Qualifying for FHA Loans: Income and Family Leave

April 2, 2023

FHA lenders trying to determine a borrower’s verifiable income, debt-to-income ratios and related issues often run into situations where a borrower has either a gap in employment or a circumstance that may appear to be a gap, but is technically not considered in the same way under FHA loan rules found in HUD 4000.1.

Is a borrower with a maternity leave situation considered to have an “employment gap”?

How does family leave impact a borrower’s “effective income” as certified by the lender?

Temporary leave such as maternity leave or disability leave is addressed in the pages of HUD 4000.1 including how the FHA defines what it considers a gap in employment:

“For Borrowers with gaps in employment of six months or more (an extended absence), the Mortgagee may consider the Borrower’s 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.”

That said, FHA loan rules state that certain situations do not 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 Borrower’s 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 Borrower’s current income plus available surplus liquid asset Reserves, above and beyond any required Reserves, as an income supplement up to the amount of the Borrower’s 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 Borrower’s intended date of return to work.”

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