Do Commissions Count When Qualifying For A Loan?

One of the most common questions I hear from prospective home buyers goes something like this: “I made $40,000 last year and $20,000 of that was commission/bonus income. Can I use that the commission income to qualify for a home loan?”

For many people who work in sales positions, commission-based income is a fact of life. If you’re successful at your job, you can make a good living from commissions, but lending rules sometimes make this income difficult to use in the event that you want to qualify for a mortgage.

People who do not receive commission but do receive regular bonuses fall into the same category. Regular bonuses are treated in exactly the same way as commission for income verification purposes.

So, the question is, “Can I use my commission income to qualify for a home loan?”

Answer: It depends on the loan program. 

Let’s take a look at a couple of the most common types of loan program and their requirements.

Federal Housing Administration (FHA) and Veterans Affairs (VA) Loans

These loan programs both follow similar federal guidelines. To be eligible to be used to qualify for an FHA or VA loan, commission income MUST be averaged over the previous two years. The key to being able to use commission income to qualify for these loan programs is consistency of the commission income. To show consistency, this income needs to be documented.

Additionally, a borrower using commission as part of their qualifying income must provide the following:

  • Copies of signed tax returns for the previous two years, and
  • A copy of their most recent pay stub.

When applying for FHA or VA loans, any documented decrease in commission income from one year to the next would require significant compensating factors (ie., a letter from an employer explaining the temporary nature of the changes impacting income) before a borrower could be approved for the loan.

The Two-Year Rule of Thumb

Two years of consistent commission income is the magic number that lenders are looking for in most loan programs that will take such income into account. Still, a borrower who has been receiving commission income for more than one year (but less than two years) may receive favorable consideration from the loan underwriter if the underwriter can:

  • Document the likelihood that the income will continue
    • To document, a letter from the employer would be required, stating that the commissioned income structure is a standard business practice for their company and the borrower will have every opportunity to continue to make commissioned income in the position he/she is in

AND:

  • Soundly rationalize accepting the commission income.
    • The underwriter will need to have a good reason why they accept the commission as qualifying income. If the file is ever audited and the use of the commission is ever questioned, the underwriter will need to articulate a defense for the reason they are accepting the commission. The decision on rationalization is made on a case-by-case basis.

There are two additional considerations that should be taken into account for these programs:

  • Unreimbursed business expenses must be subtracted from gross income.
  • An individual is considered a commissioned borrower if he/she receive more than 25% of his/her annual income from commissions.
Conventional Loans

For conventional loans, the same standards generally apply. Two years of commission income history are the standard rule, but considerations may be given for between one and two years of income as long as there are positive factors to reasonably offset the shorter income history.

In any case, tax returns for the previous two years would be required to document income from all sources.

Verification Requirements for Commission Income

If your commission income represents less than 25% of your total annual employment income, a lender will require the following:

  • A completed Request for Verification of Employment; or
  • Your most recent pay-stub and IRS W-2 forms covering the most recent 2-year period.

If your commission income represents 25% or more of your total annual employment income, a lender will require the following:

  • Copies of the your signed federal income tax returns that were filed with the IRS for the past 2 years; and either
    • A completed Request for Verification of Employment; or
    • Your most recent pay-stub and IRS W-2 forms covering the most recent 2-year period.
  • If tax returns are obtained, any non-reimbursed business expenses must be subtracted from the gross commission income.
  • A verbal verification of employment is required from each employer.

The good news is that yes, you can use commission income to qualify for a home loan.

The requirements are somewhat more stringent than they would be for non-commission income, but these are in everyone’s interest. They establish the consistency of income and ensure that there’s enough coming in on a regular basis to pay the bills and keep the lights on.

Talk to your lender if you’d like to see if you can use your commission income to get a home mortgage. If you don’t have a lender yet, contact us today, and we’ll walk you through it. You may just qualify for more than you think.

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