Job Loss and Qualifying For A Mortgage:
A home buyer called me yesterday to ask; if she could still close on a transaction even though she had just been laid off?
My answer was of course “no,” so she then asked when she could get a loan again, prompting today’s blog topic.
If a buyer is laid off prior to close, the lender cannot fund the loan – even if the buyer still wants to.
All lenders are now very concerned about employment and are doing verbal employment verifications within one to two days of funding (as opposed to within ten days of funding in normal times).
If a buyer is laid off and re-hired by the same firm after the COVID-19 crisis ebbs, he will immediately qualify for a new mortgage (assuming credit and assets remain sound).
If a buyer is laid off and re-hired by a different firm but in the same industry, he will again immediately qualify for a new mortgage (assuming credit and assets remain sound).
If a buyer is laid off and re-hired with a different position in a different industry, he will likely have to “season” his employment for six months before qualifying for a mortgage.
TERROR IN THE MORTGAGE INDUSTRY
The mortgage industry is in an extremely precarious spot right now b/c of potential mass layoffs, forbearances and the devaluation of servicing rights.
Without going too far into the weeds, suffice it to say that the industry faces tens of billions of potential losses if mass layoffs or forbearance allowances (where borrowers are allowed to skip payments) result in borrowers missing mortgage payments en masse.
If a borrower misses the payment on a newly funded loan for example, lenders face what is called a “First Payment Default” (FPD) penalty or violation.
A series of such FPD penalties could put a mortgage bank entirely out of business b/c of the potential losses (b/c such loans are unsalable) and b/c of the massive demands on capital (if lenders have to sit on the loans themselves or sell them at a huge discount).
I am oversimplifying these issues for purposes of brevity, but lenders are all extremely nervous and this is another reason rates are not dropping more.
It is also why we are all being extraordinarily careful when it comes to verifying employment.