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The Covid-19 pandemic has wreaked havoc on many people's finances. Maybe you've been laid off from your job, or perhaps you're a gig worker who experienced a significant decrease 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 companies re-organize for the new normal, there could be more organizational changes on the horizon.
But even during periods of economic uncertainty, many of us still move forward with our life plans. If you are purchasing a new car, exploring options to take out a personal loan or planning to buy a new home, your employment status is a big part of your borrowing equation.
If you were employed at the time you applied for a loan, and you then lose your job, it does have implications on the borrowing process.
"If you lose your job, you may assume that all of your financial plans will be put on hold, but it can be possible to still apply for a loan," says Baruch Silvermann, CEO of The Smart Investor. "While it can be more challenging, it still can be possible to get approval for auto loans, personal loans and mortgages."
Your main obstacle will be convincing the lender that you still have the ability to make regular payments on time every month, he explains. "Your lender may consider alternative income sources such as social security benefits, disability income, public assistance or pension funds," continues Silvermann.
Furthermore, you may also be able to use the income from your partner, or a family member by making them a co-signer on the loan, he says.
Ahead, Select offers a few tips on how to handle a job loss during your borrowing process:
Even though you've lost your job, Silvermann says there are still a number of things that lenders will be looking to see before they approve a loan in these circumstances. They include:
Strong credit history
"If you can show that you can manage any debt responsibly with a track record of on-time payments, particularly since you lost your job, they may be more inclined towards approval," he says.
Good credit-to-debt ratio
Lenders may also set minimum credit score requirements, so be sure to look at your credit utilization ratio and make sure that you haven't maxed out your credit accounts while you've had little or no income, says Silvermann.
Access to a qualified co-signer
If you have someone who will guarantee your loan who has strong credit, this could be a way to circumvent a job loss during loan approval.
When you apply for loans — including a mortgage — you sign a document verifying you'll be honest with facts and figures.
"Generally, when you are applying for a mortgage loan, you're required to tell your lender about a change in employment. You will be signing a statement at closing stating that everything in your application is still current," says Mark McArdle, assistant director, mortgage markets with the Consumer Financial Protection Bureau. "To sign that and withhold relevant information would be fraud."
Even though you're out of a job, you do have options. "For example, you can pause your application while you secure additional work," says McArdle. Plus, if you have other income sources, it's possible 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 you can explore your options."
Here's a breakdown of what to do depending on the kind of loan you're applying for:
What to do if you're applying for a mortgage
Your plan was to take advantage of record-low interest rates for mortgages. You found your dream home, put in an offer and completed all the paperwork to get a mortgage. And then, you get the bad news. Losing your job is extremely upsetting and stressful, so the first thing to do is take a deep breath and give yourself a moment to get a strategy in place.
If you lose your job after applying for a mortgage, you need to call your lender immediately and be honest with them. Your lender can discuss all your options while considering if your loss of income is temporary, permanent or a spouse is still bringing in income," says Joe DeMarkey, strategic business development leader at Reverse Mortgage Funding LLC and director of National Reverse Mortgage Lenders Association. "These factors can determine how or if you can move forward with the loan, and if there are any programs in place that can assist you while applying for the loan."
What to do if you're applying for a car loan
If you're working with a dealership to finance a car purchase, and during the process you receive word you are being let go from your job, the first thing to do is share the update with your lender.
If you have an older car that still gets you from Point A to Point B, you might decide to defer your purchase until you get a new job.
If you aren't able to defer the car purchase, you can discuss ways to restructure your loan. One option is extending the terms of the loan. For example, instead of taking a three-year loan, stretch the terms to five years. This will likely lower your monthly payment.
You may also want to reconsider upgrades. Perhaps you can skip the technology package or forgo the pricey extended warranty. All these small changes can make the purchase more affordable if money is tight.
What to do if you're applying for a personal loan
There are many reasons to take out personal loans, whether it's a big home-improvement project, starting a business, educational expenses, medical costs or a long-awaited purchase like a motorcycle or boat.
If your job situation changes around the time you're applying for a personal loan, you might want to consider using a zero-interest credit card to finance your project or purchase. For less pressing projects, it might make more sense to defer your plans for a bit until you get a new job.
If you need the cash to help pay for day-to-day expenses while you're between jobs, there are some options for personal loans, though you might not get the most favorable interest rates. Do your research before you sign up for a loan. Some lenders like Marcus by Goldman Sachs and LightStream have online tools you can use to figure out if you would qualify for a personal loan without putting in a full application.
Getting approved for a loan isn't always contingent solely on employment. For example, retired people can still apply and get approved for auto loans, home loans and personal loans.
But your odds for loan approval increase when you demonstrate a viable ability to pay the loan back on its schedule terms. Other sources include your spouse's income, rental income from a separate property, pay-outs from an inheritance or alimony payments.
This additional income could very well sway a loan or mortgage approval your way.
If you don't have other income streams, there are still options.
Ask a co-signer
You could ask family or friends to step in to assist. Maybe a parent or sibling could co-sign your loan.
A co-signer will apply with you for the loan, and shares the responsibility of paying the loan. Furthermore, a co-signer is legally bound to pay the loan off if you, as the primary borrower, can't make the payments. You must have a steady income and good credit score to be a co-signer.
Just make sure you have a clear plan to repay the loan. Otherwise, missing payments could cause the loan to go into default and seriously damage the co-signer's credit history.
Look for a new job
It might seem 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. This is a good time to reach out to contacts and let them know your situation.
If you're struggling to find a new job within your industry, consider looking outside your wheelhouse – your skillset may be transferable to a new opportunity.
You can also take on a part-time job to boost your income during your search for a full-time role. Often, employers hire part-time workers with a plan to have those hires evolve to a full-time position.
Consider the gig economy
Millions of Americans earn a living through freelancing or gig arrangements like tutoring, rideshare driving, bartending, working as a nanny, landscaping or working odd jobs. While sometimes mortgage lenders can be wary of 1099 roles, careful accounting can help demonstrate the additional income these side jobs bring in.
Even though you may be able to find a co-signer or find additional income streams, you should still do an assessment of your budget and finances before you move forward with a loan after job loss.
Should you move forward with a personal loan for that kitchen remodel, a mortgage for that 4-bedroom center colonial or an auto loan for that pricey new sedan? You need to really think about whether the loan obligation makes the most sense at this time. Will you drain your savings, hurt your credit or even worse — default on the loan and saddle your co-signer with your loan debt?
There is risk to taking on a loan if you can't meet the monthly payments due to a job loss. Your job loss will most likely be a short-term issue, but you should seriously consider if deferring the loan until you can secure full-time employment again is a better option.
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