Written By: Frankie Lacy
Commission income is income that varies and fluctuates. Commission income can vary each month based on the amount of sales the borrower has completed. Tax returns are required on commission income if the commission earnings are > than 25% of total earnings. Variable sources of income are subject to external influences. These types of income sources need to be analyzed carefully.
It is important to note:
• Variable sources must be reported separately. This is especially important with commission, overtime, and bonuses.
• Satisfactory two consecutive pay stubs are required.
• An average of two years income has to be calculated for income sources that are variable. This income also needs to be verified that it is consistent and stable income.
Any significant decrease in income should be adequately explained. The underwriter must be aware of declining income sources. This has to be closely analyzed and it should not be averaged. A letter of explanation needs to be obtained that addresses the declining income and the lower income average must be used to qualify.
Be aware of the market conditions that would indicate the income is not sustainable. In these cases, do not use the income to qualify the borrower. All sources of income included in the loan qualification must be stable. There must be a reasonable expectation that the same level of income will continue for a minimum of 3 years. When analyzing variable income, annual earnings that are level or increasing from one year to the next are considered stable.
Including Commission Income as Qualifying Income Tips:
• There needs to be a recent two year history. Documentation needs to be consecutive.
• Any un-reimbursed expenses listed on Schedule A of the tax returns must be deducted from the qualifying income.
When calculating Commission Income:
• Determine the amount of commission the customer earned in the previous two years
• Reduce the commission from the previous two years by the expenses determined.
• Average the two year’s income, minus expenses, over 24 months.
About The Author
Frankie Lacy - As an active NAMP® member and a NAMU®-CMMU designee, Ms. Frankie Lacy is a 13-year mortgage industry veteran with extensive conventional mortgage underwriting experience. Frankie is also a mortgage instructor for Mortgage Underwriter University (www.MortgageUnderwriter.org). Topics of Frankie's expertise include: Fannie Mae, Freddie Mac, USDA Rural Housing, underwriting to investor overlays, self-employed borrowers, personal and business tax return analysis, rental income, condos/co-ops/PUDs, and more. Frankie is a Davenport University graduate with a degree in Business Administration. If you're interested in becoming a writer for NAMP®, please email us at: firstname.lastname@example.org.