June 13, 2013
FHA loans require the lender to verify the applicant’s employment, credit history, and income. When it comes to income verification, the FHA requires the lender only to use “verifiable income” when calculating a borrower’s creditworthiness.
When an FHA loan applicant has ordinary hourly or salary income, it’s simple to establish what verifiable income might be using pay stubs, income tax reports, and other documentation. But what about when a mortgage loan applicant has a job that pays a commission instead of a salary?
FHA loan rules have provisions for commission-based income, as described in HUD 4155.1 Chapter Four. There, you’ll find the following:
“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.”
Like many other FHA loan rules, the “two year” requirement may have an exception IF the following applies:
“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.”
There are a few additional rules for commission-based income. Chapter Four states that unreimbursed business expenses have to be subtracted from the borrower’s gross income, but also:
“A commissioned borrower is one who receives more than 25% of his/her annual income from commissions. A tax transcript obtained directly from the Internal Revenue Service (IRS) may be used in lieu of signed tax returns, and the cost of the transcript may be charged to the borrower.”
For more information on commission-based income verification or FHA loan rules for qualifying as a borrower who makes a commission-based income, contact a loan officer or the FHA directly at 1-800 CALL FHA.
Do you have questions about FHA loan rules? Ask us in the comments section.
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.
Browse by Date: