One of the biggest factors lenders use in qualifying potential home buyers is income. When coupled with credit scores, income is critical in reducing the risk for the lender which in turn gives the buyer better terms, lowering costs. For most borrowers, income is a steady paycheck every few weeks, but for others, a sizable portion of their annual income comes from commissions or bonuses. Understanding how a lender applies this income to the qualifying criteria will help potential borrowers avoid frustration and successfully get a loan.

The main concern lenders have when evaluating risk is the consistency of the borrower’s income. Commissions and bonuses are variable, and lenders want to be assured that the income will continue. The first thing a borrower can do to reassure the underwriter is to offer strong documentation. People in the sales profession, for example, should be able to provide years of documented commissions. This shows a record of consistent commissions. Bonuses can be treated the same way.

For those who’ve recently started receiving commissions, lenders may limit the amount they use in determining income. Lenders are typically looking for two years of history to establish a pattern of earnings. They may ask for a letter from the employer to outline the commission and bonus structure.

The best strategy for those looking to get a home loan with  variable income is to plan. Provide strong and complete documentation up front. Maintaining excellent credit will also demonstrate stability. Lastly, prequalification becomes even more important for those who have commissions or bonuses as part of their income. Lenders may limit the amount of these variables when determining a maximum loan amount; knowing this upfront is important to understand before home shopping.