Commission-Based Income for Mortgages | The Whats, Hows, and Whys

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Aug 22, 2021 Homebuyer blog

What is income? It’s a basic question. However, how do you define it? Perhaps, income is what you receive from your employer. It can also be sales that a business generates. Generally, income is any cash flow that “inures” the benefit of an individual. The word “inure” means “to the advantage of” in legal jargon.

However, if we revisit the Internal Revenue Code, the Code defines income as anything from whatever source derived. Moreover, the Code enumerated several items to give emphasis, and commission income is part of compensation. In this article, we’ll discuss commission income in relation to a mortgage application.

How do you compute it for this purpose? Is it acceptable? Can you use it for mortgages? Read further to find out.

How Do You Compute Commission Income for Mortgage Qualification?

Unlike compensation for services rendered under an employer-employee relationship, commission income is variable. It depends on the transaction and other base values. In a mortgage application, commission income is still income. However, it doesn’t come in fixed monthly payments like an employed individual.

For purposes of a mortgage application, commission income is determined using a straight-line approach wherein you will spread all commission income over the earning period.

Say you earned commission income of $50,000 and $70,000 during 2019 and 2020, respectively. Overall, the earning period is 24 months. In computing commissions, you just spread out all of your commission income over the earning period.

Total income = $50,000 + $70,000 = $120,000

Monthly income = $120,000 ÷ 24 months = $5,000/month

Defining commission income | Reach Home Loans

Why Is It Important to Determine the Commission Income Monthly?

Lenders need to compute the maximum loan amount that they can offer to you. Since commission income is not earned on a fixed basis, knowing the monthly equivalent helps lenders understand your income as made monthly.

What Do Lenders Think About Commission Income?

Commission income is acceptable for most lenders. However, we cannot remove this hesitation that most lenders have. First, commission income is not earned on a fixed basis. Second, since commissions are transaction-based, there are two uncertainties: (1) amount of commission and (2) the frequency of commission-earning transactions.

Second, lenders accept commission-based income earners that pass their requirements. Though commission income is “generally” acceptable, lender requirements still reign supreme.

What Are the Requirements to Qualify for a Mortgage with Commission Income as a Primary Income Source?

Commission-based jobs are lucrative careers. Though their cash flows aren’t steady, they receive large amounts once they receive a commission. If you’re a commission income earner, here are the requirements you need to qualify for a mortgage:

  1. Steady work history (more than two years as a commission-based earner)
  2. Relevant documentation is enumerated below:
    • Income tax returns for two taxable years
    • Two years of W-2s and 1099s or both
    • Recent paycheck stubs (in the past 30 days)
    • Recent commission checks (in the past 30 days)
    • Proofs of consistent income for the past two years
  3. Other documents as required by the lender.

Take note that your commission income must be consistent for the past two years. It only means that it’s either stable or increasing. Declines in income are red flags for lenders, and you may have a hard time securing a mortgage if that’s the case.

Available mortgages for commission income earners | Reach Home Loans

What Are the Available Mortgages Can Commission Income Earners?

Commission income earners can get all available loan products available. However, there are additional requirements involved. Here are some of the loan products:

  1. Conventional—Freddie Mac and Fannie Mae loans a two-year minimum history of commission income, Form 1005, recent pay stubs, and IRS W-2 forms.
  2. FHA Loans—The FHA is lenient for commission-based income earners. There are no specific requirements involved.
  3. VA Loans—unlike FHA loans, VA loans require an average commission income over the past two years, including two years of Federal tax returns.
  4. USDA Loans—for this loan, lenders will analyze your commission income to check for significant variances.

If you need a more in-depth explanation of the different types of loans, you can read our blog here. 

Are You a Commission Income Earner Looking for a Mortgage Loan?

Reach Home Loans has the right loan products for you. We offer all of the loan products listed above, and we are eager to help you find a suitable loan product based on your commission earnings. Let’s get started and contact us at 954-703-1465.

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