VA Rules on Verifiable Income: Commissions
In our last blog post we discussed the VA requirements for verifiable income. When a borrower applies for a VA home loan they must list all sources of income that could be used to establish the borrower’s debt to income ratio.
The VA doesn’t allow some types of income to be considered for the debt to income ratio unless it meets certain requirements. For example, in our last blog post we discussed how the VA interprets income from part-time jobs, second jobs, employee bonuses and related pay. The VA rules don’t permit such income to be listed unless it is regular, likely to continue, and have been paid for at least two years.
The VA also has standards for income derived from commissions. If a VA loan applicant has a substantial portion of his pay coming from commissions, the Department of Veterans Affairs requires verification of the amount of commissions paid for the year, plus the basis of the employee’s pay arrangement.
Is the borrower paid on a salary-plus-commission basis? Straight commission? Or does the borrower’s pay structure include “draws against commission”? Whichever arrangement is used, the borrower needs documentation of it, plus how often the commissions are paid.
In these cases, the VA also requires the applicant to provide tax returns from the last two years, much in the same way it requires tax data for self-employed borrowers. The VA standard for “stable income” derived from commissions includes the requirement that the borrower has received such income for at least 24 months.
Earning commission is not a barrier to a VA loan, but it must be established that commissions are paid, for how long, and what percentage of the income the commission takes up. Borrowers who can’t show such data for at least two years worth of employment aren’t automatically barred from a VA home loan.
According to the VA rules, “Less than two years cannot usually be considered stable unless the applicant has had previous related employment and/or extensive specialized training…In-depth development is required for a conclusion of stable income on less than one year cases.”
The VA rulebook for lenders does state that it’s tougher to qualify for a VA home loan when a commission-earner doesn’t have a history of commissions of at least two years or more, but there is no specific prohibition–each application in such cases is handled individually.