When applying for a home loan, one of the key factors that lenders consider is the borrower’s income. Along with credit scores, income plays a crucial role in reducing the lender’s risk and improving the terms for the borrower. While many borrowers rely on a regular paycheck, others may receive a significant portion of their income from commissions or bonuses. Borrowers need to understand how lenders assess this type of income in the loan qualification process to avoid potential frustration and successfully secure a loan.
Lenders are primarily concerned with the consistency of the borrower’s income when evaluating risk. Since commissions and bonuses can vary, lenders want to ensure that this income will continue. To provide reassurance to the underwriter, borrowers can start by presenting strong documentation, such as years of documented commissions for those in sales. This demonstrates a consistent earning pattern. Similarly, bonuses can be handled in the same way. For individuals who have recently started earning commissions, lenders may limit the amount of income considered in the loan qualification process.
Lenders typically look for a two-year history to establish an earnings pattern and may request a letter from the employer outlining the commission and bonus structure. For borrowers with variable income, the best approach is to plan and provide comprehensive documentation upfront. Maintaining an excellent credit score also helps demonstrate financial stability.
Finally, prequalification becomes even more essential for individuals whose income includes commissions or bonuses. Lenders may cap the amount of these variable components when determining the maximum loan amount. Potential homebuyers need to be aware of these limitations before house hunting.
