Can you use commissions to qualify for a mortgage?

By Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Edited by Michael Jensen, Mortgage and Finance Guru

Updated October 20, 2020

You can definitely use commission income to qualify for a mortgage but you need to satisfy certain qualification and documentation requirements. Continue reading to understand the steps you need to take to use commissions to get approved for a mortgage.

First, you are typically required to have a two year history of receiving commissions to include that income in your loan application. A commission income history of only one year, however, may be allowed for borrowers with a strong employment profile or other supporting factors.

For example, if you have worked at the same position, employer or field for several years, then a shorter track record of commission income may be allowed, although you need at least a twelve month history. Additionally, if all or part of your past income, such as salary or wages, was converted to commissions, then a shorter history may be permitted.

It can also be beneficial if you have a high credit score, low debt-to-income ratio or a low loan-to-value (LTV) ratio. If these circumstances apply to you, the lender may be more willing to permit a commission income history between one and two years.

To document your commission income, you are required to provide a mortgage industry Verification of Employment form or your most recent pay stub and tax documents for the prior two years. In addition to these documents, the lender is also required to verbally confirm your employment within ten days of your mortgage closing.

The Verification of Employment form -- also referred to as a form 1005 -- indicates how frequently you are paid and outlines your total gross earnings including your base pay and commissions. We should highlight that your lender provides the form directly to your employer who fills it out and returns it to the lender. You are not involved in completing the form.

If your employer cannot provide a Verification of Employment form or if you are self-employed, you can provide the lender your most recent pay stub and your W-2 or personal tax returns that show your commission income.

Lenders calculate your average monthly commission income over the specified time period -- usually two years -- to determine the mortgage you can afford. For example, if you earned $48,000 in commissions over the prior two years, then $2,000 in monthly commission income is included in your application ($48,000 ÷ 24 months = $2,000 per month).

Please note that lenders use your total annual commissions to calculate the monthly average, which takes into account how often you are paid. So if you earn $5,000 in commissions on a quarterly basis, the lender uses $20,000 for the annual figure. If you earn $15,000 in commissions semi-annually, the lender uses $30,000 in yearly commissions.

Your average monthly commission income is added to any other income sources you earn such as a base salary or hourly wages. The higher your total monthly gross income, the higher the mortgage you qualify for.

Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you can afford based on commission and other income

It is also important to understand that lenders factor in the trajectory of your commission income to determine the monthly figure that is used for your application. If your commission income is increasing, lenders calculate your average monthly income, as outlined above.

This means that if your commissions have increased recently, you may not fully benefit from the higher income. For example, if you earned $48,000 in commissions this year -- a monthly average of $4,000 -- and $24,000 the prior year -- a monthly average of $2,000 -- the lender uses $3,000 in average monthly commissions over the two year period.

In this case, the monthly income figure used by the lender is significantly lower than your current commission income, which affects the mortgage amount you can afford.

Additionally, if your commission income decreased recently but has flattened, the lender uses your lower current income figure instead of the monthly average. If your commission income continues to trend downward with no signs of stabilizing, it may be omitted from your application altogether .

We recommend that you contact multiple lenders in the table below to confirm their requirements for using commission income to qualify for a mortgage.  Shopping lenders also enables you to find the best loan terms so you can save money on your mortgage.

Sources

"B3-3.1-04, Commission Income."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, December 4 2018.  Web.

"B3-3.1-01, General Income Information, Variable Income."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, August 7 2019.  Web.