How to Buy a House if I Work on Commission

When you apply for a mortgage, you have to prove to a lender that you can afford to repay the loan. This can prove difficult if your wages mainly come in the form of commission, as you may not have a steady level of income. Lenders use a calculation called a debt-to-income ratio when underwriting loans. Your DTI ratio shows how much of your income you spend on debt payments, including the proposed mortgage. Lenders typically do not approve loan applications for people with DTI ratios in excess of 50 percent. However, before your lender can even tabulate your DTI you must first substantiate your income.

Ask your lender for a verification of employment form. Government-backed mortgage enterprises like Freddie Mac and Fannie Mae require your employer to complete this form during the underwriting process to prove that you are currently employed. If you are buying a home, your lender must send the form directly to your employer, but if you are refinancing, you must take take the form from your lender to your employer and return it once your employer has signed it. The form confirms your employment but does not include details of your wages.

Complete a T-4506 federal tax form. You can obtain this form from your lender, and you must include your personal information -- such as your name, address and Social Security number -- on the form. You sign the form to give your consent for your lender to obtain transcripts of your last two years of tax returns from the Internal Revenue Service.

Print out copies of your last two years of tax returns. Most lenders require you to provide your copies of your returns as well as giving your lender permission to obtain your transcripts directly from the IRS. As a commissioned employee, you can only qualify for a loan if you have two years of steady income. You could therefore not qualify on your commission-based income if you made a lot of money last year but made little or nothing in the current year.

Give your lender evidence of any other sources of income that you have, such as award letters to substantiate pension income or lease agreements to substantiate income from rental homes. You must also give your lender at least two months of bank and investment account statements to prove that you have sufficient cash reserves to cover the closing costs and down payment. If you apply for a loan backed by the Federal Housing Administration, you can use gift funds from a relative to cover your down payment but you must provide documentary evidence, such as bank statements, to prove that your relative has these funds.

Give your lender your consent to check your credit. If your lender approves your application, you can then enter into a purchase agreement with a seller. You must give your lender a copy of the contract and your lender finishes the loan process by ordering a home appraisal.

Tips

  • Some people who largely rely on commissions and bonuses apply for stated-income loans rather than conventional loans. Due to high levels of foreclosures during the recession that began in 2007, few banks now offer stated-income loans. Industry experts disparagingly refer to these mortgages as "liar loans" because nothing prevents loan applicants from exaggerating their income levels. Despite the negative press that these loans receive, stated-income loans do provide an option for people who lack two years of steady income. However, interest rates on these loans are typically higher than on standard loans.

    If you cannot qualify for a loan by yourself, you could ask a friend or relative to co-sign on the loan. If you co-sign on a loan, the debt appears on your credit report and if the loan goes into default or even foreclosure, the loan could cause severe damage to both the principal borrower's credit score as well as your own credit score.

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