If You Earn Commission and Plan to Apply for a Conventional Loan, Read This
If you earn commission and you're about to apply for a conventional loan, this one is for you. Let me introduce Olivia, a fictional buyer near Folly Beach. She is not a real client, but her situation is one that comes up often, and it can catch commission earners off guard.
Olivia's Assumption
Olivia's paycheck has a big commission component. Lately, she has had some strong months, and she assumes those strong months are what a lender will count when she applies. It makes sense. They are the most recent and the most impressive.
What Olivia doesn't know is that a two-year history rule applies to her income. She is planning her purchase around her best stretch, when the lender is going to look at something broader.
What the Conventional Guideline Says
Here is the guideline, word for word: "Commission income that exceeds 25% of total income is considered variable and requires a two-year history. The lender must calculate the monthly average using the most recent two years."
There are two pieces in that passage. First, once commission is more than 25% of total income, it is considered variable income. Second, variable income of this kind requires a two-year history, and the lender calculates the monthly average using the most recent two years.
In plain terms, a strong few months does not set Olivia's income on its own. Her commission is looked at across the most recent two years and turned into a monthly average.
Why This Matters Before You Apply
Most commission earners think about their income in terms of what they are earning now. The guideline asks a different question: what has your commission looked like over time? That shift in thinking is where the surprise comes from.
If Olivia finds this out after she has already picked a price range and started touring homes, she has to rethink her plans in the middle of the process. If she finds it out before, she can plan around her real history from the start.
I am not going to promise how any particular calculation will turn out. That depends on the borrower, the documents, and the lender's review. What I can tell you is how the rule is built, so you know what to expect.
The Question to Ask Your Lender
Here is the practical piece you can use today. Olivia asks her lender this, and you can too:
"My commission is over 25% of my total income. Under Selling Guide B3-3.1-04, how will you calculate my monthly average from the most recent two years, and which documents do you need from me to show that two-year history?"
That question does three things. It tells the lender you know your commission is over the 25% line. It points to the guideline by name, so the conversation is about the actual rule. And it asks two things you need answers to: how the monthly average will be calculated, and which documents are required to show the two-year history.
Asking before you apply means the calculation and the paperwork are on the table early, rather than showing up as a surprise partway through.
A Few Ways to Use This
If you are paid in commission, start thinking about your income as a two-year picture, not a recent snapshot. Ask your lender how they will do the math. Ask which documents they need. And plan your purchase with those answers in hand.
This guidance applies to conventional loans. Other loan programs have their own guidelines, so if you are considering a different product, ask about that program's rules specifically.
Let's Look at Your Situation
I'm Jason Sharon, a licensed mortgage broker at Home Loans Inc, and my approach is simple: I find the path. If you earn commission and you're planning a conventional purchase, I'm glad to walk through the two-year history rule with you and what it means for your plans. Call me at 843-LOW-RATE.
Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.
Learn more about this loan program: If You Earn Commission and Plan to Apply for a Conventional Loan, Read This
