Bonus, overtime and commission: how lenders average two years of pay
How lenders average bonus, overtime and commission over two years, a worked example of why a raise counts less, and what 1099 earners should compare.
In this article
How do lenders count bonus, overtime and commission income?
- Lenders usually average bonus, overtime and commission over two years instead of using this year alone.
- Your extra pay has to look like it will keep coming before a lender counