What is Mortgage Unemployment Insurance?

Read Time: 4 minutes

Losing your job is traumatic in many respects, but the biggest of these is that it leaves you wondering how you will pay your bills, including your mortgage. Unemployment mortgage insurance may be a good investment if you’re concerned about losing your job and home. Here’s what you need to know.

How Does Mortgage Unemployment Insurance Work?

There are three types of unemployment insurance that you can tap if you lose your job. They are state unemployment, supplemental unemployment, and mortgage unemployment insurance.

The government funds state unemployment insurance; you can buy supplemental and mortgage unemployment insurance for added protection. Each of these comes with restrictions and conditions. For example, with supplemental and mortgage unemployment insurance, you’ll need to buy a policy before you lose your job.

Each state sets its requirements for unemployment insurance eligibility, benefit amounts and length. Most states offer a maximum of 26 weeks of unemployment insurance, and the amount you receive is based on what you earned over a recent 52-week period.

This type of insurance is designed to replace about half of your wages up to certain dollar amounts.

You qualify if you’ve been let go from your job through no fault of your own. If you get fired for cause, you won’t qualify for benefits.

It may take a couple of weeks or longer to get your first benefit check, and you’ll need to periodically demonstrate that you’re looking for work to continue to qualify. You can also buy additional supplemental unemployment insurance to help augment income shortfalls not covered by state benefits.

In addition, you can buy a separate mortgage unemployment policy that specifically protects your ability to make payments when you lose your job. It covers loan payments during layoffs, lockouts, strikes, or union disputes.

Just like state benefits, you must demonstrate that these actions were not the claimant’s fault and that job separations were involuntary.

You can buy mortgage unemployment insurance when you take out a loan to finance your home. This may be the best time to do it since you could qualify for lower premium costs versus buying a stand-alone policy later.

The downside is that policy costs are rolled into your monthly mortgage payment, increasing your ongoing out-of-pocket costs.

Although the amount might be small by comparison, you’ll also pay interest on that policy as part of your mortgage. By itself, that may not influence your decision to buy a policy, but you should be aware that it does impact your bottom line to some degree.

Premiums amortized into a mortgage are determined as a percentage of the total insured loan. The larger the mortgage, the more a mortgage unemployment insurance policy costs.

‍Don’t confuse mortgage unemployment insurance with private mortgage insurance (PMI). PMI protects the lender in the event of default, while unemployment mortgage insurance pays your mortgage and helps you stay in your home.

Buying a Policy: Restrictions and Qualifying Details

One of the most important qualifiers for a policy is your occupation. You must work in a fairly stable occupation. You must also be in a wage-earning, W-2 based occupation.

Independent contractors, gig workers, and the self-employed are not eligible. That also applies to military personnel, retirees, or if you’re under 18 or over 60 years old.

When you buy a policy, you must also complete a waiting period before your coverage kicks in, usually 30 days or more, depending on the issuer. If you lose your job sooner than that, you won’t qualify.

Some policies may guarantee your entire mortgage, but in most cases, policies only cover your payments for a limited time, usually 6-12 months. While that’s not optimal, it will buy you critical time to find a new job.

Also, maximum payouts vary. One policy may only pay $1000 monthly, while another may cap out at $2,500 monthly. There may also be an overall dollar amount cap versus a monthly cap.

Obviously, the higher the coverage, the more premium you’ll pay for that peace of mind. Take that into consideration when plotting your finances because you’ll still have to make up the difference if your policy amount doesn’t cover your full monthly mortgage payment.

Mortgage unemployment insurance policies are offered by insurance companies, home builders, banks, credit unions, real estate agencies, and realty associations. In some cases, you may be able to negotiate a discount if you bundle other services with a policy.

For example, it can be bundled with life and disability insurance or as part of your mortgage.

However, it’s not available for homeowners with mortgages held by Fannie Mae or Freddie Mac, but both have forbearance arrangements for unemployed homeowners.

In addition to the size of the mortgage, policy issuers will also look at other factors such as your credit history and other variables similar to those used when issuing a mortgage.

While every policy is different, a good rule of thumb is that you should expect to pay at least as much as you’d pay for PMI on the same loan if you’ve got less than 20 percent equity in the home.

Another thing to note is that payments made to your mortgage company may be considered taxable unemployment benefits, depending on your situation.

If you’ve already got a home, mortgage unemployment insurance can add to your peace of mind. If you’re home shopping, though, you might want to ask yourself if you should be buying a home if you’re uncertain about your long-term employment prospects.

But if your job and career prospects are solid and you like the idea of having some added security, mortgage unemployment insurance may be something for you to consider.

Kirk Haverkamp

Kirk Haverkamp is an award-winning reporter and editor with more than 25 years of experience in journalism and public relations. He has contributed to Credit.com, Investopedia, and MetroMode online magazines, among other work. He has a B.A. in English from Hope College and a Master’s Degree in journalism from Michigan State University.