October 28, 2016
A reader asks, “Can I apply for an FHA loan after just one year of commission based pay with a cosigner?”
FHA loan rules require all borrowers to be obligated on the loan to financially qualify, which would include verification of both employment and income. A co-signer or co-borrower may not be able to make up for financial shortcomings of the other borrower(s) on the mortgage loan, but lender standards would apply in this area and it’s best to have a conversation with a loan officer about those standards and what may be possible.
FHA loan rules for commission income, found in HUD 4000.1, state the following:
“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.”
The “likely to continue” factor is key. Furthermore, FHA loan rules break down the requirements for commission income based on the percentage of the borrower’s pay that comes from commission:
“For Commission Income less than or equal to 25 percent of the Borrowers total earnings, the Mortgagee must use traditional or alternative employment documentation.”
And for commission income greater than 25 percent? FHA loan rules in HUD 4000.1 require the lender to, “obtain signed tax returns, including all applicable schedules, for the last two years. In lieu of signed tax returns from the Borrower, the Mortgagee may obtain a signed IRS Form 4506, Request for Copy of Tax Return, IRS Form 4506-T, Request for Transcript of Tax Return, or IRS Form 8821, Tax Information Authorization, and tax transcripts directly from the IRS.”
To calculate a borrower’s income from commission pay, the lender is required to make a specific type of calculation, depending on the length of time commission income has been earned.
“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.”
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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