Saturday, April 28, 2012

How Does FHA & Fannie Mae Calculate Commission and Bonus Income?

What income will an underwriter consider as income? And more importantly, what will they not consider as income?
The HUD 4155.1, Mortgage Credit Analysis has 40 pages dedicated to these two questions: Fannie Mae’s Sellers Guide has 56 pages.  They cover everything from salaried income to self-employment income; from border income to bonus income. In this post, we are going to limit our discussion to commissions and bonus income.

Generally, commissions and bonus income can be counted if the borrower can document they have received it for two years and there is a likelihood that it will continue. There are few things the underwriter will consider when looking at this type of income.

As a rule, the underwriter will average the last two years and the year to date bonus or commission income. But there are exceptions.

Has commission or bonus income decreased from the year before? Or does the year to date indicate lower commissions? If so, the underwriter may not consider it likely to continue. Where the underwriter will usually average the commission or bonus income over the past two years, they may instead only consider most recent year or not count it at all.

What if the borrower switched from one commission job to another commission job? As long as the most recent two years of continuous employment reflect commissions or bonus income, it may be considered subject to the same limits listed above. It will not be considered if the jobs are not in the same field or if the jobs are not considered similar. 

What if the borrower changed employers from a salary or hourly position to an employer that pays a lower salary plus commissions or bonuses? Unfortunately, unless there is a two year history of receiving the commissions or bonuses; only the current lower salary can be used.

There are methods that can be used to reflect the highest income possible when calculating commission or bonus income for mortgage underwriting. A seasoned Loan Officer knows that a two year average is the guideline: not a two year and several month average. By documenting only most recent two years and eliminating lower commission months over two years ago, the underwriter can increase the amount available to qualify.

There are many aspects to calculating commission or bonus income that an underwriter and a seasoned Loan Officer review when determining commission and bonus income . They are too numerous to go through here but feel free contact to Franklin Advantage  or call us at (800) 314-5363. Our seasoned, professional Loan Officers can help you explore your home loan options.

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