How sudden job loss affects your mortgage pre-approval or approval
If you’ve been thinking about buying a house, you’ve probably considered how much you can afford in mortgage payments. Have you also thought about what would happen if you lost your source of income?
While the sudden loss of employment is always a possibility, the current uncertainty of our economy has made more people think about the stability of their income. Whether you’ve already made an offer on a home or you’ve just started looking, here is how job loss could affect your mortgage approval.
What role does employment play in mortgage approval?
In addition to ensuring you earn enough to afford a mortgage payment; mortgage lenders want to see that you have a history of consistent income and are likely to in the future. Consistent employment is the best way to demonstrate that.
To qualify for any mortgage, you’ll need proof of sufficient, reliable income. Your mortgage broker will walk you through the income documents your lender will need to verify you’re employed and earning enough income. So, if your employment situation is questionable, you may want to reconsider a home purchase until your employment is more secure.
Should you continue with your home purchase after you’ve lost your job?
What if you’ve already qualified for a mortgage, and your employment circumstances change? Simply put, you must tell your lender. Hiding that information might be considered fraud, and your lender will find out when they verify your information prior to closing. If we are aware of this change we may be able to work it out with the lender.
What if you don’t tell the lender or us – your broker – and hope the lender does not find out?
The lender will probably “pull your financing” if they find out on their own, and this can happen right up to the minute before possession, like 11:59 am on possession day.
At best, you may “close late” and there are fees for that, at worst, you could both:
· Lose your deposit that you gave and
· Be sued for “specific performance” of completing a legal and binding contract to buy the home. If the sellers need the funds to close on another house, they could “fire sale” the home for say $50,000 less and sue you for that to. And you will probably lose.
If you’ve already gone through the approval process, then you know that your lender is looking for steady income and employment.
Here are some possible scenarios where you may be able to continue with your purchase:
- If you secure another job right away and the job is in the same field as your previous employment at a direct competitor. You will still have to requalify, and it may end up being for less than the original loan, but you may be able to continue with your home purchase. Be aware, if your new employer has a probationary period (usually three months), you might not be approved.
- TIP: ask if you can have probation waived or be hired without probation.
- If you have a co-signer on your mortgage, and that person earns enough to qualify on their own, you may be able to move forward. Be sure your co-signer is aware of your employment situation.
- If you have other sources of income that do not come from employment, they may be considered. The key factors are the amount and consistency of the income. Income from retirement plans, rentals, investments, and even spousal or child support payments may be considered if we have not used that income to qualify you please tell us.
Can you use your unemployment income when applying for a mortgage?
Generally, Employment Insurance income can’t be used to qualify for a mortgage. The exceptions for most financial institutions are seasonal workers or people with cyclical employment in industries such as fishing or construction. In this situation, you’ll be asked to show at least a 2-year cycle of employment followed by Employment Insurance benefits.
Also if you are in an apprenticeship, then you are on EI when you are in your “school term” and that is totally fine.
What happens if you’re furloughed (temporary leave of absence)?
Not all job losses are permanent. As we’ve seen during the COVID-19 pandemic, many workers were put on temporary leave. If you’ve already been approved for a mortgage and are closing on a house, your lender might take a “wait-and-see” approach and delay the closing if you can demonstrate you’ve only been furloughed. In these cases, you’ll need a letter from your employer that has a return-to-work date on it. Keep in mind, if you don’t return to work before your closing date, your lender will likely cancel the approval and ask for a resubmission later.
If you haven’t started the application process, it would be wise to wait until you are back to work for at least 3-months to demonstrate consistent employment.
Your credit score and debt servicing ratios may change because of lost income, which means you may no longer meet your lender’s qualifications for a mortgage. While it may not be possible, try to avoid accumulating debt or missing any payments while unemployed.
Talk to your mortgage broker.
You don’t want to get locked into a mortgage you can’t afford. You also don’t want to lose a deposit on a home because you lost your financing. When trying to assess if it’s better to move forward or walk away, we should be your first call.
Data on July 1, 2022 Prime Increase to 3.7%
Today, the Bank of Canada showed once again that it is seriously concerned about inflation by raising its overnight benchmark rate to 1.50% – making Consumer Prime 3.70%
This latest 50 basis point increase follows a similar-sized move in April and is considered the fastest rate hike cycle in over two decades.
Everyone STAY COOL!
Says Mortgage Mark Herman, top Calgary Alberta Mortgage Broker.
With it, the Bank brings its policy rate closer to its pre-pandemic level.
In rationalizing its 3rd increase of 2022, the Bank cited several factors, most especially that “the risk of elevated inflation becoming entrenched has risen.” As a result, the BoC will use its monetary policy tools to return inflation to target and keep inflation expectations well anchored.
These are the highlights of today’s announcement.
Inflation at home and abroad
- Largely driven by higher prices for food and energy, the Bank noted that CPI inflation reached 6.8% for the month of April, well above its forecast and “will likely move even higher in the near term before beginning to ease”
- As “pervasive” input pressures feed through into consumer prices, inflation continues to broaden, with core measures of inflation ranging between 3.2% and 5.1%
- Almost 70% of CPI categories now show inflation above 3%
- The increase in global inflation is occurring as the global economy slows
- The Russian invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions are all weighing on activity and boosting inflation
- The war has increased uncertainty, is putting further upward pressure on prices for energy and agricultural commodities and “dampening the outlook, particularly in Europe”
- U.S. labour market strength continues, with wage pressures intensifying, while private domestic U.S. demand remains robust despite the American economy “contracting in the first quarter of 2022”
- Global financial conditions have tightened and markets have been volatile
Canadian economy and the housing market
- Economic growth is strong and the economy is clearly “operating in excess demand,” a change in the language the Bank used in April when it said our economy was “moving into excess demand”
- National accounts data for the first quarter of 2022 showed GDP growth of 3.1%, in line with the Bank’s April Monetary Policy Report projection
- Job vacancies are elevated, companies are reporting widespread labour shortages, and wage growth has been “picking up and broadening across sectors”
- Housing market activity is moderating from exceptionally high levels
- With consumer spending in Canada remaining robust and exports anticipated to strengthen, growth in the second quarter is expected to be “solid”
With inflation persisting well above target and “expected to move higher in the near term,” the Bank used today’s announcement to again forewarn that “interest rates will need to rise further.”
The pace of future increases in its policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation.
In case there was any doubt, the Bank’s message today was clear: it is prepared to act more forcefully if needed to meet its commitment to achieve its 2% inflation target.
July 13, 2022 is the date of the BoC’s next scheduled policy announcement.