Optical Illusions are great at magic shows, but terrible when it comes to your finances. I am going to tell you the story of a client whose income had two parts – salary and commission. The rule for calculating commission income is a two year average.
I got a referral client that needed to get a loan, because he was previously turned down because of a low credit score. What made the situation so stressful is that he had his house on the market and was already under agreement on another property.
Wanting to get the quick facts, I ask whats your income, credit, and down payment. He indicated about 200,000 per year, 690 plus credit score score, and a 20% down payment – which would have qualified him with the bank. I proceeded with a loan application.
During the process, I discovered he switched jobs in 2012. His previous job had a high base pay with low commissions. His current job had high commissions with low base pay. Sadly, his qualifying income is that low base pay and an average of his commission of the previous two years (which will not support both properties). In other words, his qualifying income is less than he made in each of the previous two years.
My advice is the following when you apply for a home loan:
- Explain. You must tell the bank how you get paid.
- Accuracy. Know when you started and left your current job.
- Review. Go over all the facts of the mortgage application.