Income for any mortgage loan is an important part of the ratios that are required for loan approval. FHA mortgage guidelines for commission income are very specific as to what is required when an underwriter performs an income analysis. For any borrower who has commission income, it is worthwhile to know these rules in order to avoid being surprised by the lender.
To be considered a commissioned income borrower, more than 25% of the annual income must come from commissions. Borrowers must document this type of income with copies of signed income tax returns or tax transcripts received from the IRS for the last two years. The relevant income will be calculated for the average amount of the previous two years. The most recent pay stubs will also be necessary to show current employment and confirm that commissions are continuing which will be verified by the lender. When commission income shows a decrease from one year to the next, compensating factors are necessary in order to reach and issue an approval status. If commissions were received for more than one year, but less than two years, it must be documented that the income will continue in order to be used for debt to income ratios. When calculating the average income, any unreimbursed business expenses will be subtracted from the gross income.
Any commission income that has been earned for less than one year will not be considered as effective income. There are exceptions such as when a borrower went from salary to commission in a similar position and with the same employer. Since some borrowers receive a portion of regular salary plus commission, the regular salary will always be considered first since this may be sufficient enough for the borrower to qualify without even using the commission income.
Many sources of employment today, especially sales, are commissioned positions. Needless to say, if this income has steadily increased from year to year, it will be easy to determine the amount of income to be used for the mortgage application. Being familiar with FHA mortgage guidelines for commissioned income gives borrowers a better chance to know when to apply for an FHA mortgage in order to receive the best results.
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