How Will 401k Contributions & "Commission part of Income" Affect Pre-Approval?

[jeff2017]

Info:

Spouse (soon to be engaged by eoy) - 2018 $65K salary (2017 was $62K, 2016 salary $60K). Her income is steady, with the same employer for 7 years now. Frugal since Day 1 and very much so a live below means type of lifestyle, both of us really fit that profile. She is deferring the MAX for her 401K this year, 2017 tried to add a lot at the end of year, I believe ended up contributing around $13K, and in 2016 did the minimum 6% to get the employer match of 3%. Solid credit score, 780s.

My income situation is a bit more complex, with same employer 6 years. My "salary" is $65K as well, but there is a commission component to my job. The last 3 years, after commissions, I have made nearly the same exact amount around $85K, but the commissions each year have come as follows - 2018 - EOY bonus of $20K, 2017 - 3 Bonuses in June, July, & November, and 2016 - 2 Bonuses in March & December... I'm deferring the max to my 401K this year, 2017 was the max, and around $12K in 2016. Solid credit score, 800. If you just look at my W2s, each year looks identical, but above is the full scoop.

How will lenders view these incomes during the pre-approval process? For example, for my spouse, will they say she makes $65K and subtract the 401K contribution to show her "lendable income" as $46.5? Will they dig into my income beyond the W2s and lend based on my W2 income ($85K) OR my $65K - 401K Contributions = $46.5? These things would greatly impact the figures.

We have no debt and will be looking to purchase a home in the next 12-24 months, so trying to get our education well in advance.

[fuzzy math]

Most lenders have a giant checklist that involves w2s, tax returns, monthly bank statements etc. They use those to verify that you didn't somehow fabricate income on a single form. They will have a very detailed picture by the time they approve you. With no debt and incomes totaling $140k you will probably be approved for something ridiculous like $600k. The biggest question is going to be what sort of down payment you have.

[nobody123]

You will be asked to provide tons of documentation (like explaining every deposit / withdrawal from your checking and savings accounts).  From what I remember, they looked at my 401k balance and counted the $50K potential loan as part of my liquid assets.  I think they also assume you could discontinue the 401k contributions if you really needed the money to pay the mortgage, so I wasn't penalized for it as far as how much money they would lend me.

Not sure about commission income vs. salary.  I think they just care about what's on the W2 to show an income history, but I never had to deal with commissions or explaining them on my pay stubs.

[patchyfacialhair]

Wife and I both have jobs that pay base plus bonus.

I told the loan officer just our base pay amounts, and we were still approved for something like 4x our gross pay including bonuses. So like 650k on 120k base income at the time. This was for a conventional loan in the US, 2017.

Our 401k balances or withholding %s were never discussed or disclosed, every piece of paperwork we signed reflected only the gross pay amount for each of us before bonuses.

I think the thought process behind this is that you can always decrease or stop retirement contributions to service a loan. In fact, the person maxing their 401k is probably even less of a risk compared to the average customer, since they're demonstrating good financial behavior.

[robartsd]

They can consider gross income from all sources. If you had wage only income, they'd probably just use the most recent year's gross wages; with less consistent income sources, they usually want to see more history of the income (perhaps using the lowest of the past few years rather than last year's total).

[jeff2017]

Thanks for all the responses and feedback. Will continue to read as much as possible to be prepared when the time comes in the next year or so.

[Michael in ABQ]

Up until recently I was 100% commission, though it was structured as a base of $30k but I made about $60k a year. I looked into a mortgage briefly as was told by two lenders that I would just need two years in that job to establish some history. My month-to-month pay didn't vary too much but I worked with some real estate brokers who could have wildly different income month-to-month or year to year. The commission on selling an million apartment complex is in the tens or even hundreds of thousands but might only occur a few times a year. On the other hand if you're leasing retail or office space you've got a lot smaller commissions but more frequently.

[Acastus]

The simplest way to understand this is, the bank wants to know your income. They don't want to try to get blood out of a stone. If you have variable income, such as commissions, overtime, bonuses, or seasonal swings, the bank only counts it if you can show that it is reliable. If it is not guaranteed, but you got roughly the same amount for the last few years, it counts. If it was one time or it got slashed one year, it will not count, or they will give you a partial.