Have you ever wondered what babies have to do with retirement planning or even mortgages? Surprisingly, more than you might imagine. First off, once the idea of starting a family takes root in a young couple’s psyche, things change dramatically. Smart couples plan for unintended consequences such as the mother not wanting to return to work, the need for day care if she does, and the possibility that the bank will turn you down for a new home loan because you need a bigger place for the family. Wait. Is that last one even legal?
Last week, Tara Siegel Bernard, personal finance columnist for the New York Times posted an interesting thought in her column “Making the Most of Your Money.” Can banks turn you down for a mortgage if they know you plan on having a baby? Or can they claim, after you have signed the papers, that you lied when asked about potential income interruptions, a sly way of asking about pregnancy without asking about pregnancy.
We all know that banks have tightened their collective belts in order to protect the loans they make. In the old days—just several short years ago—the appearance of the ability to pay was all that was needed to get a mortgage worth hundreds of thousands of dollars. But can they refuse to lend you money on the basis of your plans to begin a family?
Businesses have often struggled with the concept of maternity leave. The smaller the firm, the more likely a pregnancy will impact the workplace. Pamela Ryckmanalso writing in the New York Times: “Even employers who want to be fair and compassionate can suffer anxiety over the potential loss of a top performer or even an average worker trained in an essential role.” Often disability insurance is acquired, sick days and vacation are used to cover lost income but admittedly, both the business and the new mother know, there is no guarantee that once the baby arrives, they will return to work.
While businesses may take a very proactive approach and hope for the best, banks don’t have that luxury. Among the business suggestions listed in Ms. Rykman’s article, the ability to plan for a pregnancy can make the whole process much easier. Cali Williams Yost, chief executive of the Flex&Strategy Group, a consulting firm in Madison, New Jersey, was quoted as saying: “Of all the work-life challenges business owners face, maternity leave should be the easiest because you can plan for it. But you need to encourage employees to come to you freely and with a problem-solving attitude.”
By law, banks can’t ask. But should you show up during the application process already showing signs that a baby is imminent, a bank may find some reasons to renege on the loan. While a business may offer any number of solutions to your situation from flexible work hours to other more discrete solutions, banks see the problem differently.
Disability payments cannot be counted as income when trying to qualify for a home. In many instances, these payments are finite and even the parents have arranged for income replacement, the banks will not be confident that all will be as it seems after the baby arrives.
Is this discrimination or is it prudent lending? Should your first thought after deciding to have a child be a mortgage? Can you consider yourself financially savvy by not only taking on the unknown of having a child but also the single largest purchase you will ever make at a time of planned uncertainty? Are you simply acting entitled to think that your current qualifications are enough to project income confidence years down the road?
The old qualifier for mortgages done decades ago was debt-to-income, often at 40 percent. In the seventies, that income was solely that of the husband. Not only was this practical then, with relevant statistics backing the notion that he would probably not have any work interruption but in those distant times, women worked less outside the home and had a lesser track record of steady income.
Fast-forwarding decades and women not only have steady incomes, they have steadier incomes. The Great Recession has impacted the workforce in ways not seen in the past. Two-thirds of the folks who lost their jobs in recent years were men. While this not only shines a light on the advancements women have made in terms of workplace presence, it illustrates the changing dynamic of who is working and why. From an income standpoint, women have also made advancements worth noting.
Yet when it comes to a home loan, most of these steps forward don’t matter. But back to the prudent part of borrowing. Six years ago, in my first book published I suggested that a new home buyer live without one income and do so based on the mortgage payment they might make (including taxes, insurance and upkeep, all not part of the renting experience).
Had everyone taken this simple piece of advice, we would not be in the financial mess we are currently recovering from, albeit slower than most would like. Are income interruptions bound to happen during the course of a thirty-year loan? Absolutely. Should you plan for it? Yes.
Although they haven’t done it yet, banks could take another approach to the long-term loan process and revisit the loan every two years during the first ten years of the loan. This could be a simple addition to the mortgage process that would require you send a copy of your year-end income statement. It would open the communication process and may stem the foreclosure issue before it happens. For those that made a plan or were prudent in developing their plan, the original loan would have taken in many of these potential problems.
But even high income earners don’t think these new guidelines apply to them. Fannie Mae and Freddie Mac have both instituted guidelines for income right up until the time of closing. One soon-to-be-mother in Ms. Siegel Bernard’s article had gone on maternity leave just before closing and the loan was not allowed.
Janis Smith, a spokeswoman for Fannie Mae, confirmed that this was wrong for the lender to do suggesting that “as long as the borrower had proof at the time of the closing that his or her income would be adequate upon returning to work.”
Now how do babies affect your retirement plan? Applying for a mortgage when you are young, starting a family and planning on some sort of income disruption often puts the prime earning years for a retirement plan on hold. Worse, retirement plans that may have been started earlier, before all of these plans were formed, could be tapped for down payments on the new home or closed entirely to cover those costs.
There are basically three things you can do to make sure your plan stays of track: Plan for the worst (the loss of one income for a considerable length of time—over six months), plan for the future (all retirement accounts should be considered a hands-off affair), and plan for the expected (although we can’t predict many of the things life throws our way, a surprising amount of things we do can be planned for, saved for, and paid for).
Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.com and contributor to MomsMakingaMillion Radio