Know how much of your bonus income applies towards your mortgage
If you make $200,000 a year and find that only $150,000 applies to your loan application, you may rethink the timing, structure, and size of your loan. Regardless of your profession, it’s likely that you make more money than your salaried or base income. To ensure as much of your income is accounted for during the loan application process, it’s imperative to understand the types of incentive income, how your eligibility will be considered, and how this could affect timing for obtaining the home of your dreams.
Incentive Income Types
There are three common types of incentive-based income: bonus, commission, and restricted stock units (RSU’s).
Bonus income represents performance-based or discretionary income paid in addition to your base income. Historically, this is the bonus you get each year based on your participation in reaching company objectives and goals. It is traditionally paid once a year but can be paid at different intervals and can be based on many factors.
Commission income, on the other hand, is your cut on a certain transaction, is based on your individual performance, and is typically paid out monthly. An example of this may be income from personal sales accomplishments.
RSU’s are a more modern way for companies to offer incentive compensation. They are often offered in lieu of a cash bonus, as units of equity in the company, and come with a vesting schedule that determines when you can convert that stock into cash.
Once you clearly define the type of incentive income you receive, we can consider how this might apply to your home loan application.
How Incentive Income is Considered
Incentive income is valid income that can be applied to your home loan application. For a lender to determine if your incentive income will be considered, three requirements must be met.
Firstly, and in most cases, a pattern must be established to prove you have a minimum of a two-year history at your current company or employer.
Secondly, the amount must be verified based on the pattern or trend over the past two years; if the amount earned over the past two years has increased, an average will likely be taken from the historical data over the past two years. Conversely, if the incentive income has decreased, only the most recent year will be considered.
Thirdly, it is imperative to prove it is likely to continue for three years or more by providing proof of your incentive salary for eligibility in your loan application. To recap, those steps are outlined below.
Steps to Earn Eligibility for Non-Salaried Income
- Establish History (2 Years)
- Amount, Trend & Consideration
- Eligibility Proof (3+ Years)
Considerations for Your Scenario
Because a two-year, established pattern or history is required, a new job or an increase in pay within the last year may not generate the type of qualifying income you may expect.
For example, if you have been at the same company for six years but just recently got a promotion, your new commission amount will likely be the average of the past two years rather than the amount you’re earning now, unless your company could offer proof that your commission structure would continue to be at the new amount or increase.
For this reason, even if you’re making more income overall, it may benefit you to wait until you have two years proof with this higher income structure to apply for the loan. Additionally, if your bonus commission decreased last year, it may help to wait until this amount increases before applying for a home loan.
Due to these factors, it’s important to consider how much history you have with your existing company, the trend of the amount you’ve received in the past year in incentive income, and ensure you have proof of these funds through your employer.
Incentive Compensation Competence
In summary, incentive income is any income outside your consistent salaried pay. Knowing the type of incentive income, how that type of income is considered, and what scenario you may be facing, you’re equipped to make sound decisions when applying for a home loan.
All non-salaried pay can help you qualify for a larger home loan but is subject to approval for use. You must establish a two-year history, consider the trend of earnings, and prove eligibility for the next three years. Based on these factors, you may choose to wait for more earning history to get approval for a higher loan amount. We recommend analyzing these three factors in advance so that you can time it right and get the amount that fits your needs.
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