployment with a home mortgage loan, there are worse, better and best courses of action that can help mitigate the financial fallout.

Before You Close on a Mortgage Loan

If you are planning on buying a home, chances are you’ve already been pre-approved for a mortgage. If you lose your job sometime between pre-approval or approval and closing, there is a chance that you can still close on your home mortgage loan and execute the purchase of your home. But in most cases, this is a terrible idea. For one, many home mortgage lenders re-verify your employment days prior to closing. If they discover that you no longer hold the job, they are fully justified in withdrawing approval for the loan. Secondly, when you close on the home loan, you must sign an affidavit swearing that all the criteria that the mortgage loan was approved upon is still true. Lying on an affidavit is a federal offense and carries a number of legal implications. Lastly, if you somehow squeak through on a home loan without any income to make payments, you’ll quickly find yourself unable to make payments. You’ll default and have your home foreclosed, which will be ruinous to your credit score.

Your best bet is to let your mortgage lender know as soon as your employment situation changes. You may be able to make a last minute modification to your home loan, perhaps by negotiating a lower interest rate or terms or adding a spouse or relative as a co-signer. Or, more likely, you’ll have to walk away from the loan. You’ll lose your application fee and any hand money you made on the offer, but at least you won’t completely destroy your creditworthiness and credibility.

After You Close on a Mortgage Loan

If you lose your job one, two, five, or even 15 years into your mortgage loan, you still have to make payments. The best course of action is to try to make up for the lost income, either by working a part time job, renting out your basement or liquidating assets. You may even be forced into selling your house to avoid defaulting on your home mortgage loan. These are tough decisions to make, but they beat the alternative by a mile.

If you are unable or unwilling to sell your home and you can’t find a way to make up for your lost income, you may be able to work out an agreement with your lender. Lenders typically do not want you to default on your mortgage any more than you want to, and they may work with you in order to keep your loan on good terms while you weather financial hardship. You may be able to work out a mortgage payment deferral program, where payments are temporarily reduced and made up later when you are employed again, or they may be able to help you arrange a short sale, where you sell the home and hand over the proceeds to the bank, who forgives any remaining balance.

The takeaway is this: the burden is on you to approach your lender. As soon as it becomes apparent to you that you may have difficulty making your mortgage payments, it’s up to you to contact them. Depending on your circumstances, having an attorney or community housing organization on your side may help you work something out that is favorable to all parties.

Refinancing or Getting a Second Mortgage

Depending on how much equity you have built in your home, you may be able to weather financial hardship by refinancing your mortgage or taking out a home equity loan. By refinancing and extending your mortgage term, you may be able to lower your monthly payments to a level where they are manageable. Or, you may be able to take out a loan against your home equity to cover your first mortgage payments. To find out how much time you can buy, divide 90 percent of your home equity line of credit or home equity loan by your monthly payment amount. For example, if you secured a home equity line of credit of $20,000 and your monthly payment was $500, you could stay afloat for about 36 months. Borrowing against your own home to cover mortgage payments is preferable to getting a personal loan, since home equity lines of credit often have much lower interest payments than unsecured debt. However, once you run out of time, you’ll have to begin making payments towards your home equity loan and your home mortgage payments.