Can you qualify for a mortgage when you are on family leave?
In short, it is definitely possible to get approved for a mortgage if you are currently on family leave -- also known as maternity or paternity leave. With more companies, as well as governments, adopting more parent-friendly family leave policies this topic is thankfully becoming increasingly relevant for more people. Continue reading to learn how to qualify for a mortgage even if you are earning a reduced income while you are on leave.
If you are on leave you may want to buy a new home to support your growing family or refinance your mortgage to lower your monthly payment. Whatever your reason, it is important to realize that you do not need to wait until your leave is over before you apply for the loan.
That said, the mortgage qualification guidelines for applicants on family leave are different than if you are working full-time. As we explain below, you are required to provide additional documentation and your income may be calculated differently which affects the loan you can afford.
First, you need to provide your lender a letter from your employer that details your family leave including your income while on leave, the date you are scheduled to return to work and your regular income. Even though you are on leave, the lender is also required to verify -- either verbally, in writing or via email -- that you are employed by the company within ten days of your scheduled mortgage closing.
You -- the applicant -- need to provide a letter that confirms that you intend to return to your employer when your leave is over. The lender wants to make sure that you plan to go back to work and that you can continue to afford your mortgage payment in the future.
If you are scheduled to resume your job before your first mortgage payment is due, the lender uses your regular income to determine the loan you can afford. In this case, being on family leave should not affect the mortgage you qualify for.
Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you can afford based on your monthly gross income and debt
Keep in mind that your first payment is typically due on the first day of the second month after your mortgage closes. For example, if your loan closes on February 15th, your first payment is not due until April 1st. In this scenario, as long as you return to work before March 1st, the lender uses your regular income for your application.
If your return date is after the date of your first mortgage payment, the lender uses the lower of your leave compensation or regular income to determine the mortgage you qualify for. If your family leave compensation and regular monthly income are the same, then this is a non-issue. But if your leave compensation is less than your regular income, the loan you can afford is lower.
The example below demonstrates how the timing of your return from family leave and differences between your leave and regular income impact the mortgage you qualify for. The example assumes a 30 year fixed rate loan with a 3.750% mortgage rate.
Family Leave Mortgage Qualification Example
Applicant Assumptions
Regular Monthly Gross Income: $6,000
Monthly Leave Income: $4,000
Monthly Debt Expenses: $500
Case 1: Applicant Returns to Work Before Date of First Mortgage Payment
Monthly Income: $6,000 (regular income)
Monthly Debt Expenses: $500
Mortgage Amount the Applicant Qualifies for: $430,000
Case 2: Applicant Returns to Work After Date of First Mortgage Payment
Monthly Income: $4,000 (family leave income)
Monthly Debt Expenses: $500
Mortgage Amount the Applicant Qualifies for: $255,000
In Case 1, the applicant can afford a much higher mortgage because their return to work date is prior to their first mortgage payment date. The enables the lender to use the applicant’s higher, regular monthly income which increases the loan they qualify for.
It is important to highlight that if you are on family leave, you can use your savings and investments to offset a drop in your monthly income and qualify for a higher loan amount. The rationale being that you can use your savings to help pay your mortgage until you return to work and start receiving your regular income again.
According to this guideline, your savings after subtracting your down payment, closing costs and any required reserves, divided by the number of months you are on leave after the date of your first mortgage payment, is added to your monthly leave income. The example below shows how this formula works and assumes the applicant returns to work two months after their first mortgage payment.
Family Leave Income from Savings Example
Savings and Investments: $30,000
(-) Down Payment: $20,000
(-) Closing Costs: $4,000
(-) Required Reserves: $2,000
Net Savings After Subtracting Down Payment, Closing Costs and Reserves: $4,000
Months on Leave After Date of First Mortgage Payment: 2
Additional Monthly Income from Savings: $2,000 (net savings / months on leave after first payment)
Monthly Family Leave Income: $4,000
Total Monthly Income for Application: $6,000 (family leave income + additional income from savings)
This example illustrates how extra savings can help you make up for potentially lower family leave income when you apply for the mortgage. The higher the monthly income used by the lender in your application, the higher the loan you qualify for.
In closing, being on family leave does not mean you need to wait to apply for a mortgage. As long as you understand the applicable document and qualification requirements, you should be well positioned to get approved for the loan, even if your income dips temporarily.
We recommend that you contact multiple lenders in the table below to confirm their eligibility guidelines for borrowers on family leave. Shopping lenders is also the best way to save money on your mortgage.
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Sources
"B3-3.1-09, Other Sources of Income, Temporary Leave Income." Selling Guide: Fannie Mae Single Family. Fannie Mae, October 2 2019. Web.
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