Buying a home with commission income
Income qualification is one of the most important factors when applying for a home loan — so understanding how lenders calculate your income can be crucial.
For commissioned workers and the self-employed, calculating income can be a little more complex.
Fortunately, just because you’re self-employed or a commission-based earner, doesn’t mean you can’t qualify for a home loan. It just means you should understand how lenders look at your income so you can set yourself up for success.
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Calculating commission income for mortgage loans
When it comes to calculating commission-based income, most lenders look for the same thing: the likelihood your commissions will continue at the same level in the future. They want to know the homeowner has the ‘ability to repay’ their new home loan in the long run.
Lenders look for consistent monthly commission income over the past two years. This shows them you’ll be able to afford future mortgage payments if approved at your current income level.
Inconsistent income and/or declining commission income can make it tough to get approved for a mortgage or refinance.
To calculate commission income for a mortgage, lenders average your commissions over the past two years to arrive at an estimated monthly income.
For home buyers with a steady two-year history of earning commissions, the income calculation for a mortgage is simple.
Lenders will typically average the past two years of commission income, and use the average as your qualifying income when calculating debt ratios.
For example, say your annual income is 100 percent commission-based. Over the past two years, you earned $65,000 and then $75,000.
To arrive at a monthly income for mortgage qualifying, the lender would add your past two years’ commission income 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 you have an income of $5,833 per month. It would then calculate your maximum loan amount and monthly payment based on that number.
Mortgage requirements for commission earners
Generally, commission income guidelines are similar to self-employed mortgage guidelines.
First, you need a steady work history. Commission-based earners typically need to be on the job as a commissioned wage earner for two years prior to their mortgage application.
Second, you’ll need to properly document that income and prove you have a consistent commission history.
Standard documents to get approved for a mortgage with commission income include:
- Two years of income tax returns
- Two years of W-2s and/or 1099s
- 30 days most recent paycheck stubs
- 30 days most recent commission checks (assuming the mortgage borrower is a commission-income wage earner)
- The past two years of commission income should be consistent and not declining from one year to the most recent year
Remember, mortgage underwriters are looking for stable commission income year after year.
If your income has declined, or if you’re a first-time buyer in a brand new job, you may have a harder time getting approved based on commissions.
Types of mortgages for commission earners
Commission-based earners can apply for all the same types of home loans as other borrowers.
Conventional, FHA, VA, and USDA loans have similar underwriting guidelines for calculating commission income.
Further, qualifying for a home loan with commission-based income isn’t much different than qualifying with bonus income.
Fannie Mae and Freddie Mac — the agencies that set rules for conforming loans — generally prefer a 2-year minimum history of commission income.
Commission income that has been received for 12 to 24 months may be considered, as long as there are positive factors to reasonably offset the shorter income history.
One of the following must be obtained to document commission income for a conventional loan:
- Completed Request for Verification of Employment (Form 1005 or Form 1005(S)), or
- Recent paystub and IRS W-2 forms covering the most recent two-year period
A verbal verification of employment is also required from your employer(s).
The FHA mortgage program is more lenient about commission income; borrowers may be able to get approved with just a one-year history of commission earnings.
Commission income may be used for FHA loans if the mortgage borrower earned the income for at least one year in the same or similar line of work, and the income is reasonably likely to continue.
The Federal Housing Administration says commission income will be calculated by using the lesser of either:
- the average commission income earned over the previous two years for commission income earned for two years or more, or
- the length of time commission income has been earned if less than two years; or
- the average commission income earned over the previous one year
To qualify with commission income, mortgage borrowers must provide copies of signed tax returns for the last two years and their most recent pay stub.
The Department of Veterans Affairs is a little stricter than FHA in this regard. To be considered “effective income” for a VA mortgage, commission income must be averaged over the previous 2 years.
Commission income is allowed in the same manner that bonuses are counted: consistency, history, and a continuance are key.
Most lenders will require your last two years’ Federal tax returns (1040’s) with all schedules so that income can be properly calculated. Some may allow a written verification of employment rather than a verbal one from your employer.
For USDA loans, your lender will analyze commission income for the current pay period as well as YTD earnings.
‘Significant variances’ — meaning an increase or decrease of 20 percent or greater in income from the previous 12 months — must be analyzed and documented before considering the income stable and dependable.
The documentation required includes paystubs, W2s, written verification of employment, and federal income tax returns or IRS transcripts.
How much mortgage can I qualify for?
All in all, commission-based income requires just a few extra steps for verification.
If you’ve earned at least two years of commission-based income and have a strong financial history, you could be well on your way to mortgage approval.
Income isn’t the only determining factor, however. As with all mortgages, the loan officer will also consider your:
- Credit score
- Credit history
- Debt-to-income ratio (DTI)
- Down payment
- Bank statements
- The value and condition of the home
But, if you are part of the 5% of the population working on commission, don’t let the mortgage process scare you off. Consult with multiple lenders to see what steps are necessary to make your dreams of homeownership a reality.
Getting mortgage-approved might be easier than you think.