Commission income is variable pay and treated differently than salary. Fannie Mae, Freddie Mac, FHA, and VA all require a minimum history before commission can be counted, and they all average commission over time rather than using the current year rate. Declining commission triggers additional analysis that can reduce qualifying income significantly.
Minimum History Required
All agency guidelines require a 24-month history of commission income to use it for qualification. If the borrower has received commission for less than 12 months, it cannot be counted at all. If they have received commission for 12 to 24 months, some lenders allow it with additional documentation and underwriter discretion, but this is not a guaranteed approval path.
How Commission Is Averaged
- ✦Add total commission from the most recent 2 years of tax returns (W-2 or Schedule C unreimbursed income)
- ✦Divide by 24 to get the monthly average
- ✦If year-to-date commission is ahead of the prior-year average, use the lower of the two-year average or YTD annualized
- ✦If year-to-date commission is behind the prior-year pace, declining income analysis is required
Declining Commission Income
If prior year commission was higher than the year before that, and YTD is running below the prior year pace, underwriting will flag the trend. Fannie Mae requires the underwriter to determine if there is a reasonable explanation for the decline. If no explanation is satisfactory, the lower trending number is used or income is excluded. Prepare a written explanation from the borrower and employer documenting any temporary or situational factors.
Documentation Required
- ✦2 years of W-2s or signed federal returns showing commission amounts
- ✦Most recent 30 days of paystubs showing YTD commission
- ✦VOE confirming base salary (if any) and commission structure
- ✦Signed 4506-C for IRS transcript verification
- ✦Letter of explanation if commission declined year over year
Aria can calculate qualifying commission income, identify declining income triggers, and confirm what documentation underwriting will require for any commission scenario. Ask at vicariointel.com.
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