How Does Maternity Leave Affect a Loan Approval?
That might not seem a very important question for most, but for those that do wonder about the answer, it’s certainly an important one. When someone is on maternity leave typically there is no monthly income during the leave.
So, if someone is on maternity leave and the overall household income is reduced, how do lenders calculate monthly income in absence of one party’s gross monthly income?
The Family and Medical Leave Act
For those who work for a company with at least 50 employees, the employer must adhere to the Family and Medical Leave Act. If the employee has been employed by the same company for at least 12 months with a minimum 24 hour work week, the employer is required to follow the Act’s rules, primarily as it relates to the employee returning to work after maternity leave. In addition to returning to work, the employer must continue to provide the same benefits while the individual in on maternity leave including health insurance. The standard term for maternity leave is anywhere from six to eight weeks. This period is part of the 12 workweeks per year allowed for the care of the child in the first year.
For small businesses that do not have at least 50 employees at the same location, they are not required to follow the Family and Medical Leave Act. Other states however have instituted benefits for those taking maternity leave that do not have maternity benefits. In California for example woman can collect temporary state disability payments which amount to approximately two-thirds of their wages during the six to eight week period.
Generally however, employers of all sizes rarely provide financial benefits or other income to employees who have taken time off, in fact, it’s estimated only 16% of companies provide such compensation.
When two people apply for a home loan together, the lender adds up the income from both for qualifying purposes. For example, if borrower A makes $5,000 per month and borrower B makes $4,000, total qualifying income is then $9,000.
Lenders will ask for the two most recent pay check stubs covering a 30 day period along with the applicant’s two most recent W2 forms. For self-employed borrowers, lenders will also ask for the two most recent federal income tax forms. You might have also noticed a trend here. When lenders evaluate income and employment they ask there be at least two years of employment that is consistent as well as making the determination the income is likely to continue into the future.
If a couple is pre approved for a home loan based upon their $9,000 per month income and there is a pregnancy involved, should the woman who is taking time off for maternity and is not receiving any monthly income during that period, what options does the lender have? The lender is obligated to verify there is enough monthly income available to take care of credit obligations and they do so by calculating debt to income ratios. If a loan program has a debt ratio requirement of 40, in this example it means credit obligations, including the mortgage payment, property taxes and insurance should be no higher than 40 percent of $9,000, or $3,600. But if the woman intends to take off eight weeks for the birth and care of her child, qualifying income would be reduced by that amount. If she makes $5,000 per month and the debt ratio requirement is 40, which would leave just $1,600 available for credit payments and in all likelihood declining the mortgage application.
Maternity Leave Options
However, there are options to still qualify someone who is or plans to take maternity leave. For example, FHA guidelines make allowances for maternity leave along with the subsequent reduction in income. In fact, FHA guidelines make such allowances for any temporary leave of absence including maternity leave. As long as the lender can document the borrower intends to return to work, there are exceptions.
For those who will return to work on or before the first regular mortgage payment will be made the lender will use the “pre-leave” income amount, essentially the income before the leave commenced. If the borrower intends to return to work after the first regular mortgage due date, the lender can review current liquid reserves. If there is $15,000 left in a cash account after the closing has taken place and accounting for the down payment and closing costs, lenders can divide the monthly mortgage payment into the reserves and provide a “supplemental” income amount based upon the number of months between the first regular mortgage payment and the intended date of return. If there is $15,000 available in cash reserves, and there is a three month time frame between leave and returning to work, the supplemental income is then $15,000 divided by four, or $3,750.
The lender is required to provide a written statement from the borrowers stating the intent to return, document the employer’s acceptance of employment after maternity leave and verify sufficient assets to close as well as supplemental income, the loan may be approved.
Conventional loans underwritten to Fannie Mae guidelines may also calculate temporary income while the applicant is on maternity leave. This supplemental income is calculated in a similar fashion as for an FHA loan. The lender will determine available cash reserves after the loan has closed including the down payment amount and closing costs. Leftover funds should be in a liquid account available to the borrowers. This calculation is used if the loan will close and the first payment due before the individual returns to work.
If the borrowers are being approved for a conventional, Fannie Mae loan and the lender identifies $18,000 in cash reserves and the person on leave intends to take 12 weeks of maternity leave, the qualifying income is then $18,000 divided by three (months), or $6,000.
Be careful to note here these are guidelines set forth by FHA and Fannie Mae. Other mortgage programs may not make such allowances but there are options. If you’re pregnant or thinking about it and you also have a home loan in your future, you need to discuss your situation with a loan officer who can properly pre approve and document your file to ensure a smooth approval process.