In uncertain times, it can be easy to sit back and worry your time away hoping things will work out eventually. Although worrying will absolutely give you something to do, it won’t get you anywhere. So if you’ve been wanting to buy a home or refinance this year, don’t discount the possibility just because your income may have dropped. It’s true that qualifying for a mortgage is getting trickier for many potential borrowers, but you still have plenty of options and opportunities for a home loan.
How Have Things Changed?
Many industries are facing uncertain futures and what are likely to be unstable paths of recovery. Because of this, lenders have become increasingly concerned about borrowers’ abilities to repay loans. That’s not to say that there’s no hope in sight for workers or business owners, just that from a lender’s perspective, the pandemic has introduced an additional level of risk that has never been factored into home lending equations before now.
So it’s not that you’ve done anything wrong, or that home buyers in general have done anything wrong, but lenders like to see that incomes are stable and will continue to be stable for the foreseeable future. And in the current economic climate, this is pretty much impossible to forecast. Given this, lenders are getting choosier about who they’ll lend to. Minimum credit scores are going up and, in some cases, so are down payments. The good news is that lenders are still issuing loans for home purchases and refinances, even to buyers who have lost income during the pandemic.
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Getting a Loan With a Salary Drop
Revenues in many industries have taken a huge blow, and many workers are being asked to take a salary cut in order to maintain the integrity of the workforce. This doesn’t necessarily mean that you would be denied a loan, although you may need to provide additional documentation, so your lender has a better picture of your overall financial picture. But a lower income can still affect your loan in one or more ways:
- It can reduce the amount you’ll qualify to borrow. This one is pretty obvious; if you’re making less, even temporarily, you won’t be able to make as large of a loan payment. Your lender may still be more than happy to make some kind of loan to you, but it may be for much less than you expect. So if you must borrow while on a reduced income, brace yourself for purchasing down. The upside to this, though, is a home that you’ll owe less on and be able to pay down more quickly once your income is back to normal.
- It can change your debt to income ratio. A lot of borrowers walk the debt to income line, especially as housing prices continue to increase. If you were close to the cap before your income was reduced, be prepared to have to make some changes to your plans. You may need to pay off debts strategically, sell items like extra vehicles that are encumbered with loans or settle for a much smaller loan.
- It can increase your down payment. If you’re determined to borrow within a specific price range, or you’ve already made an offer and your income changed during the sales process, a quick way back to the home of your dreams is to make a bigger down payment. There are many ways to increase your down payment, such as a gift from a relative (provided they do not expect you to repay the gift) or liquid funds from things like savings or an RRSP. Before you cash out investments or savings, though, check with your lender to ensure you’ll have enough money remaining in any accounts that may need to contain reserves.
Need Help Finding a Lender?
The good news is that just because one bank may have new requirements that reduce your loan amount or make you ineligible for a loan right now, others may not. Offers vary from bank to bank and from program to program, so it’s worthwhile to shop around for mortgages. If you’re not sure where to start, you can call me and I can introduce you to a variety of mortgage financing options! It’s a great way to know that you’re getting a professional you know and trust, who can help you achieve your dreams.
Credit for this article is attributed to HomeKeeper. September 2020