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FHA mortgage rules require the lender to verify the borrower’s income and employment, and some borrowers come to the loan process with unique circumstances such as commission income.

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FHA Loan Rules for Documenting Commission Income

September 1, 2019

FHA Loan Rules for Documenting Commission Income
FHA loan rules in HUD 4000.1 state that commission income can be used as verifiable income for an FHA loan as long as there is documentation to show the nature of the commission payment arrangement. Borrowers sometimes have to switch from salary to commission income and the FHA loan rules for that situation include the following as described in HUD 4000.1:

“The Mortgagee may use Commission Income 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.”

How much of a borrower’s income is derived from commissions can also make a difference. The lender’s requirements to document commission income may hinge on how much of a borrower’s pay comes from commission sources:

“For Commission Income less than or equal to 25 percent of the Borrower’s total earnings, the Mortgagee must use traditional or alternative employment documentation.” And for commissions that make up more than 25% of the applicant’s income?                    

“For Commission Income greater than 25 percent of the Borrower’s total earnings, the Mortgagee must obtain signed tax returns, including all applicable schedules, for the last two years. In lieu of signed tax returns from the Borrower, the Mortgagee may obtain a signed IRS Form 4506, Request for Copy of Tax Return, IRS Form 4506-T, Request for Transcript of Tax Return, or IRS Form 8821, Tax Information Authorization, and tax transcripts directly from the IRS.”

Once the lender has determined the percentage of commission income, FHA loan rules state, “The Mortgagee must calculate Effective Income for commission by using the lesser of (a) the average net Commission Income earned over the previous two years, or the length of time Commission Income has been earned if less than two years; or (b) the average net Commission Income earned over the previous one year. The Mortgagee must calculate net Commission Income by subtracting the unreimbursed business expenses from the gross Commission Income.”

The commission question can be slightly more complex due to employee expense account issues. HUD 4000.1 tells the lender, “The Mortgagee must reduce the Effective Income by the amount of any unreimbursed employee business expenses, as shown on the Borrower’s Schedule A. For information on analyzing the Borrower’s 1040, review Analyzing IRS Forms.”
Who do these rules apply to? HUD 4000.1 says FHA loan applicants are considered commission income earners when they earn money “that is paid contingent upon the conducting of a business transaction or the performance of a service.”

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