October 16, 2015
There are lots of questions about FHA loan income standards–especially where commission income is concerned. Here’s one of the latest reader questions from the comments section, asking about FHA loan income rules for commissions–the reader has a job that “… pays 60% income from salary and 40% from commissions now and am being recruited to another company same industry, same job title and scope of work but better pay. A slight increase in salary and commissions with the new company recruiting me, but same type of ratio 60% salary 40% commissions.”
“I have been in the same job title for 2+ year now. Can FHA or an underwriter use my new income with new higher commissions at the new company for a loan? Or do I have to wait for 12 months at the new company? ”
FHA loan rules permit the lender to use commission income in the borrower’s debt to income ratio, provided the income meets certain standards. According to HUD 4000.1 Part II Section A, we learn, “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.”
But there are additional factors to consider:
“For Commission Income less than or equal to 25 percent of the Borrowers total earnings, the Mortgagee must use traditional or alternative employment documentation. For Commission Income greater than 25 percent of the Borrowers total earnings, the Mortgagee must 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.”
How does the lender calculate commission income? According to Chapter II Part A, “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.”
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It’s designed especially for real estate websites–a widget that displays FHA loan limits for the counties serviced by those websites.
It is easy 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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