For many families, buying a home and having a baby are two big dreams listed on life’s to-do list.
However, the combination of these two exciting events occurring around the same time might cause problems. If you’re pregnant or a new mom who is trying to qualify for a mortgage, there’s a chance going on maternity leave could keep you from getting approved for a loan or purchasing a home.
Additionally, taking paternity or any other type of leave including disability may affect whether or not you will be able to buy a new home. Here’s what you need to know about leaves and lenders.
One woman’s story
A Michigan woman we’ll call Jane (not her real name as she requested to remain anonymous) tells the story of her mortgage experience while she was pregnant and preparing to go on maternity leave. Although Jane’s situation worked out in the end, the soon-to-be mom was put through a lot of extra stress by her mortgage lender during the last months of her pregnancy.
Here, Jane tells her story from three years ago when she and her husband were looking to purchase their first home:
“I went to the mortgage company and we were pre-qualified based on income and credit factors. I told our mortgage rep in January that we were expecting a baby in July.
After looking at many homes and several offers later, we finally had an accepted offer in May. The housing market was much more competitive than we realized and it took a while to find a house. We were told that the (mortgage approval) process should take about 30 days, if we were diligent about submitting required paperwork for the underwriters quickly.
My mortgage rep told me several times ‘you better hope you don’t have that baby.’ He claimed that if I did, they could not close on the house since I would be on maternity leave and could not verify my income. This gave me incredible anxiety since the delays in our process (repairs by the seller, appraisals and reappraisals) were entirely out of my control.
I am the breadwinner. The amount of the mortgage pre-approval was largely due to my income, so (it) had to be verified.
After much pushing and complaining, the mortgage company was finally able to get us a closing date – the day we left the hospital with my newborn. We left the hospital and closed on our house five minutes later.
It is hard to believe in this day and age that women would be treated this way in the mortgage process.”
Why maternity leave could cause mortgage approval issues
Jane’s story raises a key question: how does maternity leave impact the mortgage approval process?
When you apply for a home loan, lenders consider two important factors to determine if you qualify for a mortgage: the likelihood that you’ll pay your loan as agreed (aka creditworthiness) and your ability to pay (aka capacity). While creditworthiness is determined based on your credit scores, capacity is largely measured by your income and job status.
If your credit is great and your income is sufficient to qualify for the loan, there’s one more catch. A lender isn’t going to take your word for it when it comes to where you work and how much money you earn. For most types of loans, your employment status and income must be verified by your employer.
Casey Fleming, a Silicon Valley-based mortgage advisor and author of “The Loan Guide: How to Get the Best Possible Mortgage,” says that “being on maternity leave can create issues” during the mortgage process, “but it doesn’t have to.”
“All lenders are required to determine (and document) that your income they use to qualify you for the loan is stable, predictable and likely to continue,” Fleming explains. “This means as long as your employer is willing to verify in writing that you will be able to resume your previous position (or a similar one at similar or higher pay) as soon as your maternity leave is over, most lenders will approve and close the loan.”
Most mortgage lenders, Fleming adds, will require a documented return date. Some lenders may also require that you actually return to work and prove it by providing at least one paycheck documenting your post-maternity leave return.
Making the mortgage process easier while on maternity leave
If you’re a woman planning to purchase a home while on maternity leave, here are a few steps you can take to potentially make the process easier.
- Shop around. Buying a home is the biggest purchase many people make in their lives. Different lenders have different approval criteria and may be willing to work with people in different situations (maternity leave or otherwise). It’s smart to compare current mortgage rates, get multiple quotes, and find the best deal to fit your situation before you sign on the dotted line and make a 30-year commitment. Also be sure to figure out how much home you can afford to get a clear idea of your home-buying budget.
- Work with a mortgage broker. Rather than applying for a loan with a bank or mortgage lender, Fleming recommends working with a mortgage broker who can shop for loans from different lenders on your behalf.
- Get an approval letter in writing upfront. If you’re on maternity leave (or soon to be on leave), Fleming also recommends verifying in advance that a bank or mortgage lender is willing to work with your employment status. Should the lender refuse your request, Fleming recommends that you move on and find someone else to help you with your mortgage.
Of course, if the timing works for you and you can close on your mortgage before you begin maternity leave, like Jane, you could spare yourself a lot of extra hassle.
How to report maternity leave discrimination
A lender asking for proof of employment and income is a natural part of any mortgage qualification process. It’s also pretty normal for lenders to want you to jump through a few extra hoops if you’re on leave from your job – maternity or otherwise.
Fleming explains that “mortgage lenders want to make loans – that’s why they’re in business. However, they all sell their loans (even the big banks), so they do want to be sure that the loan will be purchased by an investor after the loan is made. Because of this, some lenders are more conservative than others, and less flexible in lending to someone on any sort of leave.”
Nonetheless, some lenders have been known to cross the line when it comes to maternity leave requirements for mortgage applicants. The U.S. Department of Housing and Urban Development (HUD) reports that some lenders have even allegedly required women to end maternity leave and return to work in order to have their mortgage applications approved.
There’s no question that this type of behavior by a lender goes too far. It’s unfair to women and families, and HUD has often had to step in when discrimination of this magnitude occurs.
According to HUD, “Refusing to approve a mortgage loan or provide refinancing because a woman is pregnant or on maternity leave violates the Fair Housing Act’s prohibitions against sex and familial status discrimination.” Still, for nearly a decade the agency has seen a steady stream of complaints from borrowers who claim to have been discriminated against by mortgage lenders because they were on maternity leave.
HUD has fined numerous mortgage companies since 2010 in an attempt to stamp out maternity leave discrimination by lenders. This includes a $5 million settlement with Wells Fargo Home Mortgage in 2014 to resolve allegations of discrimination against women on maternity leave.
If a lender requires you to take a few extra steps to prove your income during maternity leave, that’s not necessarily a cause for alarm. Yet if you feel like a mortgage lender is breaking the law and violating your rights, you have the right to file a complaint and HUD will investigate your claim at no cost.