Answer

Commission income must be averaged over the previous two years. The borrower must provide copies of signed tax returns for the last two years, along with the most recent pay stub. (Unreimbursed business expenses must be subtracted from gross income.) Individuals whose commission income shows a decrease from one year to the next require significant compensating factors to allow for loan approval. Borrowers with commission income received for more than one but less than two years may be considered favorably provided the underwriter is able to make a sound rationalization for acceptance and can document the likelihood of continuance.

Commissions earned for less than one year are not considered effective income. Exceptions may be made for situations in which the borrower's compensation was changed from a salary to commission within a similar position with the same employer. A borrower also may qualify when the portion of earnings not attributed to commissions would be sufficient to qualify the borrower for the mortgage. For mortgage applications processed through FHA TOTAL Scorecard, a commissioned applicant is defined as one who receives more than 25 percent of his or her annual income from commissions. For these individuals, obtain and analyze signed federal income tax returns, including all schedules, for the most recent two years and subtract unreimbursed business expenses in underwriting.

Handbook 4155.1: 4.D.2.g-h