August 19, 2014
There are many questions about who can qualify for an FHA mortgage loan. One type of question involves whether FHA rules have a minimum income requirement (they do not) and other types of FHA loan questions involved what kind of income may qualify for an FHA mortgage.
FHA loan applicants who earn some or most of their income through commissions do well to ask these sorts of questions–what do the FHA loan rules say about commission earnings?
The FHA loan rulebook, HUD 4155.1, spells out the requirements for verifiable commission income. If income is declared verifiable, it may be counted towards the debt to income ratio your lender will calculate when processing your loan. HUD 4155.1 Chapter Four discusses commission income as follows:
“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.”
That’s an important factor to consider when you’re getting ready to fill out your loan application. In some cases, a borrower may have more than a single year of commission earnings, but not quite two years. In such cases, FHA loan rules state:
“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.”
Commissions earned for less than a year presents a problem for the borrower–the timing of your loan application is something to seriously consider in light of the following rule from Chapter Four:
“Commission income earned for less than one year is not considered effective income. Exceptions may be made for situations in which the borrower’s compensation was changed from salary to commission within a similar position with the same employer. A borrower may also qualify when the portion of earnings not attributed to commissions would be sufficient to qualify the borrower for the mortgage.”
Do you have questions about FHA home loans? 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.
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