Using Bonus Income to Qualify for a Mortgage: Fannie Mae 2-Year Average Rules and Commission Variations

Variable income, whether bonus, commission, or overtime, is fully eligible as qualifying income under Fannie Mae and FHA guidelines when documented correctly. The errors most MLOs make are using the wrong calculation method, missing the 2-year history requirement, or failing to document the likelihood of continuance.

Fannie Mae Bonus and Overtime Income

Fannie Mae requires a 2-year history of receipt for bonus and overtime income before it can be used for qualifying. The qualifying amount is the lesser of the 2-year average or the year-to-date amount annualized. If a borrower has received bonus income for only 1 year, it cannot be used unless the underwriter can demonstrate that the exception to the 2-year rule is appropriate for the specific situation, which is a high bar. Employer verification of the likelihood of continuance is required; a VOE (Verification of Employment) stating income is likely to continue is the standard documentation.

Commission Income

• ✦Borrowers who earn commission income representing 25% or more of their total income are treated as commission-earning, requiring 2 years of tax returns
• ✦Qualifying income is the 2-year average of W-2 income plus Schedule C net income if applicable
• ✦Unreimbursed employee expenses (Form 2106) are subtracted from qualifying income
• ✦If commission income is less than 25% of total income, it may be treated like base salary for documentation purposes

Declining Variable Income

If bonus or commission income is declining year-over-year, the lower amount must be used, not the average. A significant decline may also raise questions about whether the income will continue at any level. Underwriters will look at the trend and may require a written explanation from the employer before approving the income. Document any legitimate reasons for the decline (prior-year one-time payment, industry-wide event) with a letter of explanation from the borrower plus supporting evidence from the employer.