March 26, 2014
For an FHA home loan, the participating FHA lender is required to verify the borrower’s employment and income. Only verifiable income can be used to calculate the borrower’s debt-to-income ratio and there are instructions for the lender on how to determine if certain types of income can be used and under what circumstances. Commission income is a very good example.
Not all commission income may be eligible to be used for the debt to income ratio. How does the lender determiner what’s permissible and what’s not? There are instructions to the lender in HUD 4155.1, Chapter Four, Section D under the heading, “Salary, Wage, And Other Forms Of Income”. It begins by saying:
“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.”
When commissions aren’t consistent from year to year, FHA loan rules tell the lender:
“Commission income showing a decrease from one year to the next requires significant compensating factors before a borrower can be approved for the loan.
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.
All of this is helpful to the borrower, but one important thing to know is what exactly the FHA determines to be “commission income”. According to Chapter Four, “A commissioned borrower is one who receives more than 25% of his/her annual income from commissions.”
That income ratio is very important to know when trying to determine your eligibility for an FHA home loan based on your employment and type of income. If you have significant commissions, your chances of loan approval are better than those who meet the qualifications for “commissioned borrowers” but don’t have much in the way of commission income AND don’t have other income to offset this factor.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.
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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