Looking to buy a home with a munchkin on the way? The details of your temporary leave may impact your ability to get a mortgage. If you plan on taking a maternity leave of absence from your job, it’s important to know how a home loan lender will view your income status.
Generally, when you initially decide to get pre-approved with a mortgage company, they’ll take your salary and/or compensation figures into account when determining how much house you can qualify for using your monthly pre-tax income. Supporting documentation for this includes recent pay stubs, tax returns and W-2s for the past two years. This is what the lender will use to evaluate your buying power. So it stands to reason if this income stops, or is paused, then a lender would have some cause for concern.
While the rules surrounding how lenders evaluate borrowers taking maternity leave are a bit in flux, here’s how to get approved based on the standards the industry is currently using.
Your Income Situation
If you are not receiving any income during your leave of absence…
Then in order to purchase your new home, you need to be back to work from your maternity leave to use your regular employment compensation income (usually evidenced with a pay stub).
If you are receiving income during your leave of absence…
Then the lender will want in writing from your employer that you will be back to work within the next 60 days in order for you to close escrow on your home if you need your employment income to qualify. Alternatively, if you’re going back to work longer than 60 days out, this needs to be fully documented and supported, in other words, the lender will want to justify why you’re returning to work past the 60 day requirement in using the income from your employer to qualify.
Why Maternity Leave Income Is Crucial
The lender is required to demonstrate every loan is made to borrowers who can prove their ability to pay. In today’s lending environment, the payment-to-income ratio (also known as debt-to-income ratio or DTI) is a strong measurement of how much house a borrower can actually afford given their income and other monthly liability payments. (You can use this calculator, too, to see how much house you can afford.) The key is that if you are planning to take an upcoming maternity leave while looking for a home, establishing maternity leave income is key because that will give you the ability to have your lender use your current wages for qualifying purposes when you ultimately go back to work.
If maternity leave income cannot be generated during the time you’re on maternity leave away from your normal employment, then the lender would either have to use the income of any other party (if any) who may be jointly applying for the mortgage, or you’d have to begin the house hunt when you’re back to the normal work schedule after your maternity leave has ended.
Possible Alternatives to Offset Your Income
If you do have an issue with the income requirement while trying to buy a home, there are things you can do to improve your chances of getting approved for a mortgage:
If you plan on taking maternity leave just before buying a house, take this into consideration when making your offer. Of course you can’t plan for the exact dates, but you can have a conversation with your lender about this when you are getting pre-approved at the forefront of the home search process. Making sure to inform your lender about a possible upcoming maternity leave is a wise move so your lender can plan for a smoother process, allowing you to focus on what counts and get the keys to your new den successfully.
More from Credit.com
- Why You Should Check Your Credit Before Buying a Home
- How to Search for Your Next Home
- How to Get Pre-Approved for a Mortgage
Scott Sheldon is a senior loan officer and consumer advocate based in Santa Rosa, Cali. His work has appeared in Yahoo! Homes, CNN Money, MarketWatch and The Wall Street Journal. Connect with him at Sonoma County Mortgages.