Home Loan Advice

Job-loss mortgage insurance is an insurance policy that will pay your mortgage payment, or at least a part of it, should you lose your job. Since unemployment is currently around 10% on average around the US, many people are hesitant to purchase house, even with low interest rates combined with a depressed housing market. Many people think, “What if I lose my job soon after closing on a new home?” Since so many people are concerned about how job loss will affect their mortgage this has resulted in an upswing in job loss mortgage insurance.

A few years ago, this kind of insurance policy wasn’t common, simply because there wasn’t much demand. Unemployment in previous economic downturns wasn’t as severe and didn’t affect as many areas of the economy. However, with unemployment up and forecasted to stay up in the 10% range for at least 3 to 7 years, many people want the peace of mind job loss mortgage insurance can bring. On the other side of the equation, home builders and real estate agents find such policies to help close a deal since it takes care of one of the biggest objections today’s home buyers have, job security.

As you might expect, job loss insurance policies vary from state to state and company to company. Most policies are of limited duration, typically around two years after the purchase of a home. Most also have pay out limits of around $1500-$1800 a month for up to 6 payments total during the term of the insurance.

As with any insurance policy the devil is in the details. Therefore it is essential that you carefully read and study any job loss insurance policy you purchase or that is purchased for you by the seller.

First of all, don’t assume that the policy will make your full mortgage payment. Most policies only pay out enough to keep a home out of foreclosure but may leave an underfunded escrow for private mortgage insurance, home owner insurance and taxes. Make sure you know what the policy will and want pay for. And, you need to know that this payment is considered taxable unemployment income by the IRS, so you’ll need to be prepared for the tax consequences.

Next, be aware of the effective date. Many policies delay the effective date for 2-6 months after closing to prevent people from using them to purchase a home when they know that a job loss for them is looming.

Don’t be lulled into a false sense of security by these policies. Many pay out slowly and you may end up with one or more late payment dings on your credit report. You have to be diligent and make certain that the insurer pays the mortgage holder in a timely fashion.

Lastly, there are exclusions written into job loss insurance policies that may prevent you from taking advantage of their benefits. Naturally, people who’re already unemployed can’t be covered nor can people who’re not of legal age or who’re about to retire or already retired. Plans may have other exclusions so make sure you know which ones might apply to you.

Typically self-employed people are excluded, sometimes even if the self-employment is a part-time side business and not the primary source of income. Also, plans generally state that the unemployment must be involuntary. This covers a wide range of incidents beyond just quitting a job ranging from illness to strikes. Make sure you understand these work related exclusions clearly to avoid any surprises.

Of course, I recommend that you self-fund such an insurance policy for yourself by having an emergency fund of 3 to 6 months expenses tucked away beyond having a substantial down payment before purchasing a home. I also recommend not purchasing a home where your monthly mortgage payment is more than 25% of your take home pay. However, if you do purchase a home without these safeguards in place a job loss mortgage insurance policy can help mitigate some, but not all, of your risks.