Having a baby can be an exciting time and many parents want to purchase a home for their new family. I get many questions from expecting moms about how to qualify for a mortgage while on maternity leave. I always hear, "Can I qualify for a mortgage while I'm on maternity leave?"
Yes, you can qualify for a mortgage while on maternity leave. Different lenders do have slightly different rules. In general, you will qualify if you provide a letter from your employer confirming your rate of pay and guaranteed hours prior to maternity leave and your expected return date.
Is the qualifying criteria different when I'm on maternity leave?
To qualify for a mortgage, whether you are on maternity leave or not, the criteria is the same.
For a purchase with under 20% down, you must have a credit score greater than 600. Most lenders would prefer a credit score over 650 when the mortgage is insured.
The minimum down payment for a home purchase is 5% of the purchase price. This is the same for first time home buyers, next home purchasers and for clients on maternity leave.
Lenders will calculate how much you qualify for based on your income, housing expense and debt payments. The income to house expense ratios is called Gross Debt Service ratio (GDS). The income to overall debt payments ratio is called Total Debt Service ratio (TDS).
Whether you are on maternity or not, your GDS can not exceed 39% of your gross income. Your TDS ratio can not exceed 44% of your gross income.
Does the lender use the income I am receiving while on maternity leave or a different amount?
It might make sense that a lender will want to use your reduced maternity leave income to calculate how much mortgage you qualify for but that is not the case.
Lenders will use the income that you earned prior to leaving on maternity to calculate how much you qualify for. For example, if your salary was $70,000 prior to leaving on maternity but you were only receiving EI payments of $3,000 per month (annualized to $36,000 per year), the qualifying income is still $70,000.
To use this income, your employer must provide you and the lender with a letter confirming employment status with them. The letter must state your income prior to the maternity leave. The letter must also include your expected return date.
It's prudent to make a budget before and during your maternity leave. Your net EI income is generally less than it is when you're working. Your expenses can also be higher because you are buying items and preparing for your new baby's arrival.
Many of my clients will save a little extra to tide them over until the maternity leave ends.
What if I was part time when I went on maternity leave?
If you were working part time with guaranteed hours, then you would have to provide the same letter described for a salaried employee.
Your employer would provide you and the lender an employment letter. The letter should include your rate of pay and guaranteed hours along with your expected return to work date.
If you were working part time without guaranteed hours, then lenders will ask for a little more information. In addition to the employment letter, which states your rate of pay and expected return date, you must also confirm your average earnings over the last few years.
Whenever income is fluctuating, lenders will use a 2 year average of your income to calculate how much mortgage you qualify for.
Even if you are on maternity leave and had a job with fluctuating income you can be qualified for a mortgage. In this case, a lender will use and average of your past income. You will provide copies of your last 2 years of income tax returns, T-slips and Notice of Assessments to determine the qualifying income.
This income confirmation would also apply if you were salaried or hourly with bonuses. To include the additional bonus income, your lender will ask for 2 years of income tax returns, T-slips and Notice of Assessments.
What if I'm self employed and on maternity leave?
You do qualify if you are self employed and want to purchase a home while on maternity leave.
A lender will want to verify your average income over the last couple of years, just like I explained with fluctuating income . This average income is used to determine how much mortgage you qualify for.
For self employed clients, the lender will not ask for an employment letter. You will have to provide the last 2 years of your Notice Of Assessments and 2 years of your income tax returns.
The lender will then use a 2 year average of line 150 from these documents for purposes of mortgage qualification.
You also have other qualifying options when self employed that salaried or hourly employees do not have. All these options are available to you whether you are on maternity leave or not.
Check our my article titled, "I'm Self Employed, How Do I Qualify For a Mortgage?" for all the options available to self employed clients.
There is no disadvantage to purchase a home and qualify for a mortgage when on maternity leave. I would caution you to keep an eye on your budget because your cash flow is lower at this time.
Lenders in Canada have slightly different perspectives on maternity leave. Some lenders want you to be within 60 days, or 90 days of your return to work. Some lenders are more lenient and only need confirmation of your return date.
Working with a mortgage broker is an advantage because they can help highlight the differences between different lenders so that you can make an informed choice.