Ask an RU: Navigating Loan Scenarios with Borrowers on Temporary Leave

Everyone needs some time off, our borrowers included!  We have all had situations where a borrower takes leave from work for one reason or another. Sometimes by choice and sometimes directed by his or her employer.  If you were not made aware that a borrower is on leave when you initially began reviewing the loan file, and discover this mid loan processing, it can cause alarm. Thankfully, there are many situations that will allow you to qualify the borrower with “temporary leave income.”

Our very own Jody Hanson, Regional Underwriter, explains temporary leave, navigating loans with this income type, and what else you need to know when you come across a borrower profile like this.

What is temporary leave?

Sometimes people need a break, and that’s okay! Regarding how we define that break, both GSEs, Freddie Mac and Fannie Mae, describe temporary leave as usually an employee-initiated, short-term absence from work. Life happens and people may take temporary leave for a variety of reasons, including family, medical, short-term disability, maternity, paternity, or other factors that may be acceptable by law or the borrower’s employer.

However, temporary leave doesn’t apply to leave that’s initiated by the employer. Furloughs and layoffs wouldn’t be considered temporary leave, regardless of an expected return to work date. Also, the ability to use temporary leave income doesn’t apply if the borrower doesn’t intend to return to the current employer or he or she doesn’t have a commitment from the current employer to return to employment.

Navigating GSE guidelines with a borrower on temporary leave

Both GSEs indicate that a lender may use the borrower’s pre-leave income for qualifying the loan if borrowers on temporary leave will return to work at their current employer prior to or on the first mortgage payment due date. For a borrower returning to his or her current employer after the first mortgage payment date, the lender may use the income being received for the duration of the temporary leave, not to exceed the pre-leave monthly income.

But how do you handle a borrower who is not returning to work prior to the first payment due date, and who doesn’t qualify on his or her temporary leave income (if there is any)?  Good news! Freddie Mac and Fannie Mae will also consider any reserve liquid assets, as necessary, to assist in qualifying the borrower.

Let’s say the borrower will not return to work prior to the first payment due date and the temporary leave income is less than the pre-leave income or even zero. The income can be supplemented to meet the pre-leave income with available liquid reserves. This amount needs to be deducted from other assets being used for down payment, closing costs, and reserves.

What else should I know about temporary leave?

Every borrower’s situation is different, and the most important tactic you can take when encountering borrowers on leave is to stay up to date on GSE guidelines. You can learn more in-depth information about this income type and reference how the GSEs handle these loan scenarios by reviewing Fannie Mae’s guidelines and Freddie Mac’s guidelines anytime.

Meet your borrowers where they’re at in life! Stay diligent by double checking all the crucial details of their loan That way, you can help your borrowers achieve success in the homebuying process.

More Ways We Can Help

Your Enact MI team has got you covered. They can answer any of your important questions about borrower scenarios that involve temporary leave income, and more! Our Regional Underwriting Team is available to assist you Monday-Friday 8am to 8pm ET at 800-444-5664 option 2.

Be sure to make the most of your MI experience, too. Please explore our many underwriting resources and underwriting tips for more information. Because going the extra mile comes easy for us, we also offer a comprehensive suite of training resources to help boost your industry experience.

Source:  Jody Hanson is a Regional Underwriter for Enact.

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