Recently, I got an email from a loyal reader who had a very concerning question to ask:
Can I refinance if I get laid off? What are the pros and cons I should be looking out for? A little advice would go a long way right now.
Peter
The Simple Truth
I wish I could give Peter a simple answer here but I’ll do the best I can. So let me get straight to the point. No, you can’t refinance when you are laid off. There are a lot of reasons for this but the main reason is because if you can’t provide a source of income you’re not going to get a loan.
So this asks the question, what do you need?
What You Need To Get A Loan
In order to get a loan you need several things that I will mention here. However, depending on the loan program and what you are looking for some of these things may be a bit different for your situation.
First, you need your two most recent W-2 tax returns. Why does the lender need this? The lender wants to know what kind of earned income you receive every year. They also want to see how much of that income qualifies for the loan.
Not all income counts. In most cases lenders will only consider what you earn in a normal 40 hour work week. They usually won’t count your overtime unless you’ve been putting that in for at least a couple of years.
Second, you’ll need your pay stubs from the most recent month available. If you get paid monthly you’ll need just the one but if you get paid weekly you’ll need the most recent 5 pay stubs.
Third, the lender will need to see you last 3 month bank statements. Why? Because they need to know how much debt you have and what your payment history has been. The bank will use your statement to determine your debt to income ratio. Lenders will usually not want to this any higher than 36%. If you plan to use the same bank you get your statements from they will already have these on hand.
Finally, sometimes lenders like to see what kind of investments you have like retirement accounts, mutual funds, and IRA’s. If you have a lot of money saved up this could encourage the lenders to approve you for the loan.
Things You Don’t Want To Do When Refinancing
If you’re getting laid off or have that feeling that you may be getting laid off there are few things you will defiantly want to avoid. I also recommend read my article on setting up your own plan should you get laid off, you can do that here.
- Don’t barrow money from your home. If chances are you’re getting laid off, you do not want to be pulling equity out of your home. The reason for this is quite simple. If you start pulling money out through something like a home equity line of credit (HELOC) and your already going to be strapped for money and then you come to find out that you can’t make the HELOC payments either there is a chance you could lose your home as well.
- Don’t Use Payday lenders. I’ve talked about this a lot in the past so I won’t go through that again. However, just know that interest rates for these loans are usually very high, usually around 300%. Although in states like Arizona and Ohio they have changed this law so lenders could only charge as much as 30%. The worst part about using a payday lender is that you may not be able to stop and may even become dependent on them.
- Don’t take money from retirement funds or college savings. You may be saying to yourself that you don’t have that much in that 401k or IRA, so I’ll just cash it out. Don’t do it. If you haven’t read my article on the rule of 72 take time and do that now. The point is time is your most precious asset and if you pull money out of you own retirement account you may not regret it now but in 20 or 30 years you will.
Prevention And Professional Help
The best advice I can give you on this situation is to prevent it from ever happening. If you have even the slightest thought that you might be getting laid off and you want to refinance don’t wait, do it now.
Lastly, if you are laid off and still want to refinance call on a professional for some help. Who knows what they might be able to do to help. With all of the different mortgage programs out there, they may have something that could work for you.
If one lender turns you down try another. I once knew a lady who was three month behind on here home payments, had a credit score in the 500′s and was still able to refinance. The point is you just have to keep trying until you get an answer you like.
Chris