Furlough and/or Temporary Leave Guidelines Fannie:
Temporary Leave Income
Temporary Leave from work is generally short in duration and for reasons of maternity or parental leave, short-term medical disability, or other temporary leave types that are acceptable by law or the borrower’s employer. Borrowers on temporary leave may or may not be paid during their absence from work. If a lender is made aware that a borrower will be on temporary leave at the time of closing of the mortgage loan and that borrower’s income is needed to qualify for the loan, the lender must determine allowable income and confirm employment as described below. ü
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 his or her 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 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. 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 (10/02/2018). 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 mortgage 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 mortgage 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 his or her regular employment income, the lender may supplement the temporary leave income with available liquid financial reserves (see B3-4.1-01, Minimum Reserve Requirements (08/07/2019)).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 month supplemental income: the number of months from the first mortgage payment date to the date the borrower will begin receiving his or her 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.
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Furlough and/or Temporary Leave Guidelines 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 (08/07/2019), for data entry guidance. Notes: 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 he or she intends to take leave in the future.
Freddie: 5303.5: Income while on temporary leave (07/10/19)
Effective July 6, 2017, the content of this section has moved from Section 5303.6. The following section provides guidance to Sellers for underwriting Borrowers on temporary leave from their current employment.
Temporary Leave Temporary leave from an employer may encompass various circumstances (e.g., family and medical, short-term disability, maternity, other temporary leaves with or without pay). Temporary leave is generally short in duration. The period of time that borrower is on temporary leave may be determined by various factors such as applicable law, employer policies and short-term insurance policy and/or benefit terms. Leave ceases being considered temporary when the Borrower does not intend to return to the current employer or does not have a commitment from the current employer to return to employment. Refer to Chapter 5305 regarding long-term disability income if the Seller has knowledge the Borrower has applied for, is receiving or will be receiving long-term disability benefits or long-term insurance benefits.
Determining qualifying income and borrower capacity to meet obligations while on temporary leave During a temporary leave, a Borrower’s Income may be reduced and/or completely interrupted. The Seller must determine that during and after the temporary leave the Borrower has capacity to repay the Mortgage and all the other monthly obligations in accordance with Topics 5100 through 5500. The Seller’s determination must be based on required documentation, Seller knowledge and available information.
(a) For Borrowers returning to their current employer prior to or on the first Mortgage payment due date: The Seller may use for qualifying income the borrower’s pre-leave gross monthly income.
(b) For Borrowers returning to their current employer after the first Mortgage payment due date: • The Seller may use for qualifying income the Borrower’s gross monthly income amount being received for the duration of the •
•
temporary leave In the even that the income has been reduced or interrupted, the Seller may use for qualifying income the monthly reduced income amount (this amount may be zero) being received for the duration of the leave combined with the Borrower’s available liquid assets, as necessary. Available liquid assets may be used as a partial or complete income supplement up to the amount of the income reduction. The “Asset calculation for establishing the debt payment-to-income ratio” described In Section 5307.1(b) does not apply to the calculation of assets as an income supplement when determining qualifying income and Borrower capacity to meet obligations while on temporary leave. Assets that are required for the transaction (e.g./ Down Payment, Closing Costs and reserves) may not be considered as available assets. The total qualifying income must not exceed the Borrower’s pre-leave gross monthly income amount
Documentation requirements
The following documentation is required for Borrowers on temporary leave: • Documentations to verify the Borrower’s pre-leave income and employment in accordance with Topic 5300, regardless of leave status • Written statement, in the form of a signed letter or and e-mail directly from the Borrower, confirming the Borrower’s intent to return to the current employer and the intended date of return • Documentation generated by current employer confirming the Borrower’s eligibility to return to the current employer after temporary leave. Acceptable forms of employer documentation that the Seller may obtain from the Borrower include, but are not limited to: an
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Furlough and/or Temporary Leave Guidelines
employer-approved leave request, a Family Medical Leave Act document, or other documentation generated by the employer or a thirdparty verifier on behalf of the employer. In addition, the following documentation is required for Borrowers returning to the current employer after the first mortgage payment due date: • Documentation evidencing amount and duration of all temporary leave income sources being used to qualify the Borrower (e.g., shortterm disability benefits or insurance, sick leave benefits, temporarily reduced income from employer) that are being received during the temporary leave • All available liquid assets used to supplement the reduced income for the duration of the temporary leave must meet the requirements of and be verified in accordance with the Streamlined Accept Documentation or Standard Documentation requirements, as applicable, listed in Section 5501.3 • A written rationale explaining the analysis used to determine the qualifying income, regardless of the underwriting path
FHA: Addressing Temporary Reduction in Income
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.
