You’ve decided that the bundle of joy you’re carrying deserves his or her own room and you’ve decorated the space in your mind. The only problem is you need to find a bigger home either before the baby arrives or while you’re on maternity leave.
Applying for a loan while on maternity leave doesn’t set off as many red flags as it used to. Lenders believed that most people didn’t return to their jobs after spending time with the new little one. Now, this situation doesn’t garner you an automatic decline, but you may have to provide some additional documents.
Here’s what you need to know to get approved.
How income verification works with maternity leave
According to the American Pregnancy Association, maternity leave is usually a combination of other benefits your employer provides including sick leave, vacation, holiday pay, personal days, short-term disability and unpaid family leave time.
Although progressive companies like Microsoft and others now offer their employees 12 weeks of paid parental leave for either a birth or adoption. Now the tech giant has stretched their policy even further by requiring companies they work with to do the same.
Still, the income qualification process is virtually the same for those on maternity leave and any other borrower, explains Eric Jeanette, owner of Dream Home Financing and FHA Lenders.
“You provide the pay stubs, W2s and tax returns for the dates requested,” he says.
If, however, most of your leave is unpaid, the borrower may need a letter of explanation from your employer detailing when payments will resume. This likely differs from one lender to the next, says Jeanette, and varies based upon the underwriter managing the file and how strong the other compensating factors are like cash reserves.
Additional documentation that might be requested is a letter from the borrower specifying her intention to return to work. Then the employer might have to verify the date and also explain the borrower has the right to return to work when her temporary leave period is over. The underwriter will also want to know if she will return to her original position at the same rate of pay.
Alternatives to meeting the income requirements
Unfortunately, the Microsoft example is in the minority and most employers don’t offer cash benefits to female workers on maternity leave. If you no longer meet the income requirements for the mortgage while on maternity leave, then you’ll need to look at alternate ways to boost your household income.
If you have the resources, make a bigger down payment, and if not, Jeanette suggests finding a cheaper home. Shopping around until you’re sure you’ve found the house you want is a good idea anyway. You’re going to live there for a significant period of time, so you want to be happy.
Adding a co-borrower who can bring more income to the table also works in acquiring a home, says Jeanette. That person’s income and credit history will then be used to qualify for the loan. But that person should know that he is also obligated to repay the loan if you can’t for some reason.
Pay down some of your consumer debt like credit cards or whatever has the highest monthly payment requirements, Jeanette advises. That changes your Debt-to-Income Ratio (DTI) and may drop it enough for you to get approved for the mortgage.
The last suggestion from Jeanette is to find a home with lower property taxes. That’s often a factor that eats into the DTI.
Maybe you’re thinking, you’ll not tell the lender that you’re trying to get a mortgage while on maternity leave.
Do I have to tell my lender I’m pregnant?
“Lenders are not permitted to ask whether a borrower is pregnant and if they are, can’t use that against them,” says Jeanette. “But lenders will call the employer to verify employment and income.”
That may be the time when the lender discovers you’re on maternity leave. Or if you meet the lender in person, and it’s obvious you’re pregnant, he will assume a maternity leave is in your future.
You should be totally upfront when applying for a loan and let the lender know when you plan to take time off. They’ll find out anyway and that will save time and headaches for all of you.
The Federal Fair Housing Act, authorized in 1968, says it’s unlawful to discriminate in real estate transactions. It specifically says, discrimination is prohibited concerning the sale, rental, and financing of housing based on race, religion, national origin, sex, handicap and family status. Being pregnant or on maternity leave falls under “family status.” So, a loan can’t be denied or even delayed because the applicant is expecting or on leave. Some lenders, although it’s illegal, say the person in question must return to work before the loan can be approved.
It is a violation of the Federal Fair Housing Act to assume a woman won’t return to work after her maternity leave is over. This may be considered sexual discrimination under the Fair Housing Act. Maternity leave is considered a temporary leave which means the woman is still employed.
Lenders make mistakes
Mortgage companies often believe that the household income will fall for an extended period of time when one of the parties is on maternity leave. That’s how mistakes are made.
In 2017 a couple in Santa Ana, California, alleged that Pasadena-based Wescom Central Credit Union unjustly refused to approve their mortgage loan because the woman was on maternity leave. The lender said that when she returned to work and could supply them with a current pay stub, then they would reconsider approving the loan.
The U.S. Department of Housing and Urban Development (HUD) considered discrimination and set down terms Wescom must follow. Those include refinancing the couple’s current mortgage at a lower rate, setting aside a $50,000 fund to compensate other applicants in similar situations who had been denied loans by Wescom and providing fair lending training to its employees.
In another case, a doctor in Kenmore, Washington, was house shopping late in her pregnancy. She found the perfect place and set the paperwork in motion with Cornerstone Mortgage. Two weeks before closing on the house, she went into labor and had a baby boy. A few days later Cornerstone let her know she was denied the loan because a representative had called her at work and found out she was on short-term disability (maternity leave) and her income without her full-time pay didn’t qualify for that particular mortgage.
If you feel you’ve been discriminated against because you tried to get a mortgage while on maternity leave or you want to be ready in case you are, you can file a claim with HUD and they will investigate it at no charge. Always keep in mind that being on maternity leave by itself is no cause for denial or delay of finalizing a mortgage loan.
Expectant mothers or those planning to be soon with questions not addressed in this guide should find a knowledgeable, experienced, trustworthy mortgage loan professional to answer them. How to comparison shop for a mortgage lender will give you some ideas on how to find this kind of person.