No matter your age, not everyone works a salaried job from 8 a.m. to 5 p.m. Monday through Friday. And just because you don’t work those hours, it doesn’t mean you don’t earn enough to pay your mortgage. So how will this impact your process of buying a home?
Lenders look at income in depth, the ratio of debt-to-income, but more importantly, the continuity of what the ratio is based on. So having a good understanding of how your varying sources of income impact your chance at getting a mortgage and buying a home will be beneficial when starting your home buying journey.
Jobs that are tip- or commission-based usually have a small base pay, if any at all. The base pay is what will show up on your current pay stubs, W-2, or other tax filing forms from each year, and this is what lenders will look at first and foremost.
If you work pretty consistent hours, your base pay shows the steady income coming in. Obviously in these sort of jobs you don’t really rely on the base pay, but more so on tips or commission. The good news is that lenders look at tips and commission as well. You just need documentation proving that you’ve been receiving such tips and commission for at least the last two years, which ultimately demonstrates the likelihood that it will continue.
Looking at commission is favorable, as long as it’s consistent and you HAVE to prove that you’ve been receiving this.
On the other hand, if you make most of your money “under the table” and it’s undocumented, then you won’t be able to use that to qualify for a loan, because lenders look at tax documents. So relying solely on tips or commission isn’t ideal, but there are also loan programs that look at alternative types of income documentation, which can be clarified by your mortgage banker for your specific situation.
There are also lots of freelance jobs out there on the rise. With the digital world continuing to grow and expand, you see more freelance jobs like blogging, building websites, and graphic design. These jobs don’t typically have a base pay when they’re freelance. So how does this affect your chances at buying a home?
For any freelance job done, you will most likely fill out a W-9 form to receive a 1099 by tax season, which will help show your income sources to a lender from your freelance jobs. With such forms, it will be good to keep taxes in mind. Although you made a certain amount, a portion of it will have to go towards income taxes. Since you’re not technically an employee of the company that you’re doing the freelance job for, they’re not required to withhold taxes for you; this would be your responsibility. Ultimately, this will affect your net income shown on your tax returns. There are lots of different ways that you can report your income, so make sure you consult with a tax professional.
Without these documents showing your income for the previous two years (whatever you report to the IRS), you will not be qualified for a loan. The NET amount is used because although you may bring in plenty of business, you may be writing off lots of expenses regarding your business. You also need to show the businesses’ consistency, so if the recent year had a severe decline from the year prior, then that may make things a bit more difficult.
The good news is you can have a freelance job lifestyle and still purchase a home, and you can also consider having a co-signer on the house. You just need to organize your documents and forms to prove your sources of consistent income for at least the last two years.
If you receive alimony, child support, interest on your investments, etc., then that can be considered another source of income to a lender, as long as you have the right documentation to prove that you’ve been consistently receiving this source of income and that the income will be continuous and won’t expire soon.
Lenders typically look at the consistency of your income versus the type of income. The right documentation will help prove that you have been receiving these sources of income and will continue to receive these sources of income. With that proof, you could be eligible to qualify for a loan as long as all other criteria are met, such as down payment, debt-to-income ratio, credit, etc. You can learn more about the requirements to qualify for a home loan over on the Atlantic Bay Mortgage Group blog or by contacting a mortgage banker in your area.