Commission income for a mortgage is averaged, not taken from the best recent month. The lender adds year-to-date commission to the prior year's commission, divides by the months covered, and checks the trend. Two years of history is the norm, twelve months the floor, and a falling trend can cut the figure or rule it out.
How is commission income for a mortgage averaged?
The lender takes every commission dollar earned in the averaging period and spreads it evenly across the months in that period. With a typical file, that means this year's commissions to date plus all of last year's, divided by the total number of months. The result is a monthly figure that smooths out good quarters and slow ones.
The method comes from agency rules. The Fannie Mae Selling Guide section on bonus, commission, overtime and tip income tells lenders to compare year-to-date income with prior years. When the income is stable or rising, the lender averages year-to-date and previous year's earnings, and the calculation must include at least 12 months of income. Base salary is figured separately. Commission is added on top only once the average is settled.
Worked example: a sales rep in October
The figures are an example. A medical device rep earns a $3,000 monthly base plus commission. She applies in mid-October, with a pay stub through September 30.
| Line | Example amount |
|---|---|
| Commission, prior year (W-2 detail) | $54,000 |
| Commission, current year through September (pay stub) | $45,900 |
| Months in the period | 12 + 9 = 21 |
| Total commission in the period | $99,900 |
| Monthly commission average | $4,757 |
| Monthly base salary | $3,000 |
| Qualifying monthly income | $7,757 |
The year-to-date pace is $5,100 a month, above last year's $4,500. That makes the trend rising, and the 21-month average is the figure used. A lender would not use the higher $5,100 pace alone. The average is deliberately conservative, because commission can swing with a single lost account.
Why do lenders want two years of commission history?
Two years shows that the borrower's commission has survived at least one full sales cycle, including a slow season and a change of quota. A single year can be a lucky year. Agency guidance recommends two years and lets lenders accept as little as 12 months when other strengths in the file offset the shorter record.
The same Fannie Mae section says that a two-year history is recommended and that income received for a shorter period, but no less than 12 months, may be acceptable when positive factors reasonably offset it. Positive factors are things like a long career in the same industry, a move from salary to commission with the same employer, or large reserves. What counts as enough is the underwriter's call, and many lenders set their own minimum above the agency floor.
The second year also catches plan changes. Employers revise commission plans often: a new split, a cap, a territory cut. If the borrower's plan changed this year, last year's earnings may describe a job that no longer exists. A letter from the employer describing the current plan can carry the file when the history alone cannot.
Fixed income sources work very differently. A pension, for example, has a stated amount and needs no history at all, as the guide to pension income for a mortgage explains. Commission is the opposite case: no amount is promised, so history is the only evidence.
Year-to-date commission against prior W-2 commission totals
The trend test compares this year's monthly pace with last year's, and last year's with the year before. When the pace holds or rises, the lender averages. When it falls, the lender has to show that the income has leveled off at the lower amount, and then qualifies only on that lower level.
Agency guidance is direct about decline. For decreasing income, the lender must confirm the current level has stabilized after the drop, or the income is not eligible. If it has stabilized, the lender uses year-to-date income divided by the months since it settled. In practice that means a rep whose commissions dropped by a third last year may qualify on the lower current pace, but never on the old two-year average.
Reading the documents
Commission totals come from three places, and they rarely line up to the dollar:
- The pay stub shows year-to-date commission, if the employer breaks it out. Some stubs lump commission with bonus.
- The W-2 shows total wages, with no split between base and commission. The split must come from the employer.
- The verification of employment form, Fannie Mae Form 1005, asks the employer to report earnings by type, commission included.
Fannie Mae accepts either a completed Form 1005 or the latest pay stub plus two years of W-2s, along with a verbal check of employment. When the stub does not separate commission, the written verification is the cleaner route, because it states each year's commission in the employer's own words.
Commission draws and commission checks on the borrower's bank statements
On a bank statement, commission income shows up in one of two ways. Some employers pay a fixed draw each pay period and settle the true commission later. Others pay base salary on schedule and drop commission in as separate, uneven deposits. Both patterns are normal, and both need the employer's documents behind them.
A draw is an advance against future commission. A rep might receive $2,500 every two weeks whether or not deals close, then get a true-up payment, or a clawback, once the quarter's sales are counted. On the statement, a draw looks like a steady paycheck, which can make the income seem more stable than it is. The lender should ask whether the draw is recoverable, meaning the employer can take it back if commissions fall short. A recoverable draw is a loan from the employer until it is earned.
Lump commission deposits are easier to read but harder to average. A deposit of $14,000 in March and nothing extra until July is common in quarterly plans. Pulling those deposits out month by month, alongside the pay stub totals, lets an underwriter confirm the employer's figures are real money reaching the borrower.
Lean months show up as overdrafts
Commission earners with irregular pay often run thin in the months between payouts. Overdrafts and returned items in those gaps tell the underwriter how the household handles uneven cash. The guide to NSF fees on bank statements covers how those events are counted and what explanation helps. TrueBankFlow flags NSF fees and overdrafts with the date and the statement line, so you can set them next to the payout calendar and see whether they cluster in the gaps.
Commission earners paid on a 1099 instead of a W-2
A commission earner who receives a 1099 is not an employee in the lender's eyes. The income is self-employment income, so the lender reads it from tax returns, or from bank statements on a bank statement program, after business expenses. That usually produces a smaller figure than the gross commissions suggest.
The difference matters most for real estate agents, insurance agents, and independent sales reps who pay their own travel, licensing, marketing and desk fees. An employee's commission is counted gross. An independent contractor's commission is counted net of the costs the contractor pays to earn it. Two agents with the same $120,000 of commissions can qualify on very different amounts if one is a W-2 employee of a brokerage and the other works on a 1099 and spends $30,000 a year on expenses.
Self-employment rules also bring their own history test. Most programs want the borrower in business for two years, and bank statement programs apply an expense factor to deposits rather than reading a pay stub. A borrower who switched from W-2 commission to 1099 commission with the same company can sometimes count the earlier years toward the history, but the new income is still figured the self-employed way.
When a commission average misstates the borrower's income
An average misleads when the past no longer predicts the future. A new role, a changed commission plan, one outsized deal, or a stretch of leave can each make the two-year figure too high or too low. The underwriter should adjust for the event, or set the average aside, rather than trust the arithmetic.
Cases that break the average
- A single giant deal. One contract that paid three times the usual commission inflates the average. If it will not repeat, the employer should say so, and the lender should consider leaving it out.
- A new commission role. A rep who moved from salary to commission six months ago has no commission history, only a pace. Agency guidance needs at least 12 months.
- A plan change. A new cap or split can make last year's earnings unreachable. Qualify on the current plan's results.
- Leave during the period. A rep who spent three months on leave has a lower year-to-date figure that does not reflect the job. Fannie Mae allows a lender to exclude a period when a documented, non-recurring event outside the borrower's control stopped them from earning.
- Commission replaced by benefits. A rep on long-term leave may be receiving disability benefits instead of commission. Those benefits have their own proof, covered in the guide to disability income for a mortgage.
Unreimbursed expenses
W-2 commission earners sometimes pay their own car, phone and travel costs without reimbursement. Those costs do not appear on the W-2 but may show up on the bank statements as steady debits. Lenders differ on whether to deduct them. Asking the borrower directly, before the underwriter finds the pattern, keeps the figure honest and avoids a late condition.
To set commission deposits against the employer's figures month by month, upload the borrower's statements and compare the grouped deposits with the pay stub totals.