The coronavirus pandemic has led to record-high unemployment rates not seen since the Great Depression, which can be particularly worrisome for would-be home buyers. If you were among the 23.1 million Americans laid off or furloughed, you might be worried about your financial future.
And if you were hoping to buy a house—either now or in the next few years—you might also wonder how your current jobless status might affect those plans. While the situation might seem concerning, unemployment doesn’t mean that home-buying plans have to be placed on hold for long. Here’s are five things to know about navigating a period of unemployment so it doesn’t derail your hopes of buying a home.
1. If you lose your job while shopping for a home, or even after you’ve made an offer, you might have to put the purchase on hold
Given your reduced income, lenders aren’t likely to loan you money for a property purchase unless your spouse or partner has a sizable income that can carry the mortgage alone. Even if you’re getting unemployment checks every week, that money is considered temporary income. So, it can’t be used to qualify for a mortgage. The good news is that once you find a new job, you probably can resume home shopping without an issue. Unemployment shouldn’t have a long-term effect on being able to buy a home.
2. Even if you do find a new job, that doesn’t mean you can easily buy a house just yet
Lenders like to see a steady history of employment before loaning someone money, which means regular employment must be reestablished as stable, reliable and dependable. Borrowers typically are required to have six months of employment at their current job and two years of continuous employment. Breaks in employment older than two years shouldn’t affect getting a mortgage.
3. You can put your future home-buying hopes at risk, depending on how you handle your finances while jobless
Unemployment can stress your budget in ways that can damage your credit history and score. Lenders check your credit score to assess how well you’ve managed past debts. Scores between 650 and 700 range from fair to good; scores below 650 are considered subpar, which could limit which lenders are willing to loan you money for a house. (You can check your score for free on sites like Credit Karma.) Credit scores can be damaged in various ways during unemployment.
For one, if you get behind on paying bills, this will put some blemishes on your credit history and decrease your score. Unemployment also can lower your credit score by negatively affecting your debt-to-income ratio, a calculation used by mortgage lenders to compare how much you make with how much you owe. If you’re unemployed, you may face a double whammy as your income is lower and you’re charging more to your credit cards, which increases your debt. Both moves can negatively affect your debt-to-income ratio and can make lenders wary of lending you money.
4. Hopeful home buyers should be careful not to take on too much debt, even while unemployed
Preserve cash as best as you can by cutting back on all discretionary spending and keeping bills current. Debt-to-income ratio likely will rebalance once you return to work, as long as you haven’t accrued too much debt during the period of unemployment. Always try as best as you can to pay at least the minimum required payment on all monthly debt obligations, otherwise credit may be negatively affected. It’s a good idea to reach out to landlords, credit card companies, utilities, auto lenders, and others to find out what options you have, such as payment plans, deferments, or forbearance. You also might be able to reduce some bills, such as insurance, by reviewing your policy.
5. If your credit score is negatively affected while you’re unemployed, it’s not the end of the world—but it will take time to repair
Six months to a year or more of positive credit rebuilding could get you back on track to buy a home. The sooner past-due debts are remedied, the quicker the score may begin to improve.
