Applying for a mortgage with commission and seasonal income

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I’m turning 30 and I’m just starting the search for a first house purchase. My first meeting to determine my borrowing power was discouraging. I could put as much as $50k down, and have a great credit score. However, I have a new job in sales, and mortgage providers cannot use any commission as income until I have two years of history, and will only count my base salary of $40,000. This leaves me looking for a $150–200k condo. Am I stuck until I have 2 years’ worth of commission?––Thirty, Flirty, and Trying to Buy

Dear Thirty,

Turning 30 is a big milestone, so I can understand wanting a house to start your new decade with a bang (and a shiny new key). But there’s no shame in the renting game, and depending on where you live, it could be a savvy financial move.

We covered the prerequisites of home-buying last August, but let’s talk about what mortgage lenders look for in potential borrowers:

• Credit score. Mortgage lenders look for a score of at least 620, but this can vary depending on the type of loan. The higher your score, the cheaper your mortgage interest rate will be. You’re already in a good spot here—nicely done!
• Your debt-to-income ratio (DTI). This is calculated by adding up all the minimum payments on your debts and dividing by your income. Since your potential lender is only counting your base salary, this will increase your DTI. Most lenders want you to have a DTI of about 40% or less once your mortgage is part of your debt obligations.
• Consistent and stable income. On the question of whether you need at least two years of income, it depends, said Samir Dedhia, interim CEO of LemonBrew (no relation to Morning Brew!): “When a lender takes a loan, they [usually] end up selling it.” It can go to Freddie Mac, Ginnie Mae, or Fannie Mae. While two years’ worth of commission income is desirable, lenders who work with Fannie Mae as a secondary lender could potentially make one year of commission income fit within their guidelines.

It also pays to shop around and to see if there are first time homebuyer programs you qualify for. Not only could you get approved for a bigger loan if more of your income is considered, you could also get a cheaper rate.

If your lender allows one year of commission income, you may be in a good place to buy in the next 12 months. But the average age of first time home-buyers last year was 36, so even if you need to hold off for the time being, you likely would still be ahead of your peers. If you decide to wait, keep up your healthy credit habits to maintain (or even increase) your credit score, build up your savings, and stay out of the unemployment line, if you can help it.—Myriam