Most loan pre approval programs from banks are based on the borrower having a consistent income. Collecting unemployment stereotypically runs contrary to this standard, so many real estate sites and articles will automatically say that you cannot qualify or prequalify for a loan while collecting it. This is simply a false narrative for the current generation of workers.
Does collecting unemployment mean that I am unemployed?
Stereotypically, the average person holds one job that accounts for the overwhelming majority of his income. If he loses that job, he loses his entire income. This may have been a more truthful assessment in past generations, but it is less true of Millennials, especially those born after 1990. According to Bureau of Labor Statistics, the average median job tenure for a person aged 25 or older is 5.5 years, but for those aged 20-24, it is 16 months. There is higher job turnover than ever before, and what’s more, Millennials are more into contract work than any generation previous to them. The proliferation of apps like Uber and sites geared towards contract and freelance workers have given more opportunity than ever to young workers, resulting in a 34 percent rate of Millennials holding a 1099 job.
Contract work is less exclusive and time dependent than W-2 work, meaning that many young workers may hold 1099 positions alongside a traditional W-2 job. In some cases, young professionals are using the W-2 job as the safety net, not the contract work. Contractors work less hours and make more money in many cases.
All of this means that young workers can very easily and legally collect unemployment while still being quite gainfully employed.
Why do banks still adhere to an old standard?
It is true that banks still want to see income presented in an old school fashion; that is, pay stubs from a W-2 job. Lenders will often give a harder time to people who bring in self-made income statements on Excel sheets, and with good reason. Although annual tax forms can prove the amount of a person’s income whether W-2 or 1099 based, it does not show another important aspect of income that may actually be more important to lenders: cash flow.
Mortgage payments come at the same time every month, and so do most W-2 paychecks. This consistency is attractive to lenders even if a person can make more money doing contract work. Why? 1099 work has more potential to be inconsistent. If a monthly payment on a home is $1,500, the average lender is more impressed with a consistent $2,500 monthly check from a W-2 employer than a single $25,000 payment for six months of contract work. If the worker gets all of this money at the end of the period, then the lender would have to wait to receive the first five mortgage payments. This is nerve wrecking for loan officers, thus the higher risk profile for a contract worker even if he makes more money than a W-2 wage worker.
How can New Age borrowers work around this hiccup?
In order to have a better chance at qualifying for a loan while collecting unemployment, a worker can use one or more of the following strategies.
First of all, form an LLC to accept all contract, freelance, and 1099 payments. Pay yourself a consistent salary from the business, and show these pay stubs to your lender. Ideally, you would not even have to tell your lender that you are the business owner, because the pay stubs that come from your business would look the exact same as a pay stub from any business. However, paying yourself consistently does even out the bumps that you may face as a contractor: You have to save money during the good times to compensate for the lower pay in bad times. Like it or not, this does actually speak to increased financial responsibility.
You may be able to achieve parity with a W-2 worker with a guarantor. The bank makes its money from consistent payments, but perhaps you have a friend or a family member who better understands the uneven payment structure of your industry. If you have someone who trusts that you will be able to pay your debts, then you can lower your risk profile with the bank by signing on one of these family members or friends as backup. This guarantor is responsible for any loan payments that you do not make, so make sure that your agreement to pay them back is in writing as well.
Showcase that you are using unemployment in a responsible way. A lender for a mortgage is not a business banker. However, you may gain points if you can show your lender how you are leveraging an unemployment check from your last W-2 job to bring more business into your 1099 contract work or get a new job by hiring a temp employment agency. However, unemployment cannot be guaranteed as a consistent income for more than three years, so you must show this tendency fairly quickly after being laid off of your W-2 job in order for your banker to take you seriously.
You may also allay the fears of your banker if you can show that your industry is seasonal and pays unemployment during the off season. Construction workers often have this arrangement with their companies.
2 Point Highlight
If a monthly payment on a home is $1,500, the average lender is more impressed with a consistent $2,500 monthly check from a W-2 employer than a single $25,000 payment for six months of contract work.
However, paying yourself consistently does even out the bumps that you may face as a contractor: You have to save money during the good times to compensate for the lower pay in bad times.
