When Un-reimbursement Expenses are an Issue?

Written By: Carlotta Emperator, Op-Ed Writer

There’s been several times that reimbursement from employee business expenses have been used against the borrower for mortgage qualification. This has caused the borrowers monthly income to be reduced based on the information noted in the two most current tax returns on schedule A or form 2106. 

Commission income refers to income that is paid contingent upon the conducting of a business transaction or the performance of a service. Commission income may be used as effective income if the borrower earned the income for at least one year in the same or similar line of work and it is reasonably likely to continue to be earned. 

For a borrower who is qualified using base pay, bonuses, overtime, or commission income less than 25% of the borrower’s annual employment income must abide by this guideline: Unreimbursed employee business expenses are not required to be analyzed or deducted from the borrower’s qualifying income, or added to monthly liabilities. This applies regardless of whether unreimbursed employee business expenses are identified on tax returns (IRS Form 2106) or tax transcripts are received from the IRS. 

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For borrowers earning commission income that is greater than 25% or more than the annual employee income, unreimbursed employee business expenses must be deducted from gross commission income regardless of the length of time that the borrower has filed that expense with the IRS.  These expenses must be deducted from the borrower’s income and are considered out-of-pocket.

The lender must calculate effective income for commission by using one of the following:
•    The average net commission over the previous two years OR,
•    The average net commission income earned over the previous one year (with a good explanation as to why only using one year).

Once this has been established the underwriter must reduce the effective income by the amount of any unreimbursed employee business expenses, as shown on the borrower’s Schedule A or 2106 form.

In conclusion, if your earnings are mainly commission based, then note that the write off on your 2106 forms will be deducted from your monthly income. This will effective your loan DTI and could also affect the qualification guidelines of your borrower not having the proper threshold based on the loan program. Fannie Mae and FHA both agree that when it comes to commission based income and qualifications that all financial resources and tax returns shall be and will be taken into consideration.

About The Author

Carlette Emperator a native of the sunshine state, Florida has an extensive background in the mortgage industry. With 20 plus years of experience, Carlette has held the title as a manager for closing, processing, and underwriting departments at several different organizations. Her ability to be a leader, a colleague, and a mentor has allowed her to continue to thrive within the mortgage industry leading her to become an instructor at Mortgage University. Currently she is a full-time Senior DE/SAR Underwriter for a major lending institution. Carlette is the mother to a 26 year old daughter and a 21 year old son. She is currently engaged to her longtime friend.  In her spare time she loves to travel, spend time with family, and decorate her home in Atlanta, GA. excited to have joined the Mortgage University Family she looks forward to working with all students and faculty. 

Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.