This is a very timely blog post for us with our own team member Parker expecting his first child this fall and many of our clients in their own family-building stages of life.
Often when a family is expecting a baby, it prompts some serious discussion about their living situation. If they are renting, is it time to take the plunge and own their own home to create more stability for their family? Or if they are in a smaller home or condo, are they are ready to upsize into something they can grow into?
If you are making a home purchase before baby arrives, everything proceeds as normal with your mortgage approval – both parents’ incomes are taken into account. But if you wait until one parent is on parental leave, this can throw a wrench into mortgage financing.
Of course, you can tell your bank that you are going back to work after maternity or paternity leave, but banks don’t necessarily like to take people’s word for it. When they are basing your pre-approval amount on your debt-servicing ratio – i.e. how much your monthly payments are compared to your monthly income – reducing one income in the family for 12-18 months can have a big impact.
We pulled in one of our long-time mortgage partners, Katie Whyte of Illuminate Mortgage Group, to answer some questions on this scenario.
Q: Can I qualify for a mortgage while I’m on maternity or parental leave?
A: Yes. Being on maternity or parental leave does not automatically disqualify you from getting a mortgage. Lenders will look at your overall financial situation, including your employment history, income, credit, debts, down payment, and ability to afford the mortgage.
The key is being able to demonstrate that you have an ongoing job and that you intend to return to work.
Q: Will the lender only use my maternity leave income?
A: Not necessarily. One of the biggest misconceptions is that the lender will qualify you using only the reduced income you’re receiving while on leave.
Depending on the lender and the documentation provided, your regular employment income may be considered, particularly when you can demonstrate that you are returning to the same employer or position. This can make a significant difference in your borrowing power.
Q: Do I need to be back at work before I can get a mortgage?
A: No. You may be able to obtain mortgage financing while you’re still on leave. However, the lender will require documentation confirming your employment status and expected return-to-work date.
Q: What if my income will change when I return to work?
A: This is important to discuss with your mortgage professional. For example, if you’re returning from leave to a different position, reduced hours, a different salary, or a different compensation structure, the lender may need to assess your income differently.
If you’re returning to the same job at the same salary, the application may be much more straightforward.
Q: Is it harder to get approved while on maternity leave?
A: It can require additional documentation, but being on maternity leave does not automatically make you a higher-risk borrower.
The lender’s primary concern is whether the mortgage is affordable and whether the income being used for qualification is sustainable. A strong employment history, good credit, manageable debt levels, and a documented return-to-work plan can all help.
You can reach Katie with further questions at katie@illuminatemortgages.ca or (403) 862-6753.
Ultimately, like anytime you are house shopping, the homework you do in advance helps make the process smooth. Having in-depth conversations with your mortgage professional and coming up with a plan and a budget that works for you will help us achieve your home ownership goals.
-Amie
