How to Qualify for a Mortgage With Commission Income

Mortgage Underwriting Guidelines for Commission Income

This article teaches you how to qualify for a mortgage when you are on commission.

 

There are special rules for commission income when applying for a mortgage:

  • These rules apply to anyone who earns at least 25% of their compensation from commissions.
  • In general, you must earn commission income for at least two years to use it for mortgage qualification. But there are exceptions.
  • Because commission income is variable, lenders average it according to certain rules.

Mortgage lenders must adhere to the Ability to Repay (ATR) rule when underwriting. That means they must make sure that borrowers can afford the loan before they approve it.

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Time on the Job for Commission Income

This is hard to predict for those who are self-employed or who earn a lot of bonus or commission income. For this reason, most lenders want to see at least two years of commission income before they are willing to count it on a mortgage application.

In some cases, applicants may qualify for a mortgage with 12-24 months of commission income. If you did the same job as a salaried employee before switching to a commissioned position, for example, and your income is the same or better, you have a good case for counting your commission income after just one year.

Commission Income Documentation 

When you qualify for a mortgage with commission income, you must supply a pay stub with year-to-date income and W-2 forms for at least two years.Alternatively, the lender can request a Verification of Employment (VOE) form from your employer to get a breakdown of your commission and other income and to make sure that your employment will continue. Your lender will probably also contact your employer before closing your loan to verbally verify your employment.Your lender will probably also want your tax returns. That’s because many commissioned salespeople write off unreimbursed business expenses. Those write-offs are deducted from your qualifying income when you apply for a mortgage.Your lender may order an income tax transcript from the Internal Revenue Service (IRS) to make sure that the income on your tax returns matches what you reported to the IRS.See today’s mortgage rates. 

Commission Income Calculation

What is the Importance of Fixed Commission Income

Commission income usually varies from month to month, so mortgage lenders generally average it over the most recent 24 months to come up with a monthly amount.

If you earn commissions monthly, the lender adds up the most recent 24 months of commissions and divides by 24 to get a monthly average. If you earn them quarterly, your monthly income is the most recent eight quarterly payments divided by 24. And if you get your commissions annually, it’s the last two payments divided by 24.

The stability of your income also matters.

  • Your lender uses the two-year average if your commission income is stable or increasing.
  • However, if the income trended lower and then stabilized at a lower amount, the lender uses the lower monthly commission income.
  • And if commission income is trending lower and not stable, the lender will investigate further. Underwriters may give you credit for the most recent, lower amount, or even less than that. Or the lender may decline your loan altogether.

If the most recent commission figures don’t accurately reflect your future income potential, it’s up to you and your loan officer to make your case. If you have a ten-year history of up and down earnings, for instance, a recent downturn might be less of a concern. Additional tax returns or a letter from your employer could reassure a lender.

FHA Commission Income Calculation

The FHA allows commission income for mortgage qualification if you earned the income for at least one year. You must be in the same or similar line of work. And it must be reasonable to assume that the work will continue.

The Federal Housing Administration calculates commission income by using the lesser of either:

  • average commission income earned over the previous two years for commission income earned for two years or more, or
  • average income over the length of time commission income has been earned if less than two years; or
  • the average commission income earned over the previous one year

This means if you’ve earned commission income for two years or more but your most recent income is lower, the underwriter will use the average monthly commission income for that year.

What are unrepaid expenses

Ask an Expert

Qualifying for a mortgage with commission income can be complicated. Contact us at GCA Mortgage Group at 262-716-8151 or text us for a faster response if you have further questions about this topic. Or email us at [email protected] The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.

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