Commission Income & Mortgages
Commission Income Buyers Could Qualify for a Home in 1 Year!
It happens all the time where someone builds up the nerves to venture from an hourly or salaried position into a full commission income job. Often, if the person is good at what they do, the income potential can be much higher than a salaried job. But then you find out the negatives when you are considering a mortgage to purchase or refinance a home after becoming commissioned sales…
Negatives About Commission Income and Mortgages:
The first negative is an underlying potential issue that could rear its ugly head sometime during the mortgage process. If the borrower writes off unreimbursed employee expenses on the tax returns, they must be subtracted from the borrower’s income (but only if 25% or more income is from commission income). This can sometimes be a significant portion of the borrower’s income which could cause major debt to income issues. Also commissions must be averaged over a period of time. Often we will have a newly commissioned borrower who will state that their income “will be $6000”, “is $6000”, or “I am getting $6000” but when we dig further, this has only been for a couple of months which would be an issue since there has not been enough time lapsed to determine a solid average income.
Less Than 2 Years of Commission Income?
We have a couple great options for less than 2 years of commission experience. A lot of mortgage programs have the standard requirement of a 2 year history of receiving commission income. Otherwise it cannot be counted at all. Once you do have the 2 year history, the commission portion of the income must be averaged over the 2 year period. For instance, if the commission income portion of the borrower’s pay is $84,000 over a 2 year period, then the monthly figured used would be $3500 per month. But then if the borrower reports unreimbursed employee expenses like mentioned above of $24,000 on the most recent tax return, then the monthly income would only be $1500 per month.
Example Calculation for 2 Years of Commission Income with Unreimbursed Expenses:
- Total Commission over 2 years: $84,000
- $84,000 / 24 months = $3500 income per month
- Unreimbursed Employee Expenses = $2000 per month
- $3500 Income – $2000 Expenses = $1500 per month of allowed commission income on the application
But, what if you don’t have 2 years of history? FHA and a Conventional loan will potentially allow a borrower to have commission income verified for a minimum of 12 months. This can make a huge difference compared to waiting 2 years! The calculation would be done basically the same as the 2 year calculation except we would only average over the shorter period.
Example Calculation for 1 Year of Commission Income with Unreimbursed Expenses:
- Total Commission over 1: $42,000
- $42,000 / 12 months = $3500
- Unreimbursed Employee Expenses = $2000 per month
- $3500 Income – $2000 Expenses = $1500 per month of allowed commission income
Now if the borrower does not have unreimbursed employee expenses, then we should be able to use the average monthly commission income verified. The borrower above would be able to use $3500 per month of income on the application.
An important factor in being able to use commission income is that we not only provide sufficient history but also we must verify the likeliness of the commissions to continue. This is verified through a verification of employment form which we would order directly with the employer.
Purchase a Home with Less Than 2 Years of Commission Income
Team Move will do everything possible to figure a legal way to make a mortgage loan work. Sometimes there are circumstances like commission being less than 2 years. So we need to check out programs that meet our client’s scenario. Check out some success stories for commission income of less than 2 years below.
FHA Commission Income Success Story:
A buyer started working at a auto dealership as a full commission salesman and has made good money over a 13 month period. We confirmed that he did not report any unreimbursed employee expenses on his tax returns and received a verification of employment which broke down the commission income earned over the 13 months. The buyer was able to be approved for a low down payment FHA mortgage to purchase their new home. Many lenders are stepping out of the FHA lending arena, but we are still very strong in FHA loans. Our loan officers, processors, and underwriters are very familiar with how to make an FHA loan work for our buyers’ goals and situations.
Conventional Loan Commission Income Success Story:
A buyer approached us with only have a little over 1 year of commission income. But it was reporting on the previous year’s tax return. The buyer had been denied by several lenders for lack of history for the commissions. The buyer had over 5% of the purchase price for down payment so it worked very well to close a conventional loan using the 12 months of commission income. The conventional loan is typically a little higher rate than FHA and if a good credit score, the PMI is lower than FHA and it can potentially come off of the loan once under 80% of the price. See when PMI ends on mortgage loans.
- Unreimbursed employee expenses causing problems on your mortgage?
- Providing complete documentation for a quick and smooth purchase & mortgage process
Looking to purchase or rent a home? There are a lot of sources which include Craigslist, Zillow, Trulia, Realtor, and Homes. There are so many ways to finance a new purchase like today’s example. There are even great options for some buyers with excessive student loan debt. Read more of our helpful blogs here or follow our author on ActiveRain.
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Team Move is a part of OVM Financial with locations growing throughout the eastern seaboard.
Author: Russell Smith
Team Move OVM Financial loan officer success is Russell’s primary focus. He provides the tools and techniques he used as a top producing loan officer. Additionally he offers the Team Move OVM Financial Agent Training Program. Sharing is so important to Russell so he works diligently to be a resource to loan originators and Realtors.