Stay home with baby or buy a home -- not both
Nervous lenders are taking an more severe view of mortgage applications when one borrower is out on new-baby leave.
This post comes from Marilyn Lewis of MSN Money.
Take your pick: Stay home with the new baby, by all means. Or buy a home. But get ready for trouble if you do them at the same time -- while applying for a home loan, that is.
Tara Siegel Bernard reports in The New York Times that increasingly conservative lenders are rejecting or questioning borrowers who are home on maternity leave: "Expectant parents shopping for a home are not the only ones concerned about the date of the baby's arrival."
Back in the slapdash days of easy credit, lenders were more likely to overlook the fact that a parent was out on maternity or paternity leave. But now that lenders have become more conservative, they are requiring new parents to jump through more hoops to prove their income will be enough to cover the mortgage.
So before some prospective parents start spending their Sundays at open houses, they should be prepared to deal with some complications. They may have to delay the purchase, deal with the banks' bureaucracy (and requests for extra paperwork) or buy a home they can afford on one salary.
Lenders grow cautious
This heightened scrutiny by lenders is a response to new guidelines (effective June 1) from Fannie Mae. (Fussy lenders also are subjecting surprised homebuyers to back-to-back credit checks.) Fannie and the other government-sponsored mortgage company, Freddie Mac, often will buy your loan from the lender who sold it to you.
As Fannie grows more careful about which loans it buys, retail lenders grow more cautious with the loans they make. For solidly employed parents who are just taking a bit of time off work to be with a newborn, the enhanced scrutiny can seem harsh. Of course they'll have the income, they would argue -- they're returning to the same job as before.
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But lenders are increasingly less inclined to see it that way. They're strictly interpreting a longstanding requirement: Borrowers must demonstrate that they can make their mortgage payments at least three years out.
The Times tells the story of Elizabeth Budde, a 33-year-old oncologist in Kenmore, Wash., who, with her graduate-student husband, ran into trouble last month while purchasing a $300,000 home for their growing family. She had excellent credit and a good job, so all systems seemed go, until the lender e-mailed Budde at work on June 15 to say her loan application had been approved.
That e-mail sparked an automated "out-of-office" response from Budde's e-mail, saying she was on maternity leave. The lender responded with another e-mail, withdrawing approval for the loan.
Since "maternity leave is classified as paid via short-term or temporary disability income," the e-mail message said, it could not be used because it would not continue for three years.
"I was really shocked," Dr. Budde said. "At the time, they didn't know how I was getting paid for my leave."
Budde, with help from her real estate broker at RedFin, was able to convince the lender that, because she was using banked vacation and sick days, she really was still on full salary from her job. A letter from her employer helped.
But other new parents may not be so lucky:
Dave Varni, a real estate agent with McGuire Real Estate in San Francisco, recently learned about lenders' nervousness about borrowers on leave while working with a couple expecting a baby within weeks. They wanted to make an offer on a home, but they needed both of their salaries to qualify. Ultimately, a mortgage broker told Mr. Varni that the expectant mother would not be considered "employed" when it was time to close the loan, which would probably disqualify her.
Stricter reading of old rule
Fannie and Freddie buy up retail loans, which lets the lenders collect their fees and then move on to make more loans (and more fees). The system seemed to work well for a long while, as it allows lenders to make loans without holding the big reserves that would be required if they kept the mortgages.
But way too many of the loans that Freddie and Fannie purchased have turned out to be duds. In the first quarter of this year alone, Fannie lost $11.5 billion, says The Wall Street Journal, and Freddie reported a loss of $6.7 billion --and mortgage defaults were a contributor.
Fannie and Freddie, taken over by the government in 2008 because of their financial plight, now are demanding that lenders repurchase many of those bad loans. They're also examining new loans with a fine-tooth comb, the Times reports. Retail lenders are responding to all this by becoming overly careful, some say.
For example, the Times writes:
Janis Smith, a spokeswoman for Fannie Mae, said there was nothing in its guidelines that would prohibit a borrower on maternity or paternity leave from qualifying for a mortgage, as long as the borrower had proof at the time of the closing that his or her income would be adequate upon returning to work. Letters from a doctor (with a return date) and the employer (stating the return date and salary) should be enough, she added.
There was good news about bad loans this week: The proportion of consumers defaulting on bills -- mortgages and credit card balances -- is shrinking, reports Standard & Poor's/Experian. That's a good thing, of course. But there's a price: Fewer loans are being made.
The consumer credit picture shows encouraging progress as default rates continue to fall across major categories and in the highlighted cities. The data are consistent with reports that people continue to eschew debt and as the slow recovery from recession and financial turmoil continues.
Fussier lending is also likely to be at a part of it.
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