Lenders require current income verification
Q:
A couple whom I know qualified for a mortgage and were about to buy a house. She is pregnant and was on maternity leave. They wanted to move before the baby came.
At the last minute, the lender denied the loan. How could this happen? It seems discriminatory.
A:
Actually, this is not the first time I have heard of lenders refusing to lend to someone on maternity leave. It’s a matter of income, not discrimination.
Back in the bad old days of easy credit and “no doc” loans, borrowers did not have to verify their income. Now, lenders check income not only at the time of application, but also just before closing.
This can cause problems for people on maternity or paternity leave, worker’s compensation or some other short-term leave of absence.
Even if the borrower plans on returning to work in a few weeks, a lender may balk at approving a mortgage.
Lenders are taking their cues from Fannie Mae and Freddie Mac, the two giant, quasi-governmental agencies that buy the majority of conventional home loans.
Beginning June 1, 2010, Fannie now requires lenders to re-verify borrowers’ income and financial situation right before closing.
This can include calling an employer to confirm employment and income. Freddie has a similar rule that went into effect in January 2010.
Fannie and Freddie not only want lenders to document that borrowers have adequate income to support the loan on the day of closing, but also to document that the income is likely to continue for at least three years.
This is making lenders very conservative. Mortgages backed by the Federal Housing Administration (FHA have similar guidelines.
A new mother on short-term disability during a maternity leave cannot count that income since it will not continue for three years.
Likewise, her regular salary cannot be counted since she is not on the job, and there is no guarantee she will return to work after the baby is born.
Ditto for fathers on paternity leave. The same logic may also apply to an injured worker on temporary disability or worker’s compensation.
Lenders cannot ask a woman if she is pregnant. But they can ask borrowers if they expect their employment and income situation to change.
A letter from a doctor with the expected date of return as well as a letter from an employer with the expected date of return and salary may help. But again, no guarantees.
A better plan might be to wait until after the baby is born and the mother or father returns to work. If you can’t wait, another alternative would be to qualify for a loan on just one salary.
