December 14, 2016
Family leave is an important issue for lenders trying to determine a borrower’s verifiable income, debt-to-income ratio, etc. We get many questions on this topic in the comments section, including this most recent query:
“How does FHA treat income after family leave? Is an 8 month maternity leave considered a job gap?”
The rules that govern gaps in employment, temporary leave, and related issues can be found in HUD 4000.1. Temporary leave such as maternity leave or disability leave is addressed, but first the FHA loan rule book defines what it considers to be “gaps in employment”:
“For Borrowers with gaps in employment of six months or more (an extended absence), the Mortgagee may consider the Borrowers current income as Effective Income if it can verify and document that:
-the Borrower has been employed in the current job for at least six months at the time of case number assignment; and
-a two year work history prior to the absence from employment using standard or alternative employment verification.”
However, maternity leave or disability leave doesn’t fall into the definition of a gap in employment. For these situations, HUD 4000.1 states:
“For Borrowers with a temporary reduction of income due to a short-term disability or similar temporary leave, the Mortgagee may consider the Borrowers current income as Effective Income, if it can verify and document that:
-the Borrower intends to return to work;
-the Borrower has the right to return to work; and
-the Borrower qualifies for the Mortgage taking into account any reduction of income due to the circumstance.”
In cases where a borrower is returning to work, “before or at the time of the first Mortgage Payment due date”, HUD 4000.1 says the loan officer can use the borrower’s pre-leave income.
But for a borrower returning to work after the first Mortgage Payment due date, “the Mortgagee may use the Borrowers current income plus available surplus liquid asset Reserves, above and beyond any required Reserves, as an income supplement up to the amount of the Borrowers pre-leave income. The amount of the monthly income supplement is the total amount of surplus Reserves divided by the number of months between the first payment due date and the Borrowers intended date of return to work.”
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
Browse by Date: