When applying for a home loan, it’s assumed that things like your current debt, credit score and your debt-to-income ratio will be taken into consideration. Alas, that’s not always the whole story – especially if you’re on a commission-based income.
That’s not to say that you can’t get approved for a mortgage when you’re on a commission-based income or similarly self-employed, but there’s more to it. Lenders love clients that are on a salary income because it’s much easier to verify the income for Fannie Mae, Freddie Mac or FHA. When you’re on a commission income it gets a little trickier, because there’s a bit more story to tell to underwriting and possible documentation needed to back it up.
For most of the major financial services, you’ll need a history of your commission income that goes back two years. This will be shown through verification with the employer, signed tax returns and recent pay stubs. These documents will prove that this method of payment has been consistent and will continue in the future. This is done to document the likelihood that this income will continue, and you’ll be able to afford your monthly payments.
While the 2-year rule is pretty standard, there are lenders (like FHA) who will give some wiggle room if you’re under the 2-year mark. For instance, we recently had a client who switched from a salaried position to a commission-based position. Since they were only in the commission-based position for 1 year, the more stringent requirements for Freddie Mac and Fannie Mae made a conventional loan out of the question. If it had been 18 months, there could have been some opportunity, but one year wasn’t enough for them to approve.
FHA typically wants two years as well, but they will consider as little as one year with substantial compensating factors. In this case, our client was willing to put down a large down payment on the home. By putting down 25% instead of the typical FHA down payment of 3.5%, our client had enough of a compensating factor for them to allow it to go through. That’s not to say that you’d have to put down such a large down payment to be considered a compensating factor, but the more you can prove your strength as a borrower to underwriting, the better your chances of approval are.
Yes, it is easier to get a loan approval for a mortgage on a salary, but it’s good to know that there are guidelines and options for different incomes. Additionally, since it’s not as cut-and-dry as a salary, you’re going to need some help from experts, like the team at Accunet Mortgage. Unlike a lot of larger banks that only sell to Fannie Mae or that won’t do FHA, Accunet has the range to accommodate your situation with a complete line-up of loan products.