When it comes to buying a home, one of the most crucial factors that lenders evaluate is your income. Coupled with your credit score, income plays a significant role in determining whether you qualify for a loan and what terms you'll be offered. Simply put, lenders want to minimize their risk, and one way they do that is by ensuring borrowers have a reliable source of income to cover their mortgage payments. The stronger your financial profile, the better the terms you can secure, ultimately reducing your costs over time.

For many borrowers, income is straightforward—it's the regular paycheck they receive every two weeks. But what about those whose income doesn't fit into this neat box? If a sizable portion of your annual income comes from commissions or bonuses, the qualification process can become more complex. Understanding how lenders view these irregular sources of income will help you avoid unnecessary frustration and position yourself for a successful loan approval.

Steady Income vs. Variable Income

Lenders prefer stability, so a consistent paycheck from a traditional salaried job is typically seen as a lower risk. However, not everyone fits that mold. Real estate agents, sales professionals, and many others rely heavily on commissions, bonuses, or even seasonal work to make up a large portion of their annual earnings.

If this sounds like your situation, it’s important to know that lenders usually look at your income history over the past two years to determine your average earnings. This means they'll scrutinize your tax returns and W-2s (or 1099s if you're an independent contractor) to calculate an average monthly income that they can use for qualifying purposes. If your commissions and bonuses are consistent year after year, lenders may consider them as part of your qualifying income, but if your income fluctuates widely, you may be viewed as a higher risk.

What Lenders Look For

When evaluating borrowers with variable income, lenders typically look for the following:

1. Consistency: They want to see a track record of consistent income over at least two years. If your income fluctuates significantly from year to year, it may raise concerns about your ability to make regular mortgage payments.

2. Documentation: Lenders will request extensive documentation to verify your income, including tax returns, W-2s, 1099s, and sometimes even letters from your employer. If you receive commissions or bonuses, be prepared to provide proof of this income and explain any significant variations.

3. Debt-to-Income (DTI) Ratio: Even if your income is irregular, lenders still use your average monthly income to calculate your debt-to-income ratio. This is the percentage of your monthly income that goes toward paying off debt, including your potential mortgage payment. The lower your DTI, the more favorably lenders will view your application.

Tips for Borrowers with Variable Income

If you rely on commissions, bonuses, or other irregular sources of income, there are a few steps you can take to strengthen your position as a borrower:

• Maintain Detailed Records: Keep thorough records of your income, including pay stubs, commission statements, and tax returns. The more documentation you can provide, the easier it will be for lenders to verify your income and assess your financial stability.

• Build a Strong Credit Profile: Since income is only one part of the equation, having a strong credit score can help offset any concerns about irregular income. Pay down debt, avoid late payments, and keep your credit utilization low to boost your score before applying for a loan.

• Consider a Larger Down Payment: If possible, a larger down payment can reduce the lender's risk and increase your chances of approval. It also lowers the amount you need to borrow, which can result in more favorable loan terms.

Work with a Knowledgeable Lender

Navigating the mortgage process can be challenging, especially if your income isn't as predictable as a regular paycheck. That's why it's crucial to work with a lender who understands your financial situation and can guide you through the process. A knowledgeable lender will take the time to explain how your commission-based or bonus income will be factored into the loan qualification process and help you explore different loan options that suit your needs.

At AF Realty Group, we work with a network of experienced lenders who specialize in helping homebuyers with diverse income sources. Whether you're a military professional, an independent contractor, or someone with fluctuating income, we're here to guide you every step of the way. Contact us today to learn more about how we can help you achieve your homeownership goals.