FHA – Pay Switches From All Salary to Salary Plus Commission

Question:

Our client is seeking an FHA loan. He has been employed by the same company for over 5 years. However, 18 months ago, his pay structure changed from a salary-only arrangement to a smaller salary plus commission. The job is the same with the same employer. Can I use his commission income?

Answer:

Yes, you can use the commission after 1 year! We have an All Agency comparison chart on commission income, which is linked for future reference.

FHA Guidelines for Commission Income with Recent Pay Structure Changes

Commission Income Requirements

FHA allows the use of commission income if the borrower has received such income for at least one year in their current job or line of work.
Per HUD Handbook 4000.1, “The Mortgagee must document the Borrower’s income from commissions for at least one year in the same or similar line of work”.

Commission income is considered “variable income,” and additional documentation is required if there has been a change in pay structure.
Treatment of Employment and Pay Structure Changes

A change from salary-only to a blend of commission and salary is permitted, provided the borrower remains in the same line of work.

FHA requires at least one full year of documented commission income if there is such a change, but prefers a two-year history for variable income types.
In this case, your client has 18 months (1 year, 6 months) of commission income in the same position and line of work, meeting the minimum FHA threshold.

If the commission income is less than two years but more than one, FHA underwriters must use caution and document the likelihood of the income’s continuance and stability.

Required Documentation

FHA requires the following:

• Borrower’s most recent two years of tax returns, including all W-2s and/or 1099s that report salary and commission.
• Year-to-date pay stub(s) covering at least one month reflecting commission year-to-date.
• Written verification of employment (VOE) from the employer detailing base salary, commission earned, and breakdown of total compensation and how commissions are calculated.
• If there has been a recent change in pay structure (such as a switch from all salary to salary-plus-commission), the lender must specifically analyze the effect of the change and demonstrate that the commission component is likely to continue.

Income Calculation Rules

Commission income is generally averaged over the most recent one or two years, depending on documentation and the underwriter’s discretion.
If the amount of commission income fluctuates significantly, the lender must use the lower amount for qualifying.

Since your client has 18 months of commission income, FHA permits averaging over that period—provided supporting documentation shows no reason to believe the income will be reduced or discontinued.
MortageGuidelines.com Resource:

MortgageGuidelines.com offers an All-Agency Comparison Chart for ‘Commission Income – All Agency Comparison’, accessible under “Guideline References” on the ‘Income Analyzers’ Page.

Submit Your Loan Scenario Question at www.mortgageguidelines.com