How a Maternity Leave Affects Applying for a Mortgage
Can I Still Get a Mortgage While on Maternity or Parental Leave?
It is a Sunday morning and I just finished changing our newborn daughter, Taliah. With space in our house decreasing daily, my wife and I often discuss how long we can last before we should take the next step up the property ladder. It seems that each day we are changing our minds.
“Let’s wait a year” I decide one week. The next, my wife suggests “why not wait until the kids enter school?”
Regardless of when we decide the time is “right” to pack up and head into a bigger home, a question many families who are expecting will be how a maternity leave will affect the application process for their mortgage. It would seem that with one spouse receiving less income due to their leave from work, they would need to wait until the maternity leave is over to be approved for the maximum amount for their regular gross income.
A Maternity Leave Can Reduce Your Maximum Mortgage Amount
Although every lender may have their own requirements, typically the following scenarios are most common:
- If you are returning to work within 90 days, your regular income can be used to apply for a mortgage. Some lenders may allow for exceptions of up to 6 months.
- If you are returning to work in more than 90 days, most lenders may take a percentage of your regular income since your income will be reduced to Employment Insurance (EI). In many cases, the percentage would be 60%.
Regardless of which scenario you fall under, you will be required to prove your income with one or more of the following:
- Salaried employees can provide your T4 statement from the year prior to the leave.
- Provide a Letter of Employment from your employer stating when you started the job, when you anticipate returning to the job, and how much you are paid annually. If you are paid hourly, the number of regular hours you work weekly should be stated. If you consistently work overtime, provide T4 slips from the previous two years to show consistency.
While taking a year off to take care of a new addition to your family will not restrict you from being approved for a mortgage, it is important to plan accordingly to ensure that you are approved for the amount you require. It is possible that waiting a few months may allow you to borrow more than you might have been able to at the beginning of your maternity leave.
Don’t Over Extend Yourself While on Maternity
While a maternity leave will not hold you back from being approved for a mortgage, you should still consider the implications of a higher monthly payment with a lower income. Even if your company has a great top-up plan for maternity leaves, unless they top-up to 100% of your regular income, you will have less money to work with each month.
Create a Budget You Are Comfortable With
It would be suggested that before you make the offer on that spacious upgrade, spend a couple of months getting used to the lower income you will receive for the next year. Modify your family budget to account for the temporary loss of income and plan to save the extra funds you’ll need to cover the increased expenses that a larger, more expensive home would bring.
Some monthly expenses expected to increase when purchasing a more expensive home:
- Increased monthly mortgage payments
- Increased annual property taxes
- Increased utility bills – Heat, water, hydro, etc.
Don’t forget the closing costs associated with selling a home and purchasing another:
- Realtor costs when selling your current home – approx. 5% to 6% of sale price
- Closing costs when purchasing your new home – approx. 1.5% to 4% of purchase price
Plan Ahead and Get Advice From a Professional
Before you plan to sell your home and purchase another, be sure to get in contact with real estate professionals who can guide you through the process. With private “commission free” companies popping up all over the internet, you may be enticed to pay the one-time kit fee in order to attempt saving on realtor costs. In reality, you will typically pay more in the long-run since selling a home privately usually takes much longer to sell and the lack of buyer traffic may result in accepting an offer which is much lower than you had anticipated.
Finally, be sure to get pre-approved through a reliable Mortgage Specialist. It may seem convenient to arrange a mortgage through your big bank, but you are limiting yourself in terms of expertise and selection. A mortgage broker enables you to apply for a pre-approval online and complete all of the details over the phone or through email to receive the best mortgage product and rate available throughout Ontario. These are features that no big bank can offer!
Not already working with a mortgage broker? Contact Hussein Saad and Home Mortgage Ontario to get the best rate, customized terms to suit your needs, and superior service.
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