Mother-to-Be Financing Information
If you haven’t heard the latest news, HUD has started multiple criminal investigations against a number of banks and other financial institutions who provide residential financing to determine whether they deny loan to potential borrowers solely because one of the borrowers is pregnant or recently gave birth.
The Vice President has recently commented on this practice, stating that “this policy is flat wrong [and] this practice could potentially affect untold numbers of families.' Shaun Donovan, HUD Secretary added that “having a child should be a time for a family to celebrate and must not be a cause for unfair lending practices.' Therefore, what are the facts about what a lender can and cannot do in underwriting a loan when one of the borrowers is expecting a child or just gave birth?
First of all, if you look through the dissertation called the Federal Housing Act (the other FHA), one of the protected classifications is for familial status. Under familial status, it specifically states “the protections afforded against discrimination on the basis of familial status shall apply to any person who is pregnant.” The FHA also states that “it shall be unlawful for any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin. The term 'residential real estate-related transaction' means the making or purchasing of loans or providing other financial assistance (A) for purchasing, constructing, improving, repairing, or maintaining a dwelling; or (B) secured by residential real estate.” Consequently, based on federal law, discriminating against a pregnant woman is a legal no-no.
The federal law offers a legal framework for understanding the groups within the classes that cannot be discriminated against, but there is also the level of reasonability that underlies this law. Lenders still have the right to document the borrower’s intent to return to work, that the borrower has the right to return to work, and that the borrower qualifies for the loan taking into account any reduction of income due to their leave. Even Mr. Donovan admitted that “lenders have every right to ascertain the incomes of families to determine whether they are eligible for a mortgage loan.” For this reason, a pregnant woman’s ongoing income stream after birth is the only question that is, and should be of concern to a lender, and not whether or not they want to start or expand their family.
Once we look at what the law states, lenders can apply the following acts of income to underwriting standards to determine whether a borrower is eligible for a loan:
Lenders like to see consistency in income streams. If you look at the bottom of the Fannie Mae Universal Loan Application under “EMPLOYMENT INFORMATION” it states in italics: “If employed in current position for less than two years or if currently employed in more than one position, complete the following:,” and it goes on ask for a borrower’s two preceding employers and/or other part time employers with so much as one mention of familial status. Lending institutions have the greatest comfort when a borrower has a consistent stream of income from the same employer, or in the same line of work for at least two years. Any form of leave, maternity, disability or otherwise can reduce the amount of that stream. So, does this mean that a woman on maternity (or anyone else on leave) can be denied a loan? The answer is no; however, a lender may postpone funding of the loan until the borrower can provide a paystub substantiating that the borrower has returned back to work. In the end, this is an issue about income and nothing else.
Hence, can a pregnant woman or a new mom qualify for a mortgage? Absolutely! The federal law guarantees it. The only concern that she will have is to prove the ongoing income stream that will support the loan as requested. In the end, it is not about familial status and lenders have no choice but to accept this. Accordingly, lenders can only worry themselves over a borrower’s income stream and nothing else.
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at email@example.com.
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