How Do Underwriters View Commission Income For 1099 Wage Earners

Gustan Cho Associates are mortgage brokers licensed in 48 states

This BLOG On How Do Underwriters View Commission Income For 1099 Wage Earners Was UPDATED On April 28th, 2019

Just because a person is employed and is a wage earner does not mean that the income they earn will be taken as income in qualifying for a mortgage loan.

  • There are strict rules and regulations as to what constitutes qualified income by a mortgage underwriters
  • It is not the underwriter that determines if the type of income borrowers make can be used towards calculating income for qualifying for a mortgage
  • Income guidelines are strictly set by agencies such as HUD, VA, USDA, Fannie Mae, Freddie Mac
  • Mortgage Underwriters needs to follow the guidelines with the type of income that can be used or not used

Types Of Income Mortgage Guidelines

HUD, VA, USDA, Freddie Mac, and Fannie Mae has dozens of pages just dedicated to income guidelines. Income Guidelines covers everything such as the following:

  • part-time income
  • self-employed income
  • hourly income
  • salaried income
  • bonus income
  • social security income
  • disability income
  • unemployment income
  • royalty income
  • alimony income
  • child support income
  • pension income

Income Consistency Is What Underwriters Look For

The reason why underwriters are so strict when it comes to income is due to the fact that once they approve a mortgage loan, they want to make sure that they have a stable job. The income the borrower has been earning for the past two years will likely to be likely to continue for the next three years.

  • A good indicator borrower’s income will continue is by judging the employment and income history of the borrower’s past
  • How Do Underwriters View Commission Income is getting a verification of employment from employer stating that the likelihood of the borrower’s employment for the next three years is likely is required

How Do Underwriters View Commission Income On Hourly Versus Salaried Income

Borrowers who are hourly employees, the way mortgage underwriters calculate income is by the following:

  • Taking their hourly wage, multiply it by 40 hours
  • Then multiply it by 52 weeks
  • Then diving it by 12 months to get their monthly gross income
  • Salaried employee’s income is calculated by taking the annual gross salary and dividing it by 12 months will yield the monthly gross income
  • Bonus and overtime income can be used if overtime income has been seasoned for two years
  • Bonus income and overtime income is normally averaged
  • Verification of employment is required stating that the bonus income and overtime income will likely to continue for the next three years

How Do Mortgage Underwriters View Commission Income?

1099 wage earner or on commission income, the income cannot be counted as qualified income unless borrowers have had the commission or 1099 income for at least two years. Underwriter needs to verify that the likelihood of commission will continue for the next three years.

  • Unlike hourly and W-2 wage earners, mortgage underwriters want to see 24 months of continuous commission income and no gaps in employment on How Do Underwriters View Commission Income
  • For W-2 wage earners and hourly employees, they can have gaps in employment
  • If the worker has been laid off for 6 months or less and got a new job, 30 days of paycheck stub is all that is required from the new job to qualify for a mortgage loan
  • If the worker has been unemployed for six or more months, borrowers needs to hold the new job for at least six months in order to qualify for mortgage
  • This case does not apply for 1099 wage earners or commissioned wage earners
  • Two continuous years of employment is required

What If You Had Multiple Commission Jobs During The Past Two Years

Borrowers with 1099 or commission wage earner in the past two years but had more than one job, commission and/or 1099 income can be used if they were employed in the same field.

  • For example, a borrower who was a car salesman at Honda, Chevrolet, Ford, and most recently got a job at a Toyota dealership, the commission income can be used

How Is Commission Income Calculated?

If borrower had similar commission income in the past two years and current year to date commission income is in line with previous years, then the mortgage underwriter will average overall commission income.

  • If most recent year commission income was substantially lower than the prior year commission income, then the lowermost recent commission income will be used for qualified income qualification
  • Borrowers with job that is part salary and part commission and have been on the job for less than two years, only the salary part can be used as qualified income
  • Cannot use commission and/or bonus income unless they had a history of getting commission and bonus income for at least 24 months

Going From Commission Income To Hourly Or Salaried Income

Home buyers who are 1099 or commission wage earners for many years but just got an hourly or salaried income job, they are in luck.

  • As long as new hourly and/or salaried income job is a full time job and the likelihood to continue for the next three years is promising, borrowers will qualify for a residential mortgage loan
  • 30 days of paycheck stubs is required along a verification of employment.

Related> Mortgage underwriting in the United States