Use Bonus, Overtime, and Commission Income To Qualify for a Mortgage
Lenders allow you to use bonus, overtime and commission income to qualify for a mortgage.
Applicants with large but irregular pay, or ongoing non-salary pay, can leverage this income to qualify for a home loan.
Bonus Income
Bonus income can be counted toward qualifying income if you’ve received it for at least two years.
If you show that you’ve consistently received bonus income for that time period, you don’t have to take extra steps to verify that it is likely to continue in the future. The lender will typically use the past to predict the future.
The lender will examine how much bonus you receive and when you receive it.
Those who receive monthly or quarterly bonuses should be able to prove bonus amounts fairly easily. Here’s how a lender will calculate your income.
Salary | Bonus | |
Year 1 | $75,000 | $30,000 |
Year 2 | $78,000 | $31,000 |
Monthly | $6,500 | $2,541 |
Total Income | $9,041/mo | |
Note that the lender doesn’t need to average two years of salary. They will use your current level of pay. However, bonus is calculated based on the previous 24 months.
Make sure you tell your lender when expected bonuses are paid. For example, if you get a bonus once per year on June 1, but you’re applying in April, you won’t have any bonus income for the current year.
In this case, the lender will look at the past two June bonuses to calculate an average. You may need a letter from the employer stating bonuses are expected to be paid again in June.
Overtime Income
Overtime pay can be added to your regular income to qualify. The lender will average the previous 24 months of overtime income.
Overtime pay from a previous but similar job can be used. The lender will verify that amounts are consistent between the old job and new. If you get less overtime now, the lender will likely use the new lower level instead of the full 24-month average.
Here’s how a lender will verify consistent overtime pay.
Salary | Overtime | |
Year 1 | $60,000 | $22,000 |
Year 2 | $65,000 | $27,000 |
Monthly | $5,416* | $2,041 |
Total Income | $7,457/mo | |
*Note that base salary does not typically need to be averaged over 24 months.
If your year-to-date overtime pay doesn't match your average, write a letter of explanation stating when in the year you receive the most overtime. Overtime is seasonal for many workers.
Commission Income
Like bonus and overtime income, commission is considered variable income by lenders. In most cases, you need two years’ history to count it toward home loan qualification.
The lender will use the following calculations for the loan.
Salary: Current level of pay
Commissions: 24-month average
Documentation
Be ready to supply W2s, pay stubs, and a document from your employer that breaks out two to three years of payment history.
W2s, pay stubs, and tax returns don’t break out bonus, overtime, and commission income from salary. But lenders need to see those figures separately to correctly calculate them.
Most employers are willing to provide a verification of employment form that shows a history of all income types year-to-date and for the previous two years. Additionally, many employers subscribe to third-party services that provide such verifications. Lenders can often directly request these verifications from the third party.
Do You Always Need Two Years Of History?
For conventional loans, Fannie Mae says that bonus, overtime, and commission income may be eligible after 12 months of receipt.
However, your loan file must contain compensating factors such as great credit, a low debt-to-income ratio, or plenty of financial reserves.
As a rule, though, expect to supply the full two years of history.
Income Trending
Another thing to watch out for is how your bonus, overtime, or commission income is trending.
If it has declined in the most recent 12 months, the lender may disregard it. Sometimes, though, the lender can use the lower, more recent 12 months' income instead of disregarding the extra income.
See If You Qualify with Bonus, Overtime, or Commission Income
Extra income earned beyond base salary is a large part of many peoples’ paychecks. Luckily this can often be used to help them qualify for a home loan.
Apply with a lender to get a full income analysis for your mortgage.
