How does commission income count when applying for an FHA mortgage? A reader asked us recently, “I was denied a mortgage because of a commissioned salary, even though Im full time and am guaranteed 15.75/hr. Interestingly, everything was all ready to go on my measly 12/hour salary before I got this better job. Now Im thinking that may have been a mistake on the part of the lender…”
FHA loan rules governing this type of income (as verifiable income that is stable and likely to continue) are found in HUD 4000.1. The reader question does not state as much, but it seems implied that the commission income situation is recent. If so, the lender may need the borrower to have more time on the job as an employee earning commissions in order to meet FHA loan rules.
HUD 4000.1 states:
“Commission Income refers to income that is paid contingent upon the conducting of a business transaction or the performance of a service…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.”
So if the income hasn’t been earned for a full year at the time of the loan application, the lender may have no other choice but to deny the loan unless there are compensating factors that might work in the borrower’s favor.
Such factors may be circumstantial (for example, the borrower’s one year date for receiving income from commissions is close), or depend on state law and/or lender standards.
When figuring this type of income, the lender is required by HUD 4000.1 as follows:
“The Mortgagee must calculate Effective Income for commission by using the lesser of (a) the average net Commission Income earned over the previous two years, or the length of time Commission Income has been earned if less than two years; or (b) the average net Commission Income earned over the previous one year. The Mortgagee must calculate net Commission Income by subtracting the unreimbursed business expenses from the gross Commission Income.”
A borrower’s debt-to-income ratio is also important. If income from commissions AND debt-to-income ratio are factors together, that could strongly influence a lender’s decision.
That’s not to say that such a scenario is at work in the reader question, but rather to point out that there are often multiple reasons that add up to the single explanation of why a mortgage loan could be denied.