How Much House Can I Afford with on a Sales Income?
/Buying a home can be a challenging process, even if everything goes smoothly. Throw a few complicating factors into the mix, and it doesn't get any easier. Being a sales professional can be one of those complicating factors when it comes to acquiring a home loan. I’ve experienced this both personally and professionally. Let me shed some light on the process of getting approved for a home loan and then give some guidelines on how much you can afford.
Be Prepared
After getting your finances in order and deciding that the time is right to buy a house, you will need to connect with a mortgage lender to walk through the pre-approval process. A mortgage lender can help determine the best type of home loan based on your circumstances. At this stage, there is no harm in talking with multiple lenders to figure out which company can give you the best rate and provide the best client experience.
Mortgage lenders prefer to see 2 years' worth of tax returns from individuals with a steady income, but often give more flexibility due to the consistency of their income. For those with a variable income, it will most likely be a requirement to provide 2 years' worth of tax returns to even be considered for a loan. Having these forms ready ahead of time, can help you expedite the process.
Don’t Get Caught Up in the Potential
When going through the pre-approval process, lenders will give you a conditional letter of approval for the highest amount that you’re able to borrow. In many cases, that amount will put you into a house that you cannot truly afford. You should have an idea of the monthly payment you are hoping to lock in, before beginning this process. If you haven’t done so yet, now is the time to run the numbers and settle on a payment that mathematically makes sense based on your income. A good mortgage professional can and should assist you in this process.
How Much Can You Actually Afford?
How much house can you actually afford, then? There are different schools of thought on this topic, but I believe that your mortgage payment should be less than 25% of your gross monthly income. Keep in mind that this is a top-end number, and the lower your monthly payment, the more flexibility you give yourself down the road.
Now, with a variable income, 25% becomes a harder number to pinpoint. As mentioned in my post “How to Budget on a Sales Income”, if you have a salary component of your income, I would recommend using 25% of that number assuming you have a decent base pay. This will give you confidence that you can make your payment regardless of job performance. It can be easy to incorporate your commission into this amount, but I recommend against doing this as it exposes you to unnecessary risk.
For those working solely on commission, I recommend finding your number by averaging your income over the span of 3 years, or longer if possible. Using your commission structure can be a good element to incorporate as well. Not every year will be a down year, but my goal is to protect you if it is. Calculate your income if you were to hit 75% of your sales target and assume that to be your yearly income. Incorporate this into your 3-year average and take your 25% from that number. This creates a small buffer in your predictions for protection.
Have Confidence
There will always be a small level of uncertainty when working in sales. Often, that works in your favor, allowing for more income flexibility, but it's also important to protect the downside. Once you’ve been pre-approved and decided on a monthly mortgage that you can afford and are comfortable with, move forward in the home-buying process with confidence.
References
Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.