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Mortgage refinancing options when unemployed
You may be able to lower your payments, but first you need to prove you can pay.
Although many borrowers see mortgage refinancing as an attractive opportunity to trim their monthly payments, qualifying can be difficult if you’re unemployed. But you have options, and there are ways to improve your chances. If you can show an alternate way to secure a new loan, you may be able to find a lender that will work with you or a program designed to work with someone in your situation.
What you should consider
Before you start to look for a lender, keep in mind the following considerations:
- Your unemployment income doesn’t count. Most lenders don’t consider unemployment payments as income for a loan, which means you’ll need to prove you have another source of income to secure your refinance.
- Length of unemployment matters. If you’re on sabbatical or on temporary leave, providing your lender with proof of when you’ll return to steady employment can improve your chances of getting a new loan.
- Refinancing may not be the solution. If you’re unemployed, consider your lifestyle and financial needs. Know whether refinancing is the best solution for your financial situation. Understanding your refinancing objectives will help you make the right choice.
- Refinancing isn’t free. Refinancing means taking out a new loan to pay off your current mortgage, which comes with closing costs. So make sure to weigh those expenses against the amount you’d save every month on your mortgage payments.
Refinance options when you’re unemployed
Here are some mortgage refinancing options to look for as you shop around for a lender to work with you if you’re currently unemployed.
- Guarantor-secured refinance. If you know someone who will sign onto the refinance loan as a guarantor, that may be enough security for a bank to take a chance on you. But if you default, your guarantor is on the hook to pay your debt for you.
- Low-income loan programs. Some lenders offer refinance loans with special rates for low-income borrowers. Often these programs require you to pass an online financial literacy class, and some require that your home is located in a specific area.
- FHA streamline refinance. This option is only for borrowers who are current on their existing FHA mortgages. It doesn’t allow you to cash out on your equity, but the loan requires very little documentation and doesn’t require income verification.
- VA streamline refinance. This loan is more often called an interest rate reduction refinance loan (IRRRL). Like the FHA streamline, you need to be current on your existing VA mortgage, but it requires less documentation and has lower closing costs.
- USDA guaranteed loans. If you live on a family farm or ranch, the USDA’s Farm Service Agency (FSA) works with certain lenders and will guarantee up to 95% of your loan, which can help you secure a refinance.
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How to improve your chance of getting approved
Use the following like a checklist of what you can do to give yourself the best chance of getting your refinance application approved.
- Be current on your mortgage. Most lenders will want to see that you’ve paid your existing mortgage on time for at least the last six months, if not longer.
- Check your credit report. Go through your credit report methodically to make sure there aren’t any errors or old entries that might hurt your chances.
- Meet with a housing counselor. The US Department of Housing and Urban Development provides a list of approved counselors who offer low-cost or free consultations and may help find programs to assist with your refinance.
- Find a mortgage broker you trust. A quality mortgage broker will know the lenders in your area and may be able to direct you to which lenders are willing to work with borrowers in your circumstances.
- Gather your paperwork. Make sure you have evidence of savings, all your income streams, monetary gifts you’ve received or any other asset that might help prove your ability to make your payments until you find new employment.
- Show your job search. Be prepared to prove that you’re actively seeking employment. If you’re taking classes through your state’s employment office or elsewhere to improve your marketability, be sure to provide proof of that as well.
If you’ve run the numbers and don’t think refinancing is for you, consider the following alternate options:
- Loan modification. With this option, your lender can sometimes adjust your interest rate or extend the term of your loan to lower your payments.
- Forbearance. You can sometimes request a mortgage forbearance to pause your mortgage payments when you can’t pay due to hardship. But repayment options vary, so know what will be expected of you when the forbearance is over.
- American Rescue Plan Act of 2021. This legislation extends the forbearance and foreclosure relief started under the CARES Act of 2020 and has funds available to help homeowners avoid foreclosure due to financial hardship caused by the coronavirus pandemic. Most of these protections are for federally-backed loans only.
Before signing on the dotted line, carefully consider the cost and risks of refinancing your mortgage while unemployed. Weighing those against the alternatives and speaking with a mortgage broker, housing counselor or financial planner can also help to ensure you’re making the best possible financial decision.
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