Home Loan Qualifying Guidelines for Maternity Leave
Maternity leave does not have to prevent you from buying a home.
One of the greatest motivating factors for buying a new home is a growing family. One of the challenges is what happens to the family’s income when you go on maternity or paternity leave?
Underwriting guidelines have not always been clear or beneficial when addressing how to treat the income of an expecting mother that intends to go back to work after the baby is born.
We now have clear guidelines regarding temporary income you may receive while on maternity leave.
Temporary leave from work is typically a short leave of absence for reasons of maternity leave or parental leave, short-term medical disability or other temporary leave types that are acceptable by law or the borrower’s employer.
Borrowers on temporary leave may or may not be paid during their leave of absence.
Maternity Leave Requirements
- Employment history must meet standard eligibility requirements which is typically a minimum of 2 years in the same field of work. If there was a gap in employment at any time during those 2 years, be prepared to explain this to your lender.
- The lender must not receive any evidence or information from your employer indicating that you would not have the right to return to work after the leave period.
- The lender must get a verbal verification of employment from your employer. If your employer confirms that you are currently on temporary leave, the lender must consider you employed.
- The lender must verify all sources and amounts of your income including any temporary leave income that you may receive, sources of that income as well as expected duration. Lender must also document the amount of your regular employment income prior to the temporary leave.
- Calculating Income Used for Qualifying
If you intend to return to work by the date of your first mortgage payment, the lender can consider your regular employment income in qualifying.
If you will not return to work as of the first mortgage payment date, the lender must use the lesser of your temporary leave income or regular employment income.
If your temporary leave income is less than your regular employment income, the lender may supplement the temporary leave income with available liquid financial reserves.
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Calculating Supplemental (liquid reserves) Income
The formula for calculating the amount available to be used as supplemental income is:
Supplemental income amount = available liquid reserves divided by the number of months of supplemental income
Available liquid reserves: subtract any funds needed to complete the transaction (down payment, closing costs, other required debt payoff, escrows, and minimum required reserves) from the total verified liquid asset amount.
Number of months of supplemental income: the number of months from the first mortgage payment date to the date the borrower will begin receiving his or her regular employment income, rounded up to the next whole number.
After determining your supplemental income, the lender will calculate the total qualifying income.
Total qualifying income = supplemental income plus the temporary leave income
The total qualifying income that results may not exceed the your regular employment income.
Example
- Regular income amount: $6,000 per month Temporary leave income: $2,000 per month
- Total verified liquid assets: $30,000
- Funds needed to complete the transaction: $18,000 Available liquid reserves: $12,000
- First payment date: July 1
- Date borrower will begin receiving regular employment income: November 1
- Supplemental income: $12,000/4 = $3,000
- Total qualifying income: $3,000 + $2,000 = $5,000
These requirements apply only if the lender becomes aware through the employment and income verification process that you are on temporary leave. If you are not currently on temporary leave, the lender must not ask if you intend to take leave in the future.
Full Disclosure
You are not required to disclose that you are pregnant on the loan application. However, your employment need to be verified prior to signing your loan documents, then again prior to funding the loan.
When one of those calls results in the employer telling the lender that your employment status has changed, that’s going to cause unnecessary delays.
If you know that there may be a change in your income or employment, tell your loan officer. If you are working with an experienced loan officer, they will know how to prepare your application and avoid surprises at the closing table.
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