What to do about applying for a loan when you lose your job
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The Covid-19 pandemic has devastated the finances of many people. Maybe you’ve been fired from your job, or maybe you’re a gig worker who has experienced a significant drop in income. Even if you’ve kept your job while embracing a work-from-home model, we’re learning that things aren’t static. As businesses reorganize for the new normal, more organizational changes could be on the horizon.
But even during times of economic uncertainty, many of us continue to move forward with our life plans. Whether you’re buying a new car, exploring options for taking out a personal loan, or considering buying a new home, your employment status is a big part of your borrowing equation.
If you were employed when you applied for a loan and then lose your job, this has implications for the borrowing process.
âIf you lose your job, you can assume that all your financial plans will be put on hold, but it’s still possible to apply for a loan,â says Baruch Silvermann, CEO of The smart investor. “Although it can be more difficult, it is still possible to get approved for auto loans, personal loans and mortgages.”
Your main obstacle will be convincing the lender that you still have the option of making regular payments on time each month, he explains. âYour lender may consider other sources of income such as social security benefits, disability benefits, public assistance or pension funds,â Silvermann continues.
In addition, you can also use the income of your partner or a family member by making them a co-signer on the loan, he says.
Up front, Select offers some tips on how to deal with a job loss during your borrowing process:
It’s not a lost cause
Even if you’ve lost your job, Silvermann says there are still a number of things lenders will be looking to see before approving a loan under these circumstances. They understand:
Strong credit history
âIf you can show that you can handle any debt responsibly with a history of on-time payments, especially since you lost your job, they may be more prone to approval,â he says.
Good credit / debt ratio
Lenders can also set a minimum credit score requirements, so be sure to look at your credit utilization rate and make sure you haven’t maximized your credit accounts while you’ve had little to no income, says Silvermann.
Access to a qualified co-signer
If you have someone who will guarantee your loan and have strong credit, this could be a way to avoid job loss when approving the loan.
Be open with your lender
When you apply for a loan, including a mortgage, you sign a document stating that you will be honest with the facts and figures.
âAs a general rule, when you apply for a mortgage, you should notify your lender of a change in employment. You will sign a statement at closing that everything in your application is still up to date,â says Mark McArdle, assistant. Director, Mortgage Markets at the Consumer Financial Protection Bureau. “To sign this and withhold relevant information would be fraud.”
Even if you don’t have a job, you have options. âFor example, you can suspend your app while you secure additional work,â says McArdle. Also, if you have other sources of income, you may qualify for the same loan or a smaller one. “Being transparent with your lender and your loan officer is the best approach so that you can explore your options.”
Here’s a breakdown of what to do depending on the type of loan you’re applying for:
What to do if you are applying for a mortgage
Your plan was to take advantage of record mortgage interest rates. You’ve found your dream home, made an offer, and completed all the paperwork for a mortgage. And then you get the bad news. Losing your job is extremely overwhelming and stressful, so the first thing you should do is take a deep breath and give yourself a moment to strategize.
If you lose your job after applying for a mortgage, you should immediately call your lender and be honest with them. Your lender can discuss all of your options while determining if your loss of income is temporary, permanent, or if a spouse is still earning income, âsays Joe DeMarkey, Strategic Business Development Manager at Reverse Mortgage Funding LLC and Director of National Reverse Mortgage Lenders Association. “These factors can determine how or if you can go ahead with the loan, and whether there are programs in place that can help you when applying for the loan.”
What to do if you are applying for a car loan
If you are working with a dealership to finance the purchase of a car and during the process you receive a message that you are being fired from your job, the first thing you should do is share the update with your lender. .
If you have an old car that still gets you from point A to point B, you may decide to postpone your purchase until you find a new job.
If you are unable to postpone buying the car, you can discuss ways to restructure your loan. One option is to extend the terms of the loan. For example, instead of taking a three-year loan, extend the terms to five years. This will likely lower your monthly payment.
You might also want to reconsider upgrades. You might be able to skip the tech package or forgo the expensive extended warranty. All of these small changes can make the purchase more affordable if money is tight.
What to do if you are applying for a personal loan
There are many reasons to take out a personal loan, whether it’s a big home improvement project, starting a business, tuition, medical bills, or a long-awaited purchase like a motorcycle or a boat.
If your professional situation changes when you apply for a personal loan, you may want to consider using a zero rate credit card to finance your project or purchase. For less urgent projects, it may make more sense to postpone your projects a bit until you find a new job.
If you need cash to pay for your daily expenses while you’re in between jobs, there are some options for personal loans, although you might not get the best interest rates. Do your research before taking out a loan. Some lenders like Marcus by Goldman Sachs and LightStream have online tools that you can use to determine if you would qualify for a personal loan without making a full application.
The approval of a loan does not always depend solely on the job. For example, retirees can still apply for and get approved for auto loans, home loans, and personal loans.
But your chances of getting approved for a loan increase when you demonstrate a viable ability to repay the loan on schedule. Other sources include your spouse’s income, rental income from a separate property, payments from an inheritance, or support payments.
This additional income could very well influence the approval of a loan or mortgage.
If you don’t have other sources of income, there are still options.
Ask a co-signer
You can ask your family or friends to step in to help you. Perhaps a parent or sibling could co-sign your loan.
A co-signer will apply for the loan with you and share the responsibility for repaying the loan. Additionally, a co-signer is legally obligated to repay the loan if you, as the primary borrower, cannot make the payments. You must have a stable income and a good credit rating to be a co-signer.
Just make sure you have a clear plan for paying off the loan. Otherwise, missing payments could lead to loan default and severely damage the credit history of the co-signer.
Looking for a new job
It might sound obvious, but it’s best to start your job search as soon as possible, especially if you’re in the middle of the mortgage process. Now is a good time to reach out to your contacts and let them know about your situation.
If you’re struggling to find a new job in your industry, consider looking outside your wheelhouse – your skills may be transferable to a new opportunity.
You can also take a part-time job to increase your income when looking for a full-time position. Often times, employers hire part-time workers with a plan for those hires to progress to a full-time position.
Consider the economy of concerts
Millions of Americans make a living working freelance or hosting concerts like tutoring, ridesharing, bartending, nanny work, landscaping, or odd jobs. Although sometimes mortgage lenders can beware of the 1099 roles, careful bookkeeping can help demonstrate the extra income that these side jobs bring.
While you may be able to find a co-signer or find additional sources of income, you should always do an assessment of your budget and finances before going ahead with a loan after job loss. .
Should you go ahead with a personal loan for that kitchen remodel, a mortgage for that 4 bedroom colonial center, or a car loan for that expensive new sedan? You really have to ask yourself if the loan obligation makes the most sense right now. Are you going to drain your savings, hurt your credit or worse yet – default on the loan and burden your co-signer with your loan debt?
There is a risk in taking out a loan if you cannot pay the monthly payments due to job loss. Your job loss will most likely be a problem in the short term, but you should seriously consider whether deferring the loan until you can once again find full-time employment is a better option.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.