Sometimes, life can happen when we least expect it, including getting furloughed from your job or having a big decrease in your hours. While many individuals dream of owning a home someday, it can be frightening when your source of income suddenly diminishes rapidly. Of course, this isn’t an ideal situation, but it’s important to understand that a furlough or decrease in hours is not going to sabotage your homeownership dreams for good! Take a look at the real impacts these have on obtaining a mortgage.
What Is a Furlough, and How Does It Differ From a Layoff or Decrease in Hours?
First of all, to understand the implications of being furloughed, we need to discuss what that means. Sometimes a furlough can be mistaken for being laid off. However, being laid off is a complete termination from the company at no fault of your own.
Being furloughed is a temporary situation due to a company not being able to pay their employees. Typically during a furlough, employees are still receiving their benefits, but they are not getting paid and are promised full-time work once the company can properly pay them again.
Rather than implementing a furlough, an employer may decide to cut back on the number of hours you are working until the company can afford to resume paying you for your usual schedule. Like a furlough, this is a temporary situation but differs slightly because you will have an income source.
How Does Being Furloughed or a Decrease in Hours Impact Mortgage Approval?
To issue a loan approval, we must verify your employment history and income stability to ensure that you will have the financial means to support your loan repayment.
If your employer reduces your hours, you may not need to worry, depending on the size of the decrease. Refer to the solutions section below for potential options to pursue if this happens.
The impact of your mortgage approval in the case of a furlough will depend largely on where you are in the mortgage process and how soon you will return to your normal schedule or rate of pay.
If you were planning to buy a home in the next year or so, there’s less cause for concern. Your employment/income will likely resume as it was before the furlough. Worst case scenario, you’ll have to wait a few more months before you can move forward.
If you are currently preapproved and shopping for your home, your approval may be denied, or your closing date will get delayed.
If there are large gaps or major inconsistencies with your income or employment history due to the furlough, it will raise a red flag when the underwriting team reviews the loan. Keep in mind, this is a temporary red flag, and it should not be viewed as a stain on your record but rather a minor setback.
Although it is unlikely that you will obtain loan approval at this stage, it’s not impossible to qualify if this roadblock emerges. Here’s what you can do.
What can you do to improve your chances of approval?
Of course, having your work hours decreased or being furloughed aren’t ideal situations for anyone. But don’t let that deter your from continue to strive toward a dream of homeownership — there are steps that you can take to help you get back on the right track!
Provide a larger down payment.
This is a good solution if your employer reduces your hours. If you have more funds elsewhere to contribute to your down payment, this can help decrease the overall balance you would need for your mortgage. If this occurs, it may be easier to qualify for a lower mortgage than the one you originally requested. However, it is important to ensure you still have a good emergency fund and are not completely depleting your savings.
Decrease your budget.
Consider decreasing your budget. While you may not qualify for the original preapproval amount, you may be able to qualify for a lower amount despite the furlough or limited hours.
Switch to an FHA Loan.
FHA loan guidelines are more flexible than other loan types. If you get a new job or return to your normal routine within a reasonable amount of time, you will have better luck qualifying with an FHA loan.
Obtain a letter from your employer about your furlough.
If you are experiencing a furlough, your lack of employment should be temporary. In this case, you should obtain a letter from your employer explaining the concessions of your furlough, and this should outline your expected date of return and pay rate.
Get a cosigner or co-borrower.
If you’re having trouble qualifying on your own, consider adding a cosigner or co-borrower to the loan. So long as it is someone you trust being on such a big investment with you. While you may not qualify on your own, your combined income and assets may give you what you need to get over the hump.
Wait it out and improve your history.
The golden number is about six months to a year of reliable and steady employment. If you choose to delay your homebuying plans for that amount of time and work on ensuring solid employment and income history, it can positively impact your approval chances!
The bottom line
Whether you’ve been furloughed or just have had a decrease in the number of hours you are getting, don’t let that throw a wrench in your dreams. Homeownership is absolutely possible with a few tweaks and adjustments to the plan!
As always, we’re here to answer any questions you have and help guide you through the mortgage loan process. Give us a call or start your application today.
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