Mortgage

Calculation of fee revenue for a mortgage

Buying a home with commission income

Income qualifications is one of the most important factors when applying for a home loan. Therefore, understanding how lenders calculate your income can be crucial.

Calculating income can be a little more complex for contracted employees and self-employed.

Fortunately, just because you're self-employed or a commission earner doesn't mean you can't qualify for a home loan. It just means that you should understand how lenders view your income so that you can prepare for success.

Check your mortgage eligibility against commission income (April 13, 2021).

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Calculation of commission income for mortgage loans

When calculating commission income, most lenders look at the same thing: the likelihood that your commissions will stay the same in the future. You want to know that the homeowner has the option to repay their new home loan over the long term.

Lenders aim for constant monthly commission income over the past two years. This shows them that you can afford future mortgage payments if they are approved based on your current income level.

Inconsistent revenue and / or declining commission income can make it difficult to get approval for a mortgage or refinance.

To calculate commission income on a mortgage, lenders average your commissions over the past two years to produce an estimated monthly income.

For home buyers with two years' experience with commissions, the income calculation for a mortgage is easy.

Lenders typically calculate commission income for the past two years and use the average as qualified income when calculating debt ratios.

For example, let's say your annual income is 100 percent commission-based. In the past two years, you've made $ 65,000 and then $ 75,000.

To make monthly mortgage qualifying income, the lender adds up the commission income for the past two years and divides by 24.

Year 1: $ 65,000 Year 2: $ 75,000 Total: $ 140,000 $ 140,000 / 24 = $ 5,833

In this example, the lender assumes you have $ 5,833 monthly income. It would then calculate your maximum loan amount and your monthly payment based on that number.

Check your mortgage eligibility against commission income (April 13, 2021).

Mortgage Requirements for Commission Eaters

In general, the commission income guidelines are similar to the self-employed mortgage guidelines.

First, you need a stable work history. As a rule, commission earners have to work as wage earners two years before their mortgage application.

Second, you need to properly document that income and demonstrate that you have a consistent commission history.

Standard documents for approving a commission income mortgage include:

Two years of income tax returns Two years of W-2 and / or 1099s 30 days of latest payrolls 30 days of latest commission reviews (assuming the mortgage borrower is a wage earner with commission income) Commission income for the past two years should be consistent and should not go back from one year to the previous year

Remember that mortgage insurers look for stable commission income year after year.

If your income has gone down, or if it's your first time shopping at a brand new job, you may have a harder time getting approval because of commissions.

Types of Mortgages for Commission Eaters

Commissioners can apply for the same types of home loans as other borrowers.

Conventional Loans, FHA, VA, and USDA Loans have similar underwriting guidelines for calculating commission income.

In addition, qualifying for a home loan with commission income does not differ significantly from qualifying for bonus income.

Conventional Loans

Fannie Mae and Freddie Mac – the agencies that set rules for credit compliance – generally prefer a minimum history of commission income of 2 years.

Commission income received for 12 to 24 months may be taken into account provided there are positive factors that adequately offset the shorter income history.

One of the following information must be required to document the commission income for a conventional loan:

Completed Employment Review Application (Form 1005 or Form 1005 (S)) or Recent Payroll Forms and IRS W-2 for the most recent biennium

Oral employment verification is also required from your employer (s).

Check Your Conventional Loan Eligibility (April 13, 2021)

FHA loan

The FHA mortgage program is milder in terms of commission income. Borrowers can potentially be approved with just one year of commission income approval.

Commission income can be used on FHA loans if the mortgage borrower has earned the income for at least a year in the same or a similar industry and the income is likely to continue.

The federal housing administration says the commission income is calculated using the lesser of the two:

the average commission income earned over the past two years for commission income earned for two years or more, or the period of time commission income has been earned if it is less than two years; or the average commission income for the last year

To qualify for commission income, mortgage borrowers must provide copies of signed tax returns for the past two years and their most recent pay slip.

Check Your FHA Loan Eligibility (April 13, 2021)

VA loan

The Department of Veterans Affairs is a little stricter than the FHA in this regard. In order to qualify as “effective income” for a VA mortgage, the commission income must be averaged over the last 2 years.

Commission income is awarded the same way bonuses are counted: consistency, history and continuity are key.

Most lenders require a federal tax return for the past two years (1040) with all the schedules so that income can be properly calculated. Some may allow written confirmation from your employer rather than oral confirmation.

Check Your VA Loan Eligibility (April 13, 2021)

USDA loan

For USDA loans, your lender analyzes commission income for the current payment period as well as YTD income.

"Significant deviations" – that is, an increase or decrease in income of 20 percent or more over the last 12 months – must be analyzed and documented before income is considered stable and reliable.

Documentation required includes pay slips, W2s, a written employment review, and federal income tax returns or IRS transcripts.

Check Your USDA Loan Eligibility (April 13, 2021)

How Much Mortgage Can I Qualify For?

Overall, the commission income only requires a few additional steps to review.

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

However, income is not the only determining factor. As with all mortgages, the loan officer will also consider the following:

Credit ScoreCredit HistoryDebt-to-Income-Ratio (DTI) Down PaymentBank Statements The value and condition of the house

However, if you are among the 5% of the population who work on commission, don't let the mortgage process put you off. Check with multiple lenders to find out what steps it will take to make your home ownership dreams come true.

Getting mortgage approval may be easier than you think.

Check your new plan (April 13, 2021)

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