Mortgage lenders are thinking twice about qualifying expectant parents for home loans due to the loss of income for taking time off of work to care for a newborn. Mortgage lenders deal in guaranteed income, and will not consider short-term disability payments for maternity leave when calculating a borrower’s eligibility since such payments will not last for more than a few months.
While Fannie Mae (Fannie) and Freddie Mac (Freddie) have not changed their rules in regards to loan qualification, they are tightening checks on lenders and requiring lenders to buy back loans that do not meet Fannie’s and Freddie’s respective guidelines. With loan buy backs up 64% from last year, lenders are more nervous about qualifying potential buyers whose income might be affected by payment shocks, such as taking time off work to care for a baby. The Federal Housing Administration (FHA) is also treating similar cases with the same amount of caution.
Some lenders are accepting letters from doctors stating an expected return-to-work date or a letter from the employer stating the employee’s regular income will apply upon their return as a means of proving a potential buyer’s guaranteed income. Such documentation may ease a lender’s skepticism that one parent might not return to work after having a baby.
first tuesday take: Since lenders are now responsible for the loans they originate, they are taking a more stringent approach when assessing a buyer’s abilities to repay the loan. This return to fundamentals is a good thing, and something the lending industry has deliberately and increasingly avoided since the commencement of financial deregulation in the ‘80s.
Prospective homebuyers now have to jump through more hoops in the mortgage process then they have become accustomed to in the recent past, but it will ultimately prove more beneficial as the maintenance of fundamentals in lending, buying or leasing will tend to stabilize the real estate market over the long-term.
The most effective advice an agent or broker can give a potential buyer is shop around for a mortgage — two lenders at a bare minimum — and obtain pre-approval from several lenders before beginning to look at homes. Greater lender stringency adds another facet — planning — to the pre-approval process should the buyer be expecting to go on maternity leave or experience any other approaching interruption of pay.
Brokers and selling agents need to advise their buyers with maternity issues that this hurdle exists. Have these buyers check with lenders on how they view maternity leave and get the documentation required by a lender before beginning the house hunt.
Other options for prospective homebuyers also planning to become parents:
- wait until after the baby is born so their guaranteed income is back to normal;
- try to qualify for a home loan based on only one income; or
- buy a home prior to planning a family.
Re: “Need a Mortgage? Don’t Get Pregnant” from The New York Times
I agree with Refugio. This article is well written and full of useful information. I will also continue to to check in with this writer.
Lenders cannot ask or consider whether or not you plan to have children as part of the qualification process. The Equal Credit Opportunity Act prohibits this.
However, if you are on disability and not receiving your regular income, the disability income is not counted unless it can be documented and is expected to last for at least 3 years. Your employment is not generally counted if you are not currently working or on disability or other leave.
So the vulnerable time is the actual period in which a new mother is out on maternity leave. Certainly a case can be made if the mother has an ongoing contract and has evidence to support that she will return to work at the level at which she was previously employed. If she is actually working the lender would be on thin ice if they tried to deny the loan, pregnant or not.
In order to avoid undue stress, it may be best to try to avoid closing on a home during the period of disability if you are, and perhaps if you are not, relying on income from the soon to be “disabled” mom. Close before, or after. To be honest, I have difficulty imagining executing a move right after the birth of child. Just surviving the first six weeks of parenthood is an accomplishment for those of us who require sleep