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What is required for temporary leave income?

Temporary Leave Income 

Temporary leave from work is generally employee-initiated, short in duration and for reasons including, but not limited to maternity or parental leave, short-term medical disability, or other temporary leave types that are acceptable by law or to the borrower's employer. Borrowers on temporary leave may or may not be paid during their absence from work.

Note: Mandatory leave initiated by an employer, such as furlough or layoff, is not considered temporary leave regardless of an expected return to work date. For income from unemployment benefits received as a result of mandatory leave initiated by an employer, see Public Assistance Income.

If a lender is made aware that a borrower will be on temporary leave at the time of the loan closing and that borrower's income is needed to qualify for the loan, the lender must determine allowable income and confirm employment as described below.

Temporary Leave -- Employment Requirements
  The borrower's employment and income history must meet standard eligibility requirements as described in Section B3–3.1, Employment and Other Sources of Income.
  The borrower must provide written confirmation of their intent to return to work.
  The lender must document the borrower’s agreed-upon date of return by obtaining, either from the borrower or directly from the employer (or a designee of the employer when the employer is using the services of a third party to administer employee leave), documentation evidencing such date that has been produced by the employer or by a designee of the employer.

Examples of the documentation may include, but are not limited to, previous correspondence from the employer or designee that specifies the duration of leave or expected return date or a computer printout from an employer or designee’s system of record. (This documentation does not have to comply with the Allowable Age of Credit Documents policy.)

  The lender must receive no evidence or information from the borrower's employer indicating that the borrower does not have the right to return to work after the leave period.
  The lender must obtain a verbal verification of employment in accordance with B3-3.1-07, Verbal Verification of Employment. If the employer confirms the borrower is currently on temporary leave, the lender must consider the borrower employed.
  The lender must verify the borrower's income in accordance with Section B3–3.1, Employment and Other Sources of Income. The lender must obtain
  • the amount and duration of the borrower's “temporary leave income,” which may require multiple documents or sources depending on the type and duration of the leave period; and

  • the amount of the “regular employment income” the borrower received prior to the temporary leave. Regular employment income includes, but is not limited to, the income the borrower receives from employment on a regular basis that is eligible for qualifying purposes (for example, base pay, commissions, and bonus).

Note: Income verification may be provided by the borrower, by the borrower's employer, or by a third-party employment verification vendor.

Requirements for Calculating Income Used for Qualifying

If the borrower will return to work as of the first loan payment date, the lender can consider the borrower's regular employment income in qualifying.

If the borrower will not return to work as of the first loan payment date, the lender must use the lesser of the borrower's temporary leave income (if any) or regular employment income. If the borrower's temporary leave income is less than their regular employment income, the lender may supplement the temporary leave income with available liquid financial reserves (see B3-4.1-01, Minimum Reserve Requirements). The following are instructions on how to calculate the “supplemental income”:

Supplemental income amount = available liquid reserves divided by the number of months of supplemental income

  • Available liquid reserves: subtract any funds needed to complete the transaction (down payment, closing costs, other required debt payoff, escrows, and minimum required reserves) from the total verified liquid asset amount.
  • Number of months of supplemental income: the number of months from the first loan payment date to the date the borrower will begin receiving their regular employment income, rounded up to the next whole number.

After determining the supplemental income, the lender must calculate the total qualifying income.

Total qualifying income = supplemental income plus the temporary leave income

The total qualifying income that results may not exceed the borrower's regular employment income.

Example
Regular income amount: $6,000 per month
Temporary leave income: $2,000 per month
Total verified liquid assets: $30,000
Funds needed to complete the transaction: $18,000
Available liquid reserves: $12,000
First payment date: July 1
Date borrower will begin receiving regular employment income: November 1
Supplemental income: $12,000/4 = $3,000
Total qualifying income: $3,000 + $2,000 = $5,000

For loan casefiles underwritten with DU, refer to B3-3.5-01, Income and Employment Documentation for DU, for data entry guidance.

Note: These requirements apply if the lender becomes aware through the employment and income verification process that the borrower is on temporary leave. If a borrower is not currently on temporary leave, the lender must not ask if they intend to take leave in the future.

 For additional information, see B3-3.1-09, Other Sources of Income.

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