A reader asks, “How would you calculate a borrower who started a new job in May 2011, made a base salary with incentive? In 2012 went from incentive to commission + base & will continue for 2013 w/a verification stating commission likely will continue. Please advise.”
While many FHA loan applicants work in “traditional” vocations with weekly, bi-weekly, or monthly paychecks, others are self employed, work on commission, etc. FHA loan rules anticipate these types of employment situations and have rules based on them.
FHA loan rules address commission income in HUD 4155.1 Chapter Four Section D, which states, “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.”
Borrowers who have been working in commission for more than a year but less than two years might find an exception is possible according to another section in the FHA loan rulebook in Chapter Four. “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.”
What about borrowers who have been working on commission but had a bad year compared to the previous year?
Is there any exception in such cases? FHA loan rules say, “Commission income showing a decrease from one year to the next requires significant compensating factors before a borrower can be approved for the loan.” Compensating factors may include substantial cash reserves, investments or other forms of capital that could justify the lender’s making an exception.
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