A reader asks, “Is it true that if you work in a job where your pay is based on commission you have to be with your current employer for at least one year to obtain a FHA loan, even if your prior job was in the same line of work and was also a commission paying job?”
FHA loan rules require the lender to verify employment and income. Only verifiable income can be used to calculate a borrower’s ability to afford an FHA home loan and there are FHA regulations that determine what constitutes verifiable income. Commission income can be used if it meets certain criteria.
The rules governing commission income are found in HUD 4155.1, Chapter Four Section D under a heading titled, “Salary, Wage, and Other Forms of Income”. For commission income, the rules state:
“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. 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.”
FHA loan rules don’t stop there–they also address situations where, similar to the reader question (but not exactly), a potential FHA loan applicant has only been in a commission-paying job for a year or less:
“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.”
These are FHA loan minimums and additional lender standards may apply. It’s best to discuss these situations with the lender to see what may be permissible in the borrowers specific circumstances.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at www.FHA.com, a private company and not a government website.