By Steven J. Sless, CLTC®
An unprecedented number of people are currently out of work due to the COVID-19 pandemic. The good news is that buyers or those seeking to leverage their home equity who are furloughed or otherwise unemployed can still get mortgages.
Lending has become very restrictive, but it’s still possible to be approved. It’s advised to contact a licensed lending professional to review your situation -- analyzing finances, assets, credit, etc. These days, lenders will focus more on credit history, down payment, reserves and assets.
Understanding Debt To Income Ratio
Income for traditional lending is based on a debt to income ratio (DTI). To keep DTI low, prospective buyers should review unnecessary expenses (i.e. subscription services), adjust insurance coverage and limit credit card use. They also should call creditors to negotiate terms on all debts.
Many lenders and credit providers will work with borrowers to reduce interest rates. Borrowers also should be sure to explore all possible options to avoid credit card debt such as a 401k withdrawal, selling assets, tapping into the cash value of life insurance, taking online jobs, etc.
HECM loans, more commonly known as reverse mortgages for homeowners 60+ use residual income (RI). Reverse mortgage guidelines also allow asset dissipation which is a calculation which converts your assets into an income calculation. Qualified seniors, especially those on a fixed or limited income, will have a far easier time qualifying for reverse mortgages over traditional mortgage loans.
Reverse mortgages offer the ability to borrow up to roughly 50 percent of the home’s value with flexible repayment terms. Borrowers have the option to make monthly payments or defer payback until the last remaining borrower leaves the home. Contrary to popular belief, borrowers do not relinquish ownership. Unlike any other type of mortgage loan, there is no mandatory monthly payment required. Payback, including loan interest, is deferred until the last remaining borrower permanently leaves the home.
HECM For Purchase
Those 62+ in search for a new home may select the HECM for Purchase loan, which combines a reverse mortgage with the equity from the sale of your previous home (or from other savings and assets) to buy your next primary home in a single transaction. Regardless of how long you live in the home or what happens to your home’s value, you only make one initial down payment towards the purchase, provided that you pay property taxes, homeowner’s insurance and maintain the property.
Another advantage of an HECM for purchase loan is that it defers payback until the last remaining borrower leaves the home. This flexibility can offer much needed additional cash flow during times of economic uncertainty.
One other non-traditional financing option is a non-qualified mortgage (Non-QM). Primarily for self-employed borrowers, some non-QM loans allow bank statements to be used in lieu of traditional proof of income.
Advice To Mortgage Seekers
Overall, my advice to mortgage seekers who are out of work is to be patient and calm. The loss of employment and income is not your fault. Don’t get in over your head in times of uncertainty. This will pass and it is possible to find other employment.
If you still wish to proceed in the home buying process, consult a licensed mortgage professional to discuss your personalized options. Do your homework and become educated. Evaluate your income situation. With a purchase, it may make sense to delay upsizing for the time being. Shop around but be decisive. Guidelines and programs are changing rapidly during these uncertain times. Best of luck and health.
Steven J. Sless (NMLS: #298581 MLO: #49963) is the national reverse mortgage division manager with PRMI and manager of its Owings Mills branch – one of the nation’s only consumer-direct retail branches which deals exclusively with reverse mortgages. For more information, visit www.TheStevenJSlessGroup.com call (410)814-7575 or follow morewithsless on Facebook, Twitter, LinkedIn and Instagram.