Understanding Bonus and Commission Income in Mortgage Loans
Navigating the mortgage loan process can be challenging, especially when your income includes components like bonuses and commissions. Whether you earn extra income for meeting sales targets or through performance incentives, understanding how these earnings are evaluated for mortgage loans is essential for a smooth application process.
What Are Bonus and Commission Income?
Bonus income is typically awarded for reaching or exceeding performance goals, while commission income is earned as a percentage of sales or deals closed. These types of income are common in industries such as sales and finance. Unlike fixed salaries, bonus and commission income can vary from month to month, but many lenders recognize their value when a consistent history of these earnings is demonstrated.
How Bonus and Commission Income Affect Your Mortgage Loan
Lenders assess bonus and commission income to determine your overall financial stability and ability to repay a mortgage. Here are some key points to consider:
Documentation is Key: Lenders usually require thorough documentation, such as recent pay stubs, but also year-end paystubs to show the annual breakdown of these income types.
Establishing Consistency: A solid track record—most loan programs will require, at a minimum, 12 months history of receipt of bonus or commission income. They also evaluate them independently so 6 months of bonus + 6 months of commission does not = 12 month history of either. Be sure to have a loan officer review your situation!
Underwriting Considerations: During the underwriting process, lenders will calculate an average monthly income from your bonus and commission earnings. They may use conservative estimates to account for any fluctuations, ensuring that you can comfortably manage your monthly mortgage payments even in less lucrative months. This means if the commission income is decreasing over the previous 24 months, they will likely use the most recent 12 months. If it's increasing over 24 months they will take the 24 month average. They are always conservative when using these income types.
Tips for Borrowers with Bonus and Commission Income
If bonus and commission income make up a significant portion of your earnings, consider these tips to prepare for your mortgage loan application:
Keep Detailed Records: Maintain organized records of all your bonus and commission earnings. This includes pay stubs, detailed commission statements, and copies of your W2s. Well-documented income can speed up the verification process and give lenders confidence in your financial reliability.
Demonstrate Consistency: This is easier said than done, but lenders prefer to see a consistent income history. Even if your bonus or commission amounts vary, a steady stream of earnings over several months or years will work in your favor.
Communicate Clearly with Your Loan Officer: Make sure to discuss the nature of your bonus and commission income with your loan officer early in the process. Clear communication can help you understand what documentation is needed and ensure that both you and your lender have aligned expectations.
Plan for the Future: While past performance is important, consider whether your income structure is likely to remain consistent in the future. If you anticipate significant changes, discuss these with your loan officer to determine how they might impact your loan eligibility.
Final Thoughts
Understanding how bonus and commission income is treated in the mortgage loan process can empower you to take charge of your financial future. By keeping thorough records, establishing a consistent income history, and communicating effectively with your lender, you can better navigate the mortgage application process and work toward achieving your homeownership goals.
If you have questions about how your bonus and commission income might affect your mortgage loan application, or if you need help gathering the necessary documents, don’t hesitate to reach out to a mortgage professional. They can provide personalized advice tailored to your unique financial situation.