Advice on Getting Approved for a Mortgage When On Commission or Self Employed

By Gina Pogol
Mortgage Credit Problems Columnist

Anonymous in Oregon Asks:  I work on commission and had been with the same company for about four years. I now work in the same capacity for a better company, and I get paid more, too. My credit isn't bad, but I have been turned down more than once for a loan that I should easily qualify for. I was told even though I have been in the same industry that I need to be at my new job for at least 18 months. Is there a way around this?

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Gina's Answer: I'm going to have to assume that you don't have bad credit or asset issues and that this is your only problem. We'll address this together. Here goes:

Fannie Mae Is a Material Girl
FNMA lender guidelines require more than the promise of higher income when you earn commissions. Her underwriters prefer the "cold hard cash" of a boring old salary. When you got a new job, did your commission structure change? It makes an enormous difference with lenders how much of your pay comes from commission versus salary. Underwriters' requirements differ significantly for those who earn 25% or less from commission (for example sales managers), and those who earn more, like most real estate agents and stockbrokers. So if you have changed from a customarily salaried position to more of a sales job (however well-compensated you are), that four year history isn't going to be as helpful as four years of selling cars or cosmetics.

Lenders Want Everything but a Saliva Sample and Fingerprints
If you have switched to a commission-based income structure and are successful, you'll probably make more--but that extra money comes with extra risk, and lenders know it. According to FNMA Desktop Underwriting guidelines, this commission income is scrutinized more closely than your W-2. "The lender must determine that the stated net commission income used for qualifying purposes is reasonable based on the borrower's occupation, tenure, and title." In addition, lenders can be as strict as they like when determining how much documentation they need to calculate commission income. From their viewpoint, a 100% commissioned salesperson is pretty much a self-employed person. So you may be treated as a new business owner, not an old employee. You could be asked for:

  • A check with your new boss. They won't believe him anyway but they'll call.
  • One year's personal federal income tax returns (showing not only the commissions but also the related expenses). You're lucky if this is all they want.
  • Two years' personal federal income tax returns and all other documents, most likely. Same as the requirements for self-employed borrowers. And if the income is trending down, you may have a hard time getting approved. Your big advantage is that you are making MORE. That's great!

Remember the IRS: It Giveths and it Takeths Away
Most salespeople also incur work-related expenses that get listed on Form IRS 2106. Lunches, golf games (those ARE for business, right?!), suffering through conventions in Hawaii, etc. The good news is--if those expenses are high enough, you get a nice deduction on your taxes. The bad news is those expenses are also deducted from your income when qualifying for your home purchase. And that's why your lender wants to see all those tax returns and a business track record.

FHA Is Not a Gold-Digger
FHA underwriters won't disallow your new income just because it's part or all commission. Of course, the longer you have had your current, higher-paying job, the more weight it is given in the calculations. They just want to see two years' of similar jobs/occupations.

Here's what HUD says: "This income must be averaged over the most recent 2-year history by analyzing the borrower's tax returns. Current pay-stubs must also document the fact that commission is being currently received by the borrower. In addition, when reviewing the tax returns, any un-reimbursed business expenses must be subtracted from the borrower's income before the 2-year average is computed."

Don't Go to Work for a Crummy Company
HUD also refers to the self-employed guidelines for more information. FHA wants data for the two most recent tax years (which is good for you if your income has increased) plus your YTD statements (probably a pay stub and unreimbursed job-related expenses, easy to come up with). And finally, "The financial strength of the business and the economic forecast for the type of business must be analyzed. Annual earnings that show stable or increasing income are acceptable. Earnings that are declining are to be considered unacceptable." So if you just went to work at AIG you might be out of luck but otherwise you should be okay.

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