How does a lender calculate income for commission or variable pay?

How do lenders calculate commission income?

You want to know how lenders calculate income when you earn commissions or variable pay instead of a steady salary. Lenders typically average your commission or variable income over the past two years to determine your qualifying income. This approach helps smooth out the ups and downs that come with variable earnings.

Lenders will ask for your tax returns from the last two years, plus recent pay stubs and a year-to-date profit and loss statement if you're self-employed. They calculate the average of your commission income across those 24 months. If your income shows a declining trend over that period, the lender might use the lower recent year instead of the two-year average.

You can check the income calculation on your Loan Estimate in Section H, which shows how the lender calculated your debt-to-income ratio. Compare that number to your own calculation using your two-year average. If the numbers don't match your Loan Estimate or you have questions about the calculation, you can ask your lender to walk you through their math. Some borrowers also provide additional documentation like client contracts or a letter from their employer explaining their commission structure.