For Borrowers returning to work before or at the time of the first Mortgage Payment due date, the Mortgagee may use the Borrower’s preleave income. For Borrowers 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.
Required Documentation
The Mortgagee must provide the following documentation for Borrowers on temporary leave: • a written statement from the Borrower confirming the Borrower’s intent to return to work, and the intended date of return; • documentation generated by current employer confirming the Borrower’s eligibility to return to current employer after temporary leave; and • documentation of sufficient liquid assets, in accordance with Sources of Funds, used to supplement the Borrower’s income through intended date of return to work with current employer.
VA: Background
VA may only guarantee a loan when it is possible to determine that the Veteran is a satisfactory credit risk and has present or verified anticipated income that bears a proper relation to the anticipated terms of repayment as outline in the VA Pamphlet 26-7, Chapter 4 Credit Underwriting. In addition, VA-guaranteed loans must maintain first lien position, as stated in 38 U.S. Code § 3703(d)(3) and 38 CFR § 36.4355.
Income Verification Guidelines.
Lenders should continue to use good judgment and flexibility when verifying stable and reliable income. Lenders should make every effort to satisfy VA’s longstanding requirements concerning Verification of Employment (VOE) as outlined in the VA Pamphlet 26-7, Chapter 4 credit Underwriting. (a) If their propriety method is impacted used to temporary business closures, the lender should use the guidelines listed
below.
(1) The lender may utilize employment and income verification third-party services. Additional fees associated with these services cannot be charged to the Veteran, as stated in VA Pamphlet 26-7, Chapter 8, Section 2 Fees and Charges the Veteran-Borrower Can Pay. (2) If the lender is not able to utilize a third-party service to verify employment and income, a VOE can be met with evidence of direct deposit from a bank statement and paystubs covering a at least one full month of employment within 30 days of the closing dates. Lenders should reconcile payment amounts between the paystubs and direct deposit listed on the bank statement.
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Furlough and/or Temporary Leave Guidelines
(3) If the required VOE documentation cannot be obtained by evidence of bank statement and paystubs, and the borrowers have cash reserves totaling at least 2 months mortgage payments (PITI) post-closing, the loan is eligible for guaranty. The lender’s effort to obtain the VOE must be documented in the Correspondence section of WebLGY. (b) In the event lenders utilize option (2) or (3) as verification, they must document in box 47 of the remarks section on VA
Form 26-6393, Loan Analysis, the option the selected and the supporting documentation.
Underwriting Loans
For income analysis purposes, as outlined in VA Pamphlet 26-7, Chapter 4 Credit Underwriting, VA guidelines generally require income to be stable and reliable for 2 years. (a) If the application was impacted by COVID-19 (i.e. furlough, curtailment of income, etc.), that period should not be considered a break in employment or income provided they have returned, or are anticipated to return, to work in the same capacity and income levels. In addition to standard verification documentation, applicants should provide furlough letters where applicable. (b) VA continues to encourage lenders to take proactive measures in documenting and uploading evidence of their analysis and justifications for all borrowers, especially for “borderline” cases. This may proactively address questions that VA may otherwise ask and prevent loan level audit of that loan. (c) Lenders are to confirm that the borrower’s income will be stable and consistent while they are on furlough in order for the income to be used
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