Commission Income and Mortgages: Can Your Bonus Help You Buy a Home?

Congratulations! You’ve just landed a job with a commission structure, and it feels like your annual income has taken a significant leap. Naturally, you may feel your time has come to finally start shopping for a home. After all, this is the big break you’ve been waiting for! But before you start browsing real estate listings, let’s address a crucial question: Can you use commission income to qualify for a home loan?

The short answer is yes, you can use commission income to qualify for a mortgage. However, the long answer might surprise you. Let’s dive into the details.

The Two-Year Rule

Here’s the first hurdle: lenders typically require a two-year history of receiving bonus or commission income before they’ll consider it for mortgage qualification. Why? They want to ensure that this income is stable and likely to continue.

This two-year requirement helps lenders assess the consistency and reliability of your commission income. They’re looking for a pattern that suggests your earnings are sustainable, not just a short-term spike.

Averaging Your Income

Once you have that two-year history, lenders will usually average your commission income over those two years. This approach helps account for the natural fluctuations that often come with commission-based work.

For example, if you earned $50,000 in commissions last year and $70,000 this year, the lender would likely use an average of $60,000 when calculating your income for mortgage qualification purposes. In some cases, you may be able to get over this hurdle with a written verification of employment (VOE) and letter of explanation (LOE or LOX) from your employer explaining the increase. However, it will depend on the program, your lender, and multiple other factors as to whether they’ll need to proceed with an average or accept the updated full value.

Documentation is Key

Be prepared to provide extensive documentation. This typically includes:

• Your last two years of tax returns
• W-2 forms
• Recent pay stubs
• A written verification of employment (VOE) from your employer

Your lender may also request a year-to-date commission income statement, especially if you’re applying for a mortgage later in the calendar year.

The Impact of Declining Income

If your commission income has declined from one year to the next, lenders may scrutinize your application more closely. They might use the lower of the two years or even decline to use the commission income altogether if they believe it’s on a downward trend.

Type of Commission Matters

The nature of your commission can also affect how lenders view it. For instance, if your job is 100% commission-based, lenders might be more cautious than if you have a base salary with additional commission income. The ticket is consistency. If you’re 100% commission-based but your income year-to-year has been consistent, this will certainly work in your favor.

Down Payment and Debt-to-Income Ratio

Remember, commission income isn’t the only factor in mortgage approval. You’ll still need to meet other criteria, such as having a sufficient down payment (if applicable – program dependent) and maintaining a healthy debt-to-income ratio (ratio requirements vary based on loan type).

In summary –

While it’s possible to use commission income to qualify for a mortgage, it’s not as straightforward as using a standard salary. The key takeaway? If you’re in a commission-based role and dreaming of homeownership, start documenting your income meticulously right away. The sooner you build that two-year history, the stronger your position will be when you’re ready to apply for a mortgage.

And remember, every situation is unique. It’s always best to consult with a mortgage professional who can provide personalized advice based on your specific circumstances. Happy house hunting!