Can you get a home loan when you’re being paid commissions?

Many Aussie salespeople earn a commission on the products or services they sell, which is calculated as a percentage of the total value of the sales. Commissions can vary for several reasons, such as changing seasonal demand for products or difficulties hitting sales targets.

For this reason, mortgage lenders may consider sales commissions to be irregular income rather than guaranteed income. While they may accept your home loan application, they may also ask you to consider borrowing a lesser amount. However, by submitting easily verifiable proof of your income, and illustrating your ability to repay the loan, you may be able to get the loan amount you require.

How do lenders consider commissions when reviewing a home loan application?

For most mortgage lenders, commissions are seen as non-standard income, as you may not receive a regular fixed salary. This is most commonly the case with salespeople, who could be selling anything from computers to homes to cars.

Depending on the product or the service you’re selling, you can earn significantly different commissions. For instance, a real estate agent earning a 2.5% commission could make $12,500 for selling a house for $500,000. On the other hand, if you earn a 5% commission on selling computer parts for $10,000, your commission income will be $500. 

Your total earnings over time can vary based on the number of sales achieved. The amount you earn in commissions can also increase with your experience as a salesperson, as your commission may increase over time. In some cases, you may even get a bonus or retainer if you can achieve specific sales targets.

All these variations may not be easily understood by a lender whose concern is only about your ability to repay the loan. If you have two years’ worth of tax returns, demonstrating how your commissions, bonuses and other benefits translate into income over time, lenders may consider your home loan application more favourably.

There are other ways you can make it easy for a lender to approve your home loan application. When buying a house with commission-based income, saving up and putting aside the cash for your deposit in a separate savings account, even for a few months, can help illustrate to lenders your ability to repay a home loan using “genuine savings”. Similarly, avoiding accumulating too much debt or repaying any debts you owe could help prove to a lender that you have the borrowing power for the loan. 

What income documents do I need to submit as proof of commissions?

Your income documents are possibly the most critical part of your home loan application, and submitting the right ones can help speed up lending decisions. For this reason, lenders specify a list of documents they most prefer, along with suitable alternatives. However, the documents you can submit depends on the nature of your employment.

Many salespeople are categorised as commission agents and not salaried employees, meaning you may not be receiving PAYG payslips. If commissions are only part of your income as an employee, you may still receive a payslip you can use as proof of income.

Whether or not you receive payslips, you’ll still need to file tax returns which can then be submitted as proof of your earnings. Lenders may ask you for at least two years’ tax returns to check if your income varies significantly from year to year. Some lenders may just consider your most recent taxable income as the amount you’re likely to earn. Other lenders may calculate the average of your income for the past two years. And in some cases, lenders may consider the lowest amount you’ve earned as a more reliable estimate of your income.

Lenders may allow you to submit other documents if you don’t have two years’ tax returns. These include a letter from your employer or the company you’re working as an agent for. If you’re earning commissions while self-employed, you can apply for an alternative documentation or ‘alt doc’ home loan. You can then submit either your tax returns or an accountant’s letter.

These certify that you’re earning commission income, including a summary of your sales targets and realisations for the past few months. However, lenders may limit your loan amount if you apply for an alt doc home loan.

Document options for commission-based income earners:

When you apply for a home loan, not all of your commission income may be considered by many lenders. The more supporting documentation you can provide, the more confidence a lender may have in your income’s reliability. For instance, if the documents you submit only help the lender confirm your earnings for the past three months, they may only consider 80% of your commission income when calculating your borrowing power.

How much will lenders let me borrow if I earn only commissions?

Most lenders express the amount you can borrow with your home loan as a percentage called a Loan to Value Ratio (LVR). Essentially, it’s the total amount of your loan as a percentage of the value of the property you are purchasing.

The most common LVR for a home loan is 80%, which means you need to pay 20% of your home’s value as the deposit. But depending on a lender’s estimate of your income, they may approve a loan up to 95% LVR if you also have an excellent credit rating.

You may have a lower interest rate on an 80% LVR home loan, and you will not need to pay for Lender’s Mortgage Insurance (LMI) either. LMI is a policy that covers the lender’s financial losses if you’re unable to repay the home loan. A 95% LVR home loan may require you to pay for LMI, unless you can ask someone, like your parents, to go guarantor on your home loan. In some cases, you can even borrow 100% with a guarantor home loan, without paying LMI. 

On the other hand, if the lender feels your income cannot be fully verified, they may only approve a 60% to 80% LVR home loan. This is often the case if you’re applying for an alt doc home loan.

You can negotiate with the lender to borrow more and possibly pay for LMI, though the lender could look at your average income over the past year and decide that it doesn’t give you enough borrowing power. You may need to check with other lenders or speak to a mortgage broker to help you get your application approved.

Can someone earning commissions qualify for special home loan deals?

No matter how irregular and variable your commission payments, they’re still a perfectly acceptable source of income. However, it may take you some effort to get the right documents to prove this to a lender and ensure that they consider your entire earnings as valid income. Further, getting a suitable home loan deal may also require you to have a high credit score and a healthy credit history showcasing your ability to make debt repayments. 

Some lenders may offer you a lower interest rate if your income is above a certain amount and your credit history is excellent. An excellent credit rating and regular commission payments may help you qualify you for a loan with 90% LVR or higher without paying LMI. 

If you’ve had any repayment issues that have affected your credit score, it could be good to build up your score again before applying for a home loan. Also, getting someone with good financial standing to go guarantor on your home loan could help ease the process. This way, you may be able to get a home loan with an LVR up to 100% approved, with lenders waiving the LMI requirement on your guarantor home loan. 

A little homework can help you get better home loan deals. Things like checking how different lenders may estimate your income and if they include income besides commissions. If you’ve recently taken on or are planning to take on more work to earn more commissions, you should discuss that with the lender.

Setting aside some money from your income may be useful in showcasing to lenders that you have a strategy for repaying the home loan. You can then use these savings to pay the deposit. Also, if you’re currently repaying other debts or loans, consolidating or refinancing them may help improve your borrowing power. 

What to look out for when applying for a home loan with commission income

As someone earning commissions, you should keep in mind that your home loan application may be scrutinised more thoroughly than someone on a traditional salary. You’ll therefore need to prove quite clearly that you have sufficient income, savings, and borrowing power to repay the loan.

However, you may still face some situations which can make lenders unwilling to approve your loan or offer you your preferred loan size. Some situations could include if you’ve been earning commissions for a fairly short time or have switched employers recently.

If you fall into one of these cases, you can either look for a lender who’ll accept your combined work experience with past employers, or a lender who’ll allow you to submit alternative documents as proof of your income. Some lenders might opt to estimate your income using their calculations even when you submit your tax returns. And they may not always include your entire commission income in their estimate.

You could ask lenders about their income estimation method before applying for a home loan with them. A mortgage broker can also help you navigate various lenders’ policies and find you the most suitable home loan.

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