April 2, 2015
A reader asks, “I made 41000 in 2013 and 65000 in 2014 I am on pace to making over 100000 this year. How will they calculate my income for an FHA loan. I am a saleried and I get commission.”
The participating FHA lender is required to calculate the applicant’s income and verify that it is likely to continue–not all income can qualify to be used in figuring out the borrower’s debt-to-income ratio, only “verifiable income”.
Commissions can and often are counted as verifiable income for the purpose of FHA loan approval, but that income must meet specific criteria. Borrowers who earn commission must have, in general, been earning the commission for a year or more.
The FHA loan rules listed in HUD 4155.1 explain such requirements for verifiable commission income; Chapter Four of HUD 4155.1 instructs the lender, “Commission income must be averaged over the previous two years. To qualify with commission income, the borrower must provide
• copies of signed tax returns for the last two years, and
• the most recent pay stub.
Commission income showing a decrease from one year to the next requires significant compensating factors before a borrower can be approved for the loan.”
Furthermore,
“A borrower whose commission income was received for more than one year, but less than two years may be considered favorably if the underwriter can
• document the likelihood that the income will continue, and
• soundly rationalize accepting the commission income.”
And finally, with regard to the “one-year rule” on commission income:
“Commission income earned for less than one year is not considered effective income. Exceptions may be made for situations in which the borrower’s compensation was changed from salary to commission within a similar position with the same employer. A borrower may also qualify when the portion of earnings not attributed to commissions would be sufficient to qualify the borrower for the mortgage.”
The lender has a great deal of the decision making in this process as long as the commission income is more than a year old. Commission income on the rise from one year to the next is a positive sign, commission income that decreases from one year to the next generally is not. You would need to work with a lender to see what might apply in your specific circumstances.
You can get connected to a participating FHA lender about your FHA loan options or to get started on an FHA refinance application.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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