June 7, 2016
A reader got in touch with us to ask a question about how the FHA views commission income. This question came in response to an older blog post from 2013, well before the FHA and HUD switched over to the new FHA loan rulebook, HUD 4000.1:
“I have currently been employed with the same company and same job title for 7 years, I have the opportunity to switch from an hourly wage to a commission percentage but still keep my same job at the same place.I will make a lot more. How will switching to commission affect my approval for a home mortgage? I plan on buying next year maybe a little sooner.”
FHA loan rules for verification of commission income are clear. HUD 4000.1 starts off by defining commissions for the purpose of income verification:
“Commission Income refers to income that is paid contingent upon the conducting of a business transaction or the performance of a service.”
Next, HUD 4000.1 explains what it takes to have an FHA loan applicant’s commission income approved as “verified income”:
“The Mortgagee may use Commission Income as Effective Income if the Borrower earned the income for at least one year in the same or similar line of work and it is reasonably likely to continue.”
The length of time, and the likelihood of the income to continue are both important factors. In the case of this reader question, it’s probably a good idea for the borrower to wait until there is a solid 12 months of commission income prior to applying for the loan, based on the language used above in HUD 40001. You can find that information on page 191 of the rule book.
It’s also important to point out that lender standards for commission income may also apply. That means that a particular lender may require more time on commission income than the FHA minimum, which is permitted as long as the lender enforces that higher standard consistently and in accordance with federal law.
That means that a borrower in this situation may need to have a conversation with the loan officer to see what additional requirements may apply. FHA loan minimums, lender standards, and sometimes even state law can affect a transaction, so it’s always best to ask.
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:
http://www.fha.com/fha_loan_limits_widget
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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