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Commission Income Mortgage Guidelines

Commission income mortgage guidelines are the underwriting rules lenders apply when a borrower's qualifying income includes sales commissions, requiring a documented history of receipt (typically two years), income averaging, trend analysis, and employer verification to establish a stable monthly income figure for loan qualification.

Key Takeaways

  • A minimum two-year history of commission income receipt is required by most agency and conventional guidelines, though some programs may allow one year with strong compensating factors .
  • If commission income represents 25% or more of the borrower's total compensation, additional documentation and analysis are typically required, including a more detailed review of income stability and business conditions .
  • Commission-only borrowers (no base salary) are underwritten similarly to self-employed borrowers in many respects, with lenders requiring tax returns, pay stubs, and potentially a profit and loss statement.
  • Declining commission income is treated conservatively; lenders will use the lower year or the declining trend figure rather than the two-year average.
  • Unreimbursed business expenses (mileage, client entertainment, home office) reported on tax returns are deducted from commission income when calculating qualifying income.

How It Works

Commission-Only vs. Base-Plus-Commission

The first distinction lenders make is whether the borrower receives commissions on top of a guaranteed base salary or is paid entirely through commissions. A base-plus-commission borrower has a guaranteed income floor; the base salary qualifies at face value, and the commission component is then averaged and added on top. A commission-only borrower has no guaranteed income, which means the entire qualifying income is subject to the averaging methodology and trend analysis. Commission-only borrowers are often classified as having variable income for the entirety of their earnings, and some lenders apply underwriting standards similar to those used for self-employed borrowers, including requirements for two years of tax returns and potentially a profit and loss statement for the current year.

The Two-Year Commission Average

Lenders calculate commission income by averaging the total commission earnings over the most recent two calendar years. The calculation uses W-2 earnings (specifically the commission portion), year-to-date pay stub data, and tax return information. If the borrower itemizes unreimbursed employee business expenses on their tax returns, those expenses are deducted from the gross commission figure before averaging. The formula is straightforward: total commission earned over 24 months divided by 24 equals the monthly qualifying commission income. If year-to-date earnings are available and cover a meaningful period, the lender may use a weighted calculation incorporating the current-year trajectory. For example, if the borrower has 18 months of commission data (full prior year plus six months of the current year), the lender divides total commissions by 18 to arrive at a monthly figure.

Employer Verification and Structure

The lender verifies commission income through a written Verification of Employment (VOE) that specifically requests a breakdown of base salary versus commission for each of the past two years and year-to-date. The VOE also asks the employer to confirm the commission structure (percentage of sales, tiered rates, draw against commission, etc.), the borrower’s tenure, and whether the commission arrangement is expected to continue. If the employer operates on a draw-against-commission model, the lender must determine whether the draw is a guaranteed minimum or an advance that must be repaid; a non-guaranteed draw complicates the income calculation because the borrower may owe money back to the employer in periods of low production.

Declining and Irregular Commission Trends

Underwriters pay close attention to the year-over-year trajectory of commission income. If commissions declined from one year to the next, the lender must assess whether the decline is temporary (due to a market cycle, territory change, or one-time event) or structural (indicating a long-term reduction in earning capacity). Under conventional guidelines, if commission income declined by more than a nominal amount year over year, the lender should use the lower annual figure rather than the two-year average, unless there is documented justification for using the average . The borrower may need to provide a letter of explanation, and the employer may need to confirm that the decline was caused by specific, non-recurring factors. Irregular commission patterns, where income swings substantially from quarter to quarter, are evaluated for overall annual consistency rather than quarter-to-quarter stability.

Tax Return Adjustments for Commission Earners

Commission earners who report unreimbursed business expenses on their federal tax returns have those expenses deducted from their qualifying income. Prior to the Tax Cuts and Jobs Act of 2017, these expenses were reported on Form 2106 and deducted on Schedule A. Under current tax law, W-2 employees generally cannot deduct unreimbursed business expenses on their federal returns . However, some states still allow the deduction, and if the borrower claims such expenses on a state return, the lender may still consider them. Additionally, if the commission earner operates as an independent contractor (1099) rather than a W-2 employee, the income is treated as self-employment income, and Schedule C business expenses are deducted from gross commission earnings.

Related topics include variable income averaging (overtime, bonus, commission), bonus income mortgage guidelines, overtime income mortgage guidelines, debt-to-income ratio explained (dti), asset and reserve requirements explained, and common income mistakes that cause mortgage denials.

Key Factors

Factors relevant to Commission Income Mortgage Guidelines
Factor Description Typical Range
Commission Structure Whether the borrower is commission-only, base-plus-commission, or on a draw-against-commission arrangement Base-plus-commission is treated most favorably; commission-only requires full averaging of all income
History Length Number of years the borrower has been receiving commission income in the same or similar role Minimum 2 years required by most agency guidelines; less than 1 year typically disqualifies the income
Income Trend Whether commission earnings are increasing, stable, or declining year over year Stable or increasing trend allows full two-year average; declining trend results in use of lower figure
Commission as Percentage of Total Income The ratio of commission income to total compensation including base salary Less than 25%: standard treatment. 25% or more: additional documentation and analysis required
Employer Verification Written confirmation from the employer of commission structure, history, and expectation of continuance Required for all commission income; must include year-by-year breakdown

Examples

Base-Plus-Commission with Stable History

Scenario: A pharmaceutical sales representative earns a $75,000 base salary plus commissions. Commission earnings were $42,000 in 2024 and $45,000 in 2025. The year-to-date pay stub through March 2026 shows $11,800 in commissions. The lender calculates the two-year commission average: ($42,000 + $45,000) / 24 = $3,625/month. Base salary is $6,250/month.
Outcome: Total qualifying income is $9,875/month ($6,250 base + $3,625 commission average). The stable, slightly increasing commission trend supports using the full two-year average. The employer's VOE confirms the commission structure and that it is expected to continue.

Commission-Only Borrower with Declining Income

Scenario: A real estate agent earned $165,000 in 2024 and $118,000 in 2025, reported on 1099-NEC forms. After Schedule C deductions of $28,000 in 2024 and $22,000 in 2025, net self-employment income was $137,000 and $96,000 respectively. The two-year average net income is $116,500/year or $9,708/month. However, the year-over-year decline in net income is approximately 30%.
Outcome: Due to the significant decline, the lender uses the 2025 net income ($96,000/year or $8,000/month) as the qualifying figure rather than the two-year average. The borrower is asked for a letter of explanation regarding the income decline. The maximum qualifying loan amount is calculated based on $8,000/month rather than $9,708/month.

New Commission Role with Prior Commission History in Same Industry

Scenario: A software sales executive left Company A (where she earned commissions for four years) and joined Company B in the same industry seven months ago. At Company B, she has a similar base-plus-commission structure and has earned $38,000 in commissions in seven months, which annualizes to approximately $65,000. At Company A, her commissions were $58,000 and $62,000 in the last two full years.
Outcome: Because the borrower has a continuous two-year history of commission income in the same industry and the new role has a comparable commission structure, the lender may use the commission history from both employers to calculate the average. The specific treatment depends on lender overlays, but the continuity of commission income in the same field supports qualification.

Common Mistakes to Avoid

  • Not accounting for unreimbursed business expenses on tax returns

    Commission earners who deduct business expenses on their tax returns often overlook that lenders subtract these expenses from qualifying income. A borrower with $100,000 in gross commissions but $20,000 in business expenses has a qualifying income of $80,000, not $100,000.

  • Switching from commission-based to salaried employment shortly before applying

    Borrowers who change from a commission role to a salaried role lose access to historical commission income for qualification purposes. The salaried income at the new employer becomes the qualifying income, which may be significantly lower than total compensation at the prior employer.

  • Failing to provide a complete two-year commission history to the lender

    If the borrower does not submit all W-2s, 1099s, and tax returns covering the full two-year period, the lender cannot calculate the required average. Incomplete documentation results in either exclusion of commission income or significant delays in processing.

  • Assuming a large recent commission check means higher qualifying income

    A single large commission payment in the current year does not override the two-year averaging methodology. Lenders are specifically designed to smooth out peaks and valleys. One exceptional quarter will be diluted across the full 24-month averaging period.

Documents You May Need

  • Most recent 2 years of W-2 forms (or 1099-NEC/1099-MISC for independent contractors)
  • Most recent 2 years of federal tax returns with all schedules
  • Most recent 30 days of pay stubs with year-to-date commission breakdown
  • Written Verification of Employment (VOE) with commission breakdown by year
  • Employer letter confirming commission structure and likelihood of continuance
  • Schedule C (if self-employed commission earner) for most recent 2 years
  • Most recent 2-3 months of bank statements (if required for income corroboration)
  • Letter of explanation for any material year-over-year commission decline

Frequently Asked Questions

How do lenders treat draw-against-commission income?
A draw against commission is an advance paid to the salesperson that is later offset against earned commissions. If the draw is a guaranteed minimum (the employee keeps it regardless of sales), it is treated as base salary. If the draw is recoverable (the employee must repay unearned draws), the lender treats the income as commission-only and averages actual commission earnings, not the draw amount.
Can I use commission income from a job I left to qualify?
Generally, no. Commission income must be current and ongoing. If you left a commission-based position, that historical income cannot be carried forward to a new non-commission role. If you moved to a new commission role in the same industry, some lenders will consider the combined history, but this depends on the specific circumstances and lender guidelines.
What if my employer does not break out commissions separately on my W-2?
If the W-2 shows only total compensation without separating base and commission, the lender will rely on pay stubs and the VOE to determine the commission component. The employer must confirm the breakdown in writing. Without clear separation, the lender may not be able to properly average commission income.
Do lenders consider the industry I work in when evaluating commission income?
Yes. Lenders assess the stability and cyclicality of the borrower's industry when determining likelihood of continuance. Commission income in a stable industry with consistent demand (such as medical device sales) may be viewed more favorably than commission income in a highly cyclical or emerging industry where revenue swings are common.
Is there a maximum percentage of income that can come from commissions?
There is no absolute cap on the percentage of income that can come from commissions. However, when commissions constitute 25% or more of total compensation, most lenders apply enhanced documentation requirements and closer trend analysis . Borrowers who are 100% commission are subject to the most rigorous review.
Can I get pre-approved based on commission income?
Yes, but the pre-approval will be based on the averaged commission income figure, not the best year or most recent paycheck. Borrowers should provide their full two-year earnings history upfront so the lender can calculate the accurate qualifying income from the outset, avoiding surprises later in the process.
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