For many employees, commission income provides an opportunity to make a higher income compared to hourly or salary employees. Rather than a set amount, commissioned sales people are paid based on their production. Due to the fluctuation that comes with commission pay, it is more difficult to calculate qualifying income. Since the income is not a set amount, lenders want to see a sufficient income history. Typically, the standard lender requirement is at least 2 years on the same commissioned job. However, we have options for employees with less than 2 years of commission income.
Calculating Commission Income
In order to calculate commission income, there is definitely more involved. Typically, just providing a pay stub and a W2 will not work. The first reason is that a W2 does not break down the prior year’s income. Thus, there is no way to tell how much of the income is commission, hourly, salary, or bonus. Furthermore, a pay stub would only show the last 12 months of income if it is a year end pay stub.
There are two best ways to calculate and average commission income. First, is for an employer to complete a verification of employment which breaks down base and commission income for the previous 1 – 2 years. Additionally, it includes year to date income. Another way to figure prior year the base and commission breakdown is by providing a year end pay stub for each prior year. Unlike a W2, pay stubs usually show the yearly pay breakdown.
Borrowers with commission accounting for 25% or more of the total income must provide tax returns. Then lenders must reduce the income by any unreimbursed employee expenses reported.
Fannie Mae Commission Income
Many do not realize there are opportunities to qualify with less than two years of commission income. Fannie Mae traditional conventional loans as well as the 3% down HomeReady loan do. Fannie Mae commission income guidelines “recommend” a 2 year minimum history of commission. However, commission income between 12 – 24 months may be allowed with compensating factors to offset under a 2 year history. Examples may include a more than required assets, longer time in same line of employment, and high credit scores.
FHA Commission Income 12 Month Requirement
Contrary to belief, FHA loan guidelines will allow as little as 12 months of commission income. Although, FHA looks for a total 2 year employment history, one year on the current commissioned job may work. We have been able to close FHA loans where sales people only have one year on the commissioned job. The minimum 12 months is actual time on the job and does not require a full 12 months reporting on the tax return. Although, if commission accounts for 25% or more of the total income, tax returns are required. If there are any unreimbursed employee expenses on the most recent return, they must be subtracted from the calculated income.