25 Percent: The VA Guideline Number That Decides How Your Commission Income Counts

25 percent. That one number in the VA guidelines decided whether Natalia's commission income would count in full, or get picked apart line by line before her loan even reached underwriting.

Natalia is a fictional illustration of a situation that comes up often: a veteran near Camp MacKall, NC, working outside sales on a base salary plus commission, applying for a VA loan. Her income looks straightforward on paper, salary plus commission, two years of history. But when it came time to calculate her qualifying income, one guideline threshold mattered more than anything else on her file.

What Most Borrowers Get Wrong About Commission Income

Many veterans assume commission income either counts or it doesn't, full stop. That is not how VA guidelines work. The treatment of commission income depends partly on how long you have earned it, and partly on what percentage it makes up of your total annual employment income. Get that percentage wrong, or never calculate it at all, and a borrower can end up with qualifying income that is either overstated or needlessly reduced.

The Guideline, Word for Word

Here is the VA language exactly as written: "Generally, income from commissions is considered stable when the borrower has obtained such income for at least 2 years. Employment for less than 2 years cannot usually be considered stable unless the borrower has had previous related employment and/or specialized training. Employment of less than 1 year can rarely qualify; however, in-depth development is required for a conclusion of stable income on less than 1 year cases. For a borrower who will qualify using commission income of less than 25 percent of the total annual employment income, IRS Form 2106 expenses are not required to be deducted from income even if they are reported on IRS Form 2106. For a borrower earning commission income that is 25 percent or more of annual employment income, IRS Form 2106 expenses must be deducted from gross commission income regardless of the length of time the borrower has filed the expenses with the IRS."

What the 25 Percent Line Actually Means

Break that down and there are really two separate calculations hiding in one paragraph. If a borrower's commission income makes up less than 25 percent of their total annual employment income, IRS Form 2106 expenses do not have to be deducted, even if those expenses are reported on the form. But once commission income reaches 25 percent or more of total annual employment income, those Form 2106 expenses must be deducted from gross commission, no matter how long the borrower has been filing them with the IRS.

Same income. Same tax forms. Two completely different outcomes, depending entirely on which side of that 25 percent line a borrower falls on.

How This Plays Out for Someone Like Natalia

For a veteran in outside sales with base salary plus commission, this is not an academic detail. It is the calculation that determines how much qualifying income actually shows up on the loan application. Before her file moves toward underwriting, the percentage needs to be calculated first: how much of her total annual employment income comes from commission, and whether that lands her above or below 25 percent.

The One Question to Ask Your Loan Officer

If you are a veteran or service member with commission-based income applying for a VA loan, here is exactly what to ask: "Can you show me my commission income as a percentage of my total annual employment income, and tell me whether Form 2106 expenses were deducted under VA Chapter 4, Topic 2, Subsection i?" Ask for that calculation in writing. It is a direct question with a direct answer, and it tells you immediately which rule applies to your file.

Where I Fit In

I'm Jason Sharon, a licensed mortgage broker at Home Loans Inc, working with veterans and service members across South Carolina, North Carolina, Georgia, Florida, Alabama, Mississippi, Virginia, West Virginia, Wyoming, and Iowa. If you have commission income and you're looking at a VA loan, let's calculate that percentage before it becomes a surprise in underwriting. Call 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: 25 Percent