Getting a Loan With a Salary Drop

Revenues in many industries have taken a huge blow, and many workers are being asked to take a salary cut in order to maintain the integrity of the workforce. This doesn’t necessarily mean that you would be denied a loan, although you may need to provide additional documentation so your lender has a better picture of your overall financial picture. But a lower income can still affect your loan in one or more ways:

• It can reduce the amount you’ll qualify to borrow. This one is pretty obvious; if you’re making less, even temporarily, you won’t be able to make as large of a loan payment. Your lender may still be more than happy to make some kind of loan to you, but it may be for much less than you expect. So if you must borrow while on a reduced income, brace yourself for purchasing down. The upside to this, though, is a home that you’ll owe less on and be able to pay down more quickly once your income is back to normal.

• It can change your debt to income ratio. A lot of borrowers walk the debt to income line, especially as housing prices continue to increase. If you were close to the cap before your income was reduced, be prepared to have to make some changes to your plans. You may need to pay off debts strategically, sell items like extra vehicles that are encumbered with loans or settle for a much smaller loan.

• It can increase your down payment. If you’re determined to borrow within a specific price range, or you’ve already made an offer and your income changed during the sales process, a quick way back to the home of your dreams is to make a bigger down payment. There are many ways to increase your down payment, such as a gift from a relative (provided they do not expect you to repay the gift) or liquid funds from things like savings or a 401k. Before you cash out investments or savings, though, check with your lender to ensure you’ll have enough money remaining in any accounts that may need to contain reserves.