Refinancing for the Unemployed

You know the old saying about how banks never lend money to people who need it? Unfortunately, it may be tough to find a lender that will extend credit to you without a steady stream of income. That's because, besides an applicant's credit history, lenders rely on income streams to make risk assessments and grant credit, says Steve Majerus, senior vice president of capital markets at E-Loan, an online lender. Unemployment-insurance income, which lasts for a maximum of 26 weeks, won't count for much. Lenders want to see that you'll be able to make your payments in a timely matter, and the best guarantee of that is income from steady employment.

Before you start searching for a new loan, contact your current lender about a loan modification, advises Paul Havemann, vice president of HSH Associates, a mortgage-rate-tracking company. That means asking the lender to lower your rate to what's currently available in the market. They can refuse — but in this competitive environment, it's worth a try. You should be honest about your current job situation, since no lender wants to foreclose on a loan, says HSH's Keith Gumbinger. At the very least, they might be willing to lower your monthly payment and lengthen the life of the loan. It isn't ideal, but it would at least lighten your debt-service load during tough times.

That isn't to say that it's absolutely impossible to refinance your mortgage — especially if you have a good credit history. But you'll probably be deemed a high risk borrower, says Neill Fendly, former president of the National Association of Mortgage Bankers. And the rate you'll pay will range anywhere between 8.5% to 11.0%, while the average 30-year fixed-rate mortgage goes for 6.6% these days, according to Bankrate.com. You should also expect a lower loan-to-value ratio, meaning you better have a fair amount of equity in your home. While most folks can get a mortgage that covers 90% or more of their home's value, someone in your position might only be able to find one that covers 60% to 70% of it, says Fendly. You might find friendlier terms if you have significant liquid assets (such as a large investment portfolio). And having a spouse with significant income could also improve the situation considerably, says Majerus.

A better might be to apply for a "no-documentation" loan. These loans are designed for the self-employed or business owners who don't have a steady income, says Majerus. So instead of asking for proof of employment and salary, the application will focus on your credit history and assets. While such loans are fairly standard and offered by reputable lenders, they're costlier than the full-documentation programs, warns Majerus, and may not make much sense for someone seeking to refinance at a lower rate. Expect to pay at least a percentage point above the market average, says Fendly.

If none of these options pan out, you're probably just going to have to wait until you're gainfully employed. We know: It isn't fair. But for what it's worth, the rate on 30-year fixed mortgages has jumped 0.45% in the past three weeks. That's the most dramatic move in recent history. So you might be kicking yourself that you didn't refinance before you were laid off. But trust us, there are many others out there kicking themselves for not refinancing three weeks ago