Cash, income, credit history…the big three of getting an approved home loan. All equally important and all have very specific guidelines and documentation requirements. We mostly think of income when asking the question, “How much mortgage can I qualify for?” This article is going to talk about income and why HOW your wages are paid by your employer can make a huge difference in the amount of the mortgage you may be eligible to borrow.
There are many methods of employment compensation. Just to name a few:
- Hourly with overtime
- Hourly with bonus
- Salary with bonus
- Salary with commission
- Straight commission
- Wage paid by your own company (or family business)
Ultimately what your lender wants to establish is the stability and consistency of your income. If you work a standard 40-hour week and are paid hourly or on a set salary; that’s the easy part and is fairly straightforward. Anything outside of that gets special attention.
Overtime and Bonus Income
Typically your lender will want to verify that you have received either overtime or bonus income for a minimum of two years. There can be exceptions, but when you are preparing to purchase a home – don’t count on the exceptions.
There are different methods the lender might use to get documentation that verifies this information. Many employers have online automated employment verification systems and quite a few still use the old school “fax a form” method. You will also be asked to provide at least the most recent 30 days of your wage statements and the last two years of W2s. (See Home Loan Document Checklist)
Regardless of the type of verification; it will closely follow this format which is a snipet of the FNMA Request for Verification of Employment.
Key points on what the lender is looking at are:
- Is the overtime or bonus income consistent?
- Does the employer state it is likely to continue (#14 in the image above)?
- Is the income increasing or declining each year?
Your lender is looking for assurance that this “variable” type of income is going to reasonably continue at the same amount. If the answer is “no” to any of the above questions; you may either not be able to use that income to qualify for the loan; or the lender might calculate it at a lesser more conservative amount.
The next thing your lender will do is take a two-year average of the bonus or overtime income. For example; if you made $5,000 in overtime income last year and $4,500 the year before; that total of $9500 would be divided by 24 (months) to give you $375 of monthly income for loan qualification.
When you are a commissioned employee; your lender is going to look at your income basically the same as if it was bonus or overtime. It’s a two-year average of your income that is needed for loan qualification purposes.
In addition to 30 days of your wage statements and W2s for the last two years; you may also be asked for the most recent two years of your income tax returns. The reason is they want to see if you declared any business expenses against your income on your tax return. With the new 2018 Tax Bill; you may be losing that deduction. Here’s a good article from CNBC on this subject.
However, if you are using 2017, and earlier, income to meet your two years, be prepared to supply your tax returns AND be prepared for whatever you deducted for business expenses to be deducted from your commission income. For example if you earned $50,000 in commission in 2017 and declared $5,000 in business expenses on your tax return; your lender will consider your income to be $45,000.
Less than two years with your current employer?
Whether you are commission or receive overtime or bonus income; if you do not have a full two years with your current employer, your lender may have a concern. It is not just two years with same employer but 2 years with same method of income.
In other words, if you’ve been with your employer for a couple years, but just started to received overtime, bonus or commission; that is not a two-year history. It’s possible they may not use your overtime or bonus income. If you need that income to qualify; you need a good loan officer that will help you obtain sufficient alternative documentation to convince an underwriter (the person that approves the loan) that the income is likely to continue. (Download Loan Officer Interview Checklist here)
When it comes to less than two years on commission income; that’s a bit tougher. It is generally the largest portion or your income and perhaps 100% of your income. It is very difficult to reasonably determine the consistency and reliability of that income. No track record of receiving a certain level of income makes it hard for a lender to qualify you for the loan.
If you’ve been a commission earner but switched employers; that may or may not be a problem. When you are a commission earner; it is generally because you are in sales. If you are in sales; you have a territory or a specific database of clients that you call on. If you switch employers; you might lose that resource OR they may not like the new products or services you offer. It’s not impossible to get the lender to use your income; but it is difficult.
One industry that comes to my mind (from my previous life as a mortgage broker) are auto sales people. They tend to switch companies on a more regular basis and their source of clients (buyers) does not change that much. Actually the same can be said for mortgage loan officers! (Yep – mortgage loan officers are sales people) Here is another instance where you’ll need a good experienced loan officer to help you gather sufficient documentation for an underwriter to approve.
Unfortunately if you have been earning either overtime, bonus or commission income for less than two years – period – you may have to get one more year of earnings before you are eligible for a home loan. In most cases; two year minimum to use the income at all is mandatory.
What if you get a paycheck from a company you own?
If you own more than 25% of the company that gives you a paycheck; you are considered self-employed. That is regardless of whether the company is a corporation or a partnership. Self employed income is an entirely different subject and is too cumbersome to adequately cover here. I plan to write a short series of articles soon for the self-employed borrower. If this is you; please sign up below to be notified when I have the series ready to publish.
If you want all of your income to “count” when it comes time for you to seek a loan to buy your new home; pay close attention to the previous consistency of any income that is variable in nature. Try to be at least two years on the job with that same employer. You’ll most likely have to have been earning that type of income for two years; regardless of where you were employed.
If you feel that you may not meet all the requirements mentioned in this article; my best advice is to be sure to get an experienced loan officer to help you. Not only are all lenders not created equal; the same applies to loan officers. Click here for a free download of my Loan Officer Interview Checklist and don’t be afraid to use it!