Understanding the 25 Percent Rule for Commission Income

 

Understanding the 25 Percent Rule for Commission Income

Commission income is common in many professions. Sales professionals, financial advisors, real estate agents, and many technology employees earn a portion of their compensation through commissions or incentive pay.

When applying for a mortgage, however, commission income is evaluated differently depending on how large a portion of total earnings it represents. Under Fannie Mae guidelines, a key threshold exists at 25 percent of total income. When commission income reaches or exceeds this level, underwriting may require additional documentation and analysis.

Understanding how this rule works can help borrowers with variable compensation better prepare for the mortgage process.

 

Why Commission Income Is Evaluated Carefully

Mortgage underwriting focuses heavily on income stability. While commission income can be substantial, it often varies from year to year depending on performance, market conditions, and compensation structures. Because of this variability, lenders typically review commission income over a longer period of time to establish a pattern. The goal is not simply to confirm that income was earned, but to determine whether it is likely to continue.

This is why additional analysis may occur when commissions make up a significant portion of a borrower’s earnings.

 

What the 25 Percent Threshold Means

The 25 percent rule helps determine how commission income is evaluated. If commission income represents less than 25 percent of total income, underwriting may treat it more similarly to supplemental income. In many cases, documentation requirements may be simpler. However, when commission income represents 25 percent or more of total earnings, it is generally considered a primary component of compensation. At that point, underwriting typically requires a deeper review of the borrower’s financial picture.

This often includes reviewing tax returns to determine whether business-related expenses reduce the effective income available for mortgage qualification.

 

Why Tax Returns May Be Required

Many commission-based professionals incur expenses related to generating income.

Examples may include:

• Marketing costs
• Travel expenses
• Professional licensing fees
• Office expenses
• Equipment or technology costs

When commission income reaches the 25 percent threshold, underwriters may review tax returns to determine whether unreimbursed business expenses are deducted. These expenses may reduce the amount of income that can be used for mortgage qualification.

For borrowers who receive commission income but have minimal expenses, the impact may be small. For others with higher business costs, the usable income may be adjusted.

 

How Commission Income Is Typically Averaged

When commission income is used for qualification, it is generally averaged over time.

Underwriters typically review the borrower’s earnings history to determine consistency. Two years of commission income is often used to establish a reliable pattern. If income has been stable or increasing, the average may closely reflect recent earnings. If income shows a declining trend, underwriting may take a more conservative approach and use the lower income level when calculating qualifying income.

Because debt-to-income ratio depends heavily on usable income, this averaging process can influence the final qualifying numbers. This is discussed further in When a Higher Debt-to-Income Ratio Can Still Be Approved.

 

Commission Income and Employment Stability

Employment continuity also plays a role when commission income is evaluated. A borrower who has worked in the same industry or role for several years typically demonstrates a stronger pattern of earnings than someone who has recently entered a commission-based position.

This does not necessarily mean newer roles cannot qualify. However, underwriting may review the borrower’s professional history to confirm that the income is sustainable.

A deeper explanation of how job history is evaluated is provided in Mortgage Job History Requirements: What Fannie Mae Actually Looks For.

 

When Commission Income Works in the Borrower’s Favor

Commission-based professionals often earn strong incomes, particularly when performance incentives are part of their compensation structure. When income history is well documented and expenses are manageable, commission income can strengthen a borrower’s qualifying profile.

Higher usable income can help:

• Reduce effective debt-to-income ratios
• Support larger loan amounts
• Improve automated underwriting findings

Income structure matters, but consistency and documentation often matter more.

 

Other Factors That Support Commission-Based Borrowers

When commission income represents a large portion of earnings, other elements of the financial profile become particularly important.

These may include:

Credit history
A strong record of on-time payments demonstrates financial discipline.

Mortgage reserves
Available savings can strengthen approval when income varies. This topic is discussed in Mortgage Reserve Requirements Under Fannie Mae.

Debt structure
Managing installment debt effectively may also influence qualification, as explained in When Installment Debt Can Be Excluded From Debt-to-Income Calculations.

Mortgage underwriting evaluates the entire financial profile rather than focusing on income alone.

 

A Practical Perspective on Commission Income

Commission-based professionals often assume that variable income makes mortgage approval difficult. In reality, many borrowers with commission income qualify successfully when their earnings history is stable and well documented.

The 25 percent rule does not prevent borrowers from qualifying. Instead, it simply determines how income is reviewed and documented during underwriting. When compensation patterns are consistent and financial documentation is clear, commission income can play a significant role in supporting mortgage approval.

Understanding how this rule works allows borrowers with performance-based compensation to approach the mortgage process with greater confidence and preparation.

 

Continue Reading: Conventional Loan Qualification Guides

For additional insight into how conventional mortgages are evaluated, the following articles expand on related topics:

• 10 Lesser-Known Fannie Mae Guidelines That Can Influence Mortgage Qualification
• When a Higher Debt-to-Income Ratio Can Still Be Approved
• When One Year of Bonus or Overtime Income May Be Enough for Mortgage Qualification
• Mortgage Job History Requirements: What Fannie Mae Actually Looks For
• Mortgage Reserve Requirements Under Fannie Mae
• When Installment Debt Can Be Excluded From Debt-to-Income Calculations
• Using Rental Income to Qualify for a New Home Purchase

Each guide explores how income, assets, and debt interact within Fannie Mae’s broader underwriting framework.