Commission Earnings And Mortgage Eligibility: What You Need To Know

If you're a commissioned worker, you may be wondering if you can get a mortgage based on your full income. The good news is that there are lenders who will consider commission income when assessing your affordability. However, different lenders have different criteria, which can impact how much you can borrow and at what rate. Most lenders will require your last two years' tax returns so that your income can be calculated properly. Lenders will also want to see that you've been earning a commission for at least two years, and that your income is stable and consistent. Some lenders will only consider a portion of your commission income to mitigate the risk, while others will consider 100% of it. It's important to speak to an impartial mortgage broker who understands the criteria of each lender before applying.

Lender criteria for commission income

Lender criteria vary, but commission-based income is often seen as less stable than a consistent salary, so lenders approach mortgage applications with this income source cautiously. This can result in additional scrutiny during the loan approval process.

Lenders want to know that you will be able to afford future mortgage payments if approved at your current income level. They will, therefore, look for consistent monthly commission income over the past two years. They will also want to see that your commission income is not declining. To calculate your income, lenders will average your commissions over the past two years to arrive at an estimated monthly income.

Some lenders will require you to have earned commission income for three years before they will consider it. However, others will accept 12 months if you can prove the payments are regular and consistent. Some lenders will calculate your commission income as an average over two years.

Some lenders will not accept any bonus or commission income, while others will cap the amount an applicant can include in their application, for example, at 50% or 60%. Others will accept 100% commission or bonus income.

If your commission income is a small part of your overall earnings, approval should be more straightforward, provided you meet all other lending criteria.

Calculating commission income

Lenders will want to see that you have a steady work history and that your commissions are likely to continue at the same level in the future. They will also want to see that you have been earning the commission for at least 12 months to three years, depending on the lender. Some lenders will only require a few months' worth of commission income if your other circumstances make you a lower-risk borrower.

To calculate your income, lenders will average your commissions over the past two years to arrive at an estimated monthly income. They will add your past two years' commission income and divide by 24. For example, if you earned $65,000 one year and $75,000 the next, the lender would assume you have a monthly income of $5,833. They would then calculate your maximum loan amount and monthly payment based on that number.

Some lenders will only consider a portion of your commission income to mitigate the risk of fluctuation—this is often capped at 100% of your basic salary. Others will consider a percentage of your actual commission, sometimes 100%, sometimes 50%, or sometimes none of it.

The Department of Veterans Affairs is stricter when it comes to commission income. To be considered "effective income" for a VA mortgage, commission income must be averaged over the previous two years. Most lenders will require your last two years' tax returns so that your income can be properly calculated.

Commission income stability

Income stability is a crucial factor in determining eligibility for a mortgage. For those whose income is primarily commission-based, demonstrating consistent earnings over a period of time is essential. Lenders typically require a history of stable commission income, often averaging the past two years of earnings to estimate a monthly income. This helps them assess the likelihood of continued commissions at a similar level.

The specific criteria vary among lenders, and some may only accept monthly or quarterly commissions, while others may consider annual commissions if they meet affordability checks. It is important to note that lenders may also have different definitions of what constitutes a "stable" income. For example, the Department of Veterans Affairs requires commission income to be averaged over the previous two years to be considered "effective income".

To prove income stability, lenders may request various documents, such as recent commission checks, tax returns, and employment verification. Some may also require a written explanation for any decreases in commission income from one year to the next. The goal is to demonstrate a consistent and preferably upward income trend.

While having a portion of income from commissions can make a difference in mortgage offers, it is not a disqualifier. Many lenders are willing to consider commission-based earnings, and some may even include up to 50% of the commission when calculating total income. However, it is essential to understand that lenders' criteria can impact borrowing limits and interest rates, so working with an impartial mortgage broker who can navigate these complexities is advisable.

In summary, income stability is a key consideration for lenders when assessing mortgage applications, especially for those with commission-based earnings. By providing comprehensive documentation and demonstrating consistent income over time, individuals can enhance their chances of obtaining a mortgage that considers their commission income.

Documenting commission income

Lenders will typically want to see a history of commission income to predict the likelihood of future earnings. This is usually a minimum of 12 months, but some lenders prefer a 2-year history. The FHA mortgage program is more lenient and borrowers may be able to get approved with just a one-year history of commission earnings.

The documentation required to prove commission income includes paystubs, W2s, written verification of employment, and federal income tax returns or IRS transcripts. Some lenders may also accept a verbal verification of employment.

For commission income greater than 25% of your total earnings, lenders will require signed tax returns, including all schedules, for the last two years. They will then calculate your net commission income by subtracting unreimbursed business expenses from your gross commission income.

If you've earned at least two years of commission-based income and have a strong financial history, you could be well on your way to mortgage approval.

Commission income and loan programs

When it comes to commission income and loan programs, it's important to understand that different lenders have different criteria and requirements. Some lenders may not accept commission income at all, while others will take it into account when determining your eligibility for a mortgage. It is recommended to consult an impartial mortgage broker or advisor who can guide you through the process and help you find a suitable deal.

To calculate commission income for a mortgage, lenders typically average the past two years of commission earnings to arrive at an estimated monthly income. This helps them assess your ability to repay the loan over the long term. Some lenders may also consider a shorter period of consistent commission history, such as one year or a few months, if your overall risk profile is favourable.

The frequency of commission payments can also impact a lender's decision. Some lenders may only consider monthly commission payments, while others may accept quarterly or annual payments as long as they satisfy affordability checks. It's important to provide recent commission checks and detailed payslips that break down your salary and commission components.

Additionally, lenders may have specific requirements for commission income verification. For instance, they may request tax returns for the previous two years if your commission income exceeds 25% of your total earnings. They may also need an explanation for any significant decreases in commission income from one year to the next.

It's worth noting that certain loan programs have specific rules regarding commission income. For example, FHA loan rules allow commission income to be used as effective income if the borrower has earned it for at least a year in the same or similar line of work and it is likely to continue. USDA loans require an analysis of current pay period earnings and year-to-date earnings, with significant variances needing additional documentation.

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