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How to calculate commission income for your mortgage

ByNichole W. Barclay

Apr 13, 2021

Buy a house with commission income

Income qualification is one of the most important factors when applying for a home loan. So it can be crucial to understand how lenders calculate your income.

For commission workers and the self-employed, calculating income can be a bit more complex.

Fortunately, just because you’re self-employed or paid by commission doesn’t mean you can’t qualify for a home loan. It just means that you need to understand how lenders view your income so that you can set yourself up for success.

Check your mortgage eligibility with commission income (November 18, 2021)


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Calculating mortgage commission income

When it comes to calculating commission-based income, most lenders look for the same thing – the likelihood that your commissions will stay the same in the future. They want to know that the homeowner has the “ability to repay” their new long-term home loan.

Lenders look for consistent monthly commission income over the past two years. This shows them that you will be able to make future mortgage payments if they are approved at your current income level.

Inconsistent income and / or declining commission income can make it difficult to approve a mortgage or refinance.

To calculate commission income for a mortgage loan, lenders average your commissions over the past two years to arrive at an estimated monthly income.

For homebuyers who have accrued commissions for two years, calculating mortgage income is straightforward.

Lenders will generally average commission income from the past two years and use the average as qualifying income when calculating debt ratios.

For example, let’s say your annual income is 100% commission based. In the last two years you have earned $ 65,000 and then $ 75,000.

To arrive at a monthly mortgage-eligible income, the lender would add your commission income from the past two years and divide by 24.

  • Year 1: $ 65,000
  • Year 2: $ 75,000
  • Sum: $ 140,000
  • $ 140,000 / 24 = $ 5,833

In this example, the lender will assume that you have an income of $ 5,833 per month. It would then calculate your maximum loan amount and your monthly payment based on that number.

Check your mortgage eligibility with commission income (November 18, 2021)

Mortgage requirements for commission employees

Generally, the commission income guidelines are similar to the guidelines for self-employed mortgages.

First of all, you need a stable work history. Commission employees generally have to be employed as a commission employee for two years before they apply for a mortgage.

Second, you will need to properly document this income and prove that you have a consistent commission history.

Standard documents for obtaining commission income mortgage approval include:

  • Two years of tax returns
  • Two years of W-2 and / or 1099
  • 30 day most recent pay stubs
  • 30 days of most recent commission verification (assuming mortgage borrower is a commission employee)
  • Commission income for the past two years should be constant and not drop from one year to the most recent year

Remember, mortgage underwriters look for stable commission income year after year.

If your earnings have declined, or you’re a first-time buyer at a brand new job, you might have a harder time getting commission-based approval.

Types of Mortgages for Commission Employees

Commission-paid employees can apply for the same types of home loans as other borrowers.

Conventional, FHA, VA, and USDA loans have similar underwriting guidelines for calculating commission income.

Also, qualifying for a home loan with commission-based income is not much different from qualifying with bonus income.

Conventional loans

Fannie Mae and Freddie Mac – the agencies that set the rules for loan compliance – generally prefer a minimum 2-year history of commission income.

Commission income earned for 12-24 months may be considered, provided there are positive factors to reasonably compensate for the shorter income history.

One of the following must be obtained to document commission income for a conventional loan:

  • Completed Request for employment verification (Form 1005 Where Form 1005 (S)), Where
  • Recent IRS W-2 payslip and forms covering the most recent two-year period

A verbal job verification is also required from your employer (s).

Check your eligibility for the conventional loan (November 18, 2021)

FHA loans

The FHA mortgage program is more lenient on commission income; borrowers can be approved with only one year of commission history.

Commission income can be used for FHA loans if the mortgage borrower has earned the income for at least one year in the same or similar field of work, and the income is reasonably likely to continue.

The Federal Housing Administration says commission income will be calculated using the lesser of:

  • the average commission income earned in the previous two years for commission income earned for two or more years, or
  • the length of time the commission income was earned if less than two years; Where
  • the average commission income earned in the previous year

To qualify for commission income, mortgage borrowers must provide copies of signed tax returns for the past two years and their most recent pay stub.

Check your FHA loan eligibility (November 18, 2021)

VA loans

The Department of Veterans Affairs is a bit stricter than the FHA in this regard. To be considered “actual income” for a VA mortgage, the commission income must be averaged over the previous 2 years.

Commission income is allowed in the same way that bonuses are counted: consistency, history and continuity are essential.

Most lenders will require your federal income tax returns for the past two years (1040) with all schedules so that the income can be calculated correctly. Some may allow written verification of employment rather than verbal verification of your employer.

Check your VA loan eligibility (November 18, 2021)

USDA loans

For USDA loans, your lender will analyze the commission income for the current pay period as well as the accrued income.

“Significant deviations” – that is, an increase or decrease of 20% or more in income from the previous 12 months – should be analyzed and documented before considering income as stable and reliable.

The required documentation includes pay stubs, W2 forms, written employment verification, and federal income tax returns or IRS transcripts.

Check Your USDA Loan Eligibility (November 18, 2021)

What mortgage amount can I qualify for?

Overall, commission based income only requires a few extra steps to verify.

If you’ve earned at least two years of commission-based income and have a strong financial history, you might be on your way to getting approved for your mortgage.

However, income is not the only determining factor. As with all mortgages, the loan officer will also consider your:

  • Credit score
  • Credit history
  • Debt-to-income ratio (DTI)
  • Advance payment
  • Bank statements
  • The value and condition of the house

But, if you are one of the 5% of the population working on commission, don’t let the mortgage process scare you. Consult with several lenders to see what steps are necessary to make your dreams of home ownership a reality.

Getting mortgage approval might be easier than you think.

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