If you’re currently unemployed, you won’t be able to use your unemployment benefits to get a mortgage. However, there are several types of income you can use to purchase a house, and some of them may surprise you.
We’ll explain what you need to get approved for a mortgage while unemployed, and also what you’ll need to show when you become gainfully employed again.
- Unemployment income cannot be used to purchase a home.
- Your debt-to-income (DTI) ratio is more important than income alone.
- You can qualify for a mortgage based on your offer letter from an employer.
- Seasonal and contract workers could qualify to buy a house.
Buying a Home While Unemployed
Although you can’t purchase a home using unemployment income, it is possible to get a mortgage while you’re unemployed. According to Jason Gelios, a Realtor at Community Choice Realty in the Detroit area, there are other types of income that could be considered.
“Income such as investment dividends, Social Security income, and having a co-signer or any other type of income coming in from a non-traditional source, are some of the options,” Gelios told The Balance by email.
So why wouldn’t unemployment benefits be considered? “This money is not considered to be qualified income for mortgage borrowers because it is short term,” explained Jeff Gravelle, chief production officer at NewRez, a mortgage lender based in Fort Washington, Pennsylvania. “In order to get a mortgage while unemployed, you would need to have at least one person on the loan application who is able to provide proper financial documentation that proves qualification,” Gravelle told The Balance by email.
After you get back on your feet and revisit the possibility of purchasing a house, it’s important to get all your financial ducks in a row first. You’ll need a stable income history and a good credit score.
Your debt-to-income, or DTI, ratio is one of the most important factors lenders consider when deciding whether to approve your mortgage application.
Learning how to budget for long-term unemployment can help you stabilize your finances between jobs so you can keep your DTI ratio in check.
To calculate your DTI ratio, add up all of your monthly debts, such as car loans, credit cards, and student loans, then divide this total amount by your gross (or pre-tax) income. A 43% DTI ratio is often the highest such ratio that lenders will accept.
A good rule of thumb is the 28/36 rule, which means that no more than 28% of your gross income should be used specifically on housing, and no more than 36% should be used for all your debts—including housing.
What Qualifies as Income?
Now you know that lenders don’t consider unemployment benefits to be qualified income. But what would they consider? “Lenders look for sources of income from employment, investment dividends paid regularly, Social Security checks, or any other form of steady income coming in,” Gelios said.
And there are also other types of income that may qualify you. “Alternative income sources, such as lawsuit settlement payments, alimony, and inheritance, also count,” Gravelle said.
Buying a Home After Being on Unemployment Income
After you’ve secured a new job and you’re back on your feet following a period of unemployment, you’ll have a much better chance of securing a loan. “Your best bet for landing a conventional mortgage is to apply when you’ve returned to work and can show proof of stable income,” Gravelle said.
At that point, you will need to provide the following, including:
- Original pay stubs
- W-2 forms
- Tax returns
- Bank statements
- Investment account statements
- Proof of Social Security number
- Driver’s license
“If a borrower has any unemployment within the past two years, that will be treated as a gap, with the current income being calculated over the course of the past two years,” Gelios said.
Qualify Based on an Offer Letter
Even if you haven’t started your new job, you may be able to qualify based on an offer letter.
“Some qualifiers exist for this type of proof of income. For example, the letter may have to show that the borrower will be employed within 90 days of obtaining the mortgage,” Gelios said. It will also need to show how much the income will be and how it’s going to be paid out; for example, salaried or hourly.
Seasonal Workers and Contractors
If you’re a seasonal income earner or contractor, Gelios said you will need to qualify based on the income you make in the periods when you work. “For example, if someone makes $45,000 in their working season, this income would be calculated over the past 12 months; if no income was earned the year prior, then that income would be calculated over 24 months.”
Using the 24-month formula above, if you earned $45,000 a year, on paper, it would show you making $22,500 a year.
It’s also helpful if you can demonstrate the seasonal work has a strong likelihood of continuing in future years.
“Again, any income from unemployment [in the two-year period] could not be used in qualifying for a mortgage, since lenders look at whether or not the source of the income is steady and how strong is the potential of future income—although future income is not calculated,” Gelios said.
The gig economy is growing, but these types of workers may not always have the documentation required by traditional lenders. “It might be worth it for self-employed borrowers to look at private lending options, as private lenders have more flexibility in their qualifying guidelines and may offer lending products unique to those who are self-employed,” Gravelle said.
What Mortgage Lenders Do Not Accept
Not all income is acceptable to lenders. The following are not considered qualifying sources of income:
- Illegal income
- Income not listed on tax returns
- Projected income
- Draw income taken in advance of anticipated commission earnings
- Capital withdrawals
- Income that cannot be verified
Frequently Asked Questions (FAQs)
Can you get a mortgage if you are unemployed?
No, unless you have funds from another source, such as an inheritance, alimony, investments, Social Security, etc.
Can you buy a house without proof of income?
Can you get a mortgage with a low income?
Yes. “For those borrowers looking into low-income home loan options, your best bet might be an FHA mortgage,” Gravelle said. “FHA loans are insured by the government and offer flexible credit qualifying requirements and loan terms such as low down payment, low interest rates, and low closing costs to help more people achieve homeownership.”
What is the minimum income to get a mortgage?
According to Gravelle, there is no specific income level for lender approval. “Income is not the most important part of the equation when it comes to qualifying someone for a loan.” While income is certainly a key part of the equation, Gravelle said the DTI ratio is the most determining factor.
Gelios agreed. “A mortgage can be obtained for just about any income level, as long as the monthly DTI is not exceeded.” So, even if your monthly income was only $2,000, as long as your DTI didn’t exceed 43%, you could be allowed a monthly payment of $1,140.