When applying for a mortgage, lenders assess your income to determine how much you can borrow. Typically, they calculate your affordability for a mortgage by using a multiplier of 4.5 or 5 for your annual income. However, not all incomes are straightforward, with commission payments, overtime and bonuses being common types of earnings.
So how do these irregular earnings affect your mortgage application? Do they increase the amount you can borrow or do lenders only consider your basic salary?
Can overtime, bonuses and commission be used for a mortgage?
The good news is that many lenders do consider secondary income types, such as overtime, bonuses and commission. They differ, however, on how they treat that income.
Lenders consider these types of earnings to be variable income and, therefore, less stable than a base salary. Regular payments, especially those with consistent amounts, are included by some lenders in your overall income. Others cap the amount that can be used in the affordability calculation, with some allowing no more than 50% but other lenders accepting higher percentages, such as 60% or 75%.
How lenders assess your variable income
Lenders look at different factors when assessing your variable income. This includes how frequently you receive the payments and the type of income those payments are for.
Frequency of payments
If the income is a one-off payment, it’s unlikely to be accepted. If payments vary considerably or are paid annually or every 6 months, lenders are more wary. For monthly or quarterly payments, though, lenders are more willing to consider it as they can see a consistent track record of this income.
Type of income
The type of non-salaried income matters, too, with lenders taking different approaches to overtime, commission and bonuses.
Overtime
Regular overtime is considered by most lenders. They take into account how often you receive it, the amount of overtime that you earn and whether it’s guaranteed in your profession. Irregular overtime, on the other hand, makes lenders more cautious. Depending on how much you earn and how often, they may not consider it or only accept a low percentage of it.
Commission and bonuses
Income from commission and bonuses is considered in a similar way, with regular payments often being included as part of your overall income. You usually need to show that you have earned commission for a minimum of 3 months. Lenders usually take an average of your commission, such as the amount earned on your last 3 or 6 months of payslips. Others prefer to take an average over a longer period, such as 12 or 24 months.
If your income is 100% commission-based, you can still secure a mortgage although you’ll have a limited pool of lenders to choose from. For annual bonuses, lenders tend to take an average over the last 2 to 3 years.
Proving your income
A lender’s main concern is that you have the ability to make your mortgage payments. A variable income that can arise from overtime, bonuses or commission can increase their risk. As such, they need to see proof of how often you receive these payments, how much of your total income they make up, if this income is guaranteed and how long you’ve been earning it.
Generally, lenders like to see that you’ve had a consistent track record of receiving these extra payments for 12 to 24 months. If the amount you’ve received has dropped from one year to the next, they will use the lower of the two amounts. If your earnings have dropped significantly from the previous year, they may not include the extra income at all.
Lenders typically need to see the following documentation:
- Payslips, usually for the last 2 years, that show the breakdown of your extra earnings
- Bank statements
- Your last two P60 forms or tax returns for the last 2 years
- A letter from your employer confirming that the overtime, bonus or commission income is stable and likely to continue as well as how it’s structured.
The more reliable your extra income, the more favourably a lender will consider it when calculating how much they’re prepared to lend you for a mortgage.
Make the most of your additional income
A strategic approach is needed when applying for a mortgage with overtime, bonuses or commission included in your earnings. That’s where we come in. Our experienced brokers know which lenders accept these forms of income and their levels of flexibility in using them. With access to the entire market, they can compare deals across the board, including exclusive deals that lenders don’t offer publicly.
Your broker will ensure you have the correct documentation required to prove your additional income and your case will be presented in the best light for a successful outcome. Give us a call on 01322 907 000 to maximise your borrowing potential with the right lender for your income structure.