Those familiar with Fair Lending laws may think that mortgage lenders cannot discriminate against female borrowers or pregnant women when approving or declining loan applications - and they'd be right. But even if pregnancy, motherhood or female gender aren't the definitive reasons for the decision, pregnant or new mothers may be, and sometimes are, being denied mortgage approval. Here's why.
Pregnancy affects income
When women (or men) take advantage of the Family Medical Leave Act (FMLA) and take time from work to care for a new baby, or stop receiving their salaries and get disability income for a few weeks, it can play hell with their purchase or refinance mortgage applications. So if you're in the process of buying a bigger house to accommodate the new addition to your family, listen up.
When your employer gets an employment verification request from a mortgage lender (and today, Fannie Mae and Freddie Mac require that such verification be made just prior to funding the loan to make sure that you're still employed), the fact that you're on leave will be noted.
If you are on disability pay, which doesn't meet established underwriting standards of being foreseeable for at least three years, the lender can't count that income for qualifying purposes, although it may be considered a "mitigating" or "compensating" factor. Ditto if you're on unpaid leave. Lenders are leery of people on maternity or paternity leave, because there is always the possibility that they may choose to exit the workforce and stay home with the baby.
Do Fannie Mae, Freddie Mac, and FHA really discriminate against pregnant women?
Fannie Mae spokeswoman Janis Smith said in a New York Times article that there was nothing in its guidelines that would keep a borrower on paternity or maternity leave from qualifying for a mortgage, as long as there was proof at the time of the closing that his or her income would be adequate upon returning to work. Letters from a doctor specifying a return-to-work date and the employer stating the return date and salary should be enough, she said. Freddie Mac and FHA have similar guidelines.
So why are mortgage lenders being so tough?
Lenders are on the hook more than ever before if loans go bad. FHA, for example, can withdraw a lender's approval for excess defaults, even if every origination from that lender complies fully with FHA guidelines. A quick check into Fannie Mae's Selling Guide (which contains underwriting guidelines) turns up no mention of the word 'maternity' at all. It does state that disability income must continue for at least three years. But the mortgage giant also states "Fannie Mae generally requires at least a two-year history of the receipt of stable income. Unless there is evidence that the income will no longer be received, the lender should conclude that the income will continue."
Best mortgage rates: what can you do?
For now, the way that mortgage lenders underwrite the income of those starting families is a matter of lender choice, not a mandate. So, if you don't like the way a lender treats your mortgage application, shop for a better one. You can find and compare mortgage lenders on Shoprate.com; see if one of them might be deserving of your business.