How Will Temporary Unemployment Impact My Ability To Purchase A Home?

The COVID-19 pandemic has created a record unemployment number in the US. If you’re one of the millions of American’s who have been affected, you may be left wondering how temporary unemployment can impact your home buying dreams or how to buy a home while unemployed. While unemployment can be a difficult circumstance to manage, it does not mean that your home buying plans will be on hold forever.

The short – and long-term impacts of unemployment

Income history

When applying for a mortgage, your OVM Financial loan officer will ask for your income history to ensure that you have a stable money-flow. However, temporary unemployment can make it difficult to prove you have a steady income to make your mortgage payments. A common base-line for income history is six months of consecutive income and employment, which cannot include unemployment benefits. If you are facing unemployment right now, your homebuying plans may be delayed until after you’ve started employment again and hit the six-month mark with a steady income. Keep in mind, requirements for work history may vary depending on the loan program. Schedule a call with your loan officer to confirm the specific guidelines for the loan program you have in mind.

Credit score

While collecting unemployment or being without work does not directly affect your credit score, there are some indirect impacts it can have. For example, if you’ve had to max out credit cards or apply for new ones to be able to pay for bills or other necessities, having multiple inquiries on your credit report or a high credit utilization can negatively impact your credit score.

Debt-to-income ratio

Your debt-to-income ratio will include a few factors in it, such as auto loans, rent payments, credit card balances, and other monthly payments you may be making at the time of your mortgage application. When unemployment hits, you are still required to make those monthly payments without the income you once had. If your debt-to-income ratio is too high or has increased due to the need to rely on credit cards or other loans for bill payments, you may be considered a more-risky borrower. Once you have money-flow again, you may have to spend a good amount of time paying down any debts that were accumulated during that time to lower your borrower risk factor.

Bouncing back from unemployment

Develop a financial plan

If unemployment has caused you to have to dip into your savings or accumulate more credit card debt, creating a financial plan can be a great way to get back on track once you have found employment again. This plan should include an outline of your income and the amount you owe, as well as how much you would like to save each month. Using a budgeting app such as Mint or a method like the 50/30/20 method can help you pay down debt and save for that down payment you need.

Should you adjust your must-haves or delay buying a home?

If your finances have taken a large hit due to unemployment a big question you may have to ask yourself is whether or not you’re willing to adjust exactly what you want in a home, or if you should delay the process a bit longer. Are you willing to adjust your budget and must-haves for a home or is it worth it to delay the process to save more money?

Talk to your creditors

A very important step to take is to contact your creditors if you cannot make payments to certain bills. The last thing you want to do is skip payments all together because this will negatively affect your credit score, causing further issues. If you get in contact with your creditors, you can have a conversation about solutions.

How to protect your finances during unemployment

Although we are living in extremely uncertain times, it is still important to protect your finances to ensure you are secure when you return to the workforce. Some steps you can take to help protect some of your assets include:

• Apply for unemployment benefits – the current executive order permits an extra $400 per week to individuals collecting unemployment.
• Do not tap into your 401(k) or retirement accounts, unless as a last resort.
• If you have been furloughed or laid-off, check to see if your healthcare benefits are still available to you.

The bottom line

If you are experiencing temporary unemployment due to the COVID-19 pandemic, it may feel like the goal of buying a home is slipping away. While it may just delay the process a bit, those dreams will not slip away entirely as long as you are taking small financial steps along the way.

As always, we’re here to answer any questions you have and help guide you through the process. Give us a call or start your application today.