Buying a home with commission income

Income qualification is one of the most important factors when applying for a home loan — so understanding how lenders calculate your income can be crucial.

For commissioned workers and the self-employed, calculating income can be a little more complex.

Fortunately, just because you’re self-employed or a commission-based earner, doesn’t mean you can’t qualify for a home loan. It just means you should understand how lenders look at your income so you can set yourself up for success.

In this article (Skip to…)

• Calculating commission income
• Mortgage loan requirements
• Types of mortgages for commission earners
• How much can I borrow?

Lenders will typically average the past two years of commission income, and use the average as your qualifying income when calculating debt ratios.

For example, say your annual income is 100 percent commission-based. Over the past two years, you earned $65,000 and then $75,000.

To arrive at a monthly income for mortgage qualifying, the lender would add your past two years’ commission income and divide by 24.

• Year 1: $65,000
• Year 2: $75,000
• Sum: $140,000
• $140,000 / 24 = $5,833

In this example, the lender will assume you have an income of $5,833 per month. It would then calculate your maximum loan amount and monthly payment based on that number.

Generally, commission income guidelines are similar to self-employed mortgage guidelines.

First, you need a steady work history. Commission-based earners typically need to be on the job as a commissioned wage earner for two years prior to their mortgage application.

Second, you’ll need to properly document that income and prove you have a consistent commission history.

Standard documents to get approved for a mortgage with commission income include:

• Two years of income tax returns
• Two years of W-2s and/or 1099s
• 30 days most recent paycheck stubs 
• 30 days most recent commission checks (assuming the mortgage borrower is a commission-income wage earner)
• The past two years of commission income should be consistent and not declining from one year to the most recent year

Remember, mortgage underwriters are looking for stable commission income year after year.

If your income has declined, or if you’re a first-time buyer in a brand new job, you may have a harder time getting approved based on commissions.

Further, qualifying for a home loan with commission-based income isn’t much different than qualifying with bonus income.

Conventional loans

Fannie Mae and Freddie Mac — the agencies that set rules for conforming loans — generally prefer a 2-year minimum history of commission income.

Commission income that has been received for 12 to 24 months may be considered, as long as there are positive factors to reasonably offset the shorter income history.

One of the following must be obtained to document commission income for a conventional loan:

• Completed  (Form 1005 or Form 1005(S)), or
• Recent paystub and IRS W-2 forms covering the most recent two-year period

A verbal verification of employment is also required from your employer(s).

FHA loans

The FHA mortgage program is more lenient about commission income; borrowers may be able to get approved with just a one-year history of commission earnings.

Commission income may be used for FHA loans if the mortgage borrower earned the income for at least one year in the same or similar line of work, and the income is reasonably likely to continue.

The Federal Housing Administration says commission income will be calculated by using the lesser of either:

• the average commission income earned over the previous two years for commission income earned for two years or more, or
• the length of time commission income has been earned if less than two years; or
• the average commission income earned over the previous one year

To qualify with commission income, mortgage borrowers must provide copies of signed tax returns for the last two years and their most recent pay stub.

VA loans

The Department of Veterans Affairs is a little stricter than FHA in this regard. To be considered “effective income” for a VA mortgage, commission income must be averaged over the previous 2 years.

Commission income is allowed in the same manner that bonuses are counted: consistency, history, and a continuance are key.

Most lenders will require your last two years’ Federal tax returns (1040’s) with all schedules so that income can be properly calculated. Some may allow a written verification of employment rather than a verbal one from your employer.

USDA loans

For USDA loans, your lender will analyze commission income for the current pay period as well as YTD earnings.

‘Significant variances’ — meaning an increase or decrease of 20 percent or greater in income from the previous 12 months — must be analyzed and documented before considering the income stable and dependable.

The documentation required includes paystubs, W2s, written verification of employment, and federal income tax returns or IRS transcripts.

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