A Mortgage with Commission Income: What You Need to Know
For commission based income earners, getting approved for a mortgage can be tricky, but it’s far from impossible. With the right approach and preparation, you can show lenders that your income is as reliable as any salaried employee’s, even if it’s not consistent every month. Here’s how to improve your chances of mortgage approval when working with commission income.
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Commission Stability Is Key
Lenders like to see stability, and that’s why they generally want to look at your commission income over the last two years. They’ll take an average of these earnings to get a clearer picture of your financial standing. However, there’s good news for borrowers who have been in the same line of work for the past two years and show an upward trend in income: some lenders may consider only the most recent year of commission income instead of averaging over two years.
Example of Commission Income Calculation:
Let’s take Sarah, an insurance agent. In 2022, she earned $80,000 in commission income, and in 2023, her income increased to $100,000. Sarah has been working in the same field for over two years, so her commission income is eligible to be considered for a mortgage.
When Sarah applies for a mortgage, the lender will take the average of her last two years of commission income to calculate her qualifying income.
Here’s how it works:
- 2022 commission income: $80,000
- 2023 commission income: $100,000
Average commission income:
($80,000 + $100,000) ÷ 2 = $90,000 per year
Now, to calculate Sarah’s monthly income for qualifying purposes:
- $90,000 ÷ 12 months = $7,500 per month
With this $7,500 monthly income, the lender will calculate the maximum monthly mortgage payment Sarah can qualify for based on the lender’s allowed debt-to-income (DTI) ratio. If the DTI limit is 43%, the calculation is:
- $7,500 × 0.43 = $3,225 per month
This means Sarah could potentially qualify for a mortgage with monthly payments up to $3,225, based on her average commission income over the last two years.
Prepare the Right Documentation
Documentation is everything when it comes to commission income. Make sure you have tax returns from the past two years, along with recent commission statements and any other proof of income. If your income varies significantly, providing a letter of explanation can help lenders understand why. Highlighting any steady or increasing trends in your income can make your case even stronger.
Tips for Strengthening Your Application
If you’re worried about qualifying, there are several things you can do to make your application more appealing. Making a larger down payment can significantly reduce the lender’s risk, making it more likely that your mortgage will be approved. Additionally, paying down existing debt can improve your DTI ratio, which will further strengthen your application.
Trust the Right Mortgage Broker for Guidance
The key to success for commission income earners is working with a mortgage broker who knows how to navigate unconventional income situations. Different lenders have different requirements, and an experienced mortgage broker will know which ones are more flexible.
If you’re a commission earner looking for help navigating the mortgage process, Maor Lavi at Superior Mortgage Lending is here to assist. Maor’s expertise as both a mortgage broker and lender ensures you get the best possible advice and loan options for your situation. Don’t let fluctuating income stand in your way—reach out today to find the right solution for you.
