Most are at least familiar with the term unemployment income, which assists those out of work. It is offered to out of work employees through either a federal or state insurance fund. Additionally, it is not a long term form of income. Instead, it is temporary and may last up to 26 weeks to provide a tax-paying employee an income while searching for work again.
Typically, unemployment compensation is not a regular event and is not counted as qualifying income when buying a home. Makes sense, right? Why count temporary income, plus the person is out of work? In most cases, that would be correct, but there is a scenario where we can use unemployment income for mortgage qualification.
How to Count Unemployment Compensation as Income
For any loan, income must be consistent and customary. Unemployment is no different. There are fields of employment where it is customary for employees to be laid off at certain times of the year or between contracts.
Jobs With Consistent Unemployment
- Working shutdowns
- Seasonal employment
Factors that play a role in consistent periods of unemployment include weather, temporary work projects, or waiting for the employer to win bids for work. While employed, it is not uncommon for these employees to work a lot of overtime. One would think that this would not be the case.
For instance, construction or shutdown work may require long hours to accomplish a project before the deadline. So, employees may receive a lot of overtime income, but when the work is complete, there is a layoff. Some employees use this time sort of like a vacation.
Therefore, in most cases like the above, the income may be counted.
Unemployment Compensation Exclusion
Even though unemployment income may be averaged and counted towards a mortgage qualification, there is an important point to remember when buying a home. The borrower may NOT count unemployment if currently unemployed.
Unemployment income may be averaged over the last two years and year to date, but the lender must verify income from a current job in the same field. Therefore, borrowers currently receiving unemployment may not count the previous job’s income or unemployment income until their loan officer can verify that the borrower has a new job.
In fields where unemployment is common, be careful about the timing of unemployment and buying a home. At least as best you can, and hopefully, an issue like this will not come up during your home purchase.