It happens all the time where someone builds up the nerves to venture from an hourly or salaried position into a partial or full commission income job. 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 it is hard to buy a home with less than 2 years of commission income. Even homeowners looking to refinance with commissioned income have qualifying issues.
Negatives About Commission Income and Mortgages
The first negative is an underlying potential issue that could rear its ugly head during the mortgage process. First, there are unreimbursed employee expenseson the tax returns. If there are URE’s, 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 are averaged over a period of time. Using expected future, potential commissions cannot be used because sufficient history is required. So, brand new commission income cannot be counted for insufficient history.
Less Than 2 Years of Commission Income?
Fortunately, we have a couple potential 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. Although, if the borrower reports unreimbursed employee expenses, it will reduce the income.
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. Therefore, it is possible to buy a home with only 1 year of commissioned income! 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
We 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 Commissioned 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 have stepped 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 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. Receiving an approval for a conventional loan with less than 2 years history may be a little more difficult than FHA. Additionally, conventional loans are 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.
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