A reader asked about the FHA loan rules governing commission income this week in our comments section:
“My employer recently (1yr) switched the pay scale to a base/commission/bonus format. Basically we now get paid per load instead of hourly. Since weve only received commission for 2016 and not 2015, should my itemized job related expenses for 2015 count against my income over the previous two years?”
FHA loan rules in HUD 4000.1 address this issue, but may not be the only rules at work-lender standards would also apply as well as any applicable state law. Here’s what HUD 4000.1 states about commission income:
“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. The Mortgagee must reduce the Effective Income by the amount of any unreimbursed employee business expenses, as shown on the Borrower’s Schedule A.”
This is essentially all HUD 4000.1 has to say on the subject. The above seems to imply that commission income is reviewed on a yearly basis using the borrower’s tax returns to help the lender determine the debt-to-income ratio. So the basic answer to this particular FHA loan reader question is that it depends on the lender.
Does the lender’s standards permit this type of income averaged over only a year or so? Does the nature of the income count with that lender as commission income, or could lender standards or the laws of the state require the income to be interpreted as contract or self-employment work? That depends greatly on details that aren’t provided in the reader question but would be asked by the loan officer.
FHA loan rules often provide some basic guidance in cases like these but leave some details to the lender. In other cases FHA loan rules may be quite specific, but here the above is as specific as it gets. A conversation with a lender would be in order to learn what is permitted or expected at that financial institution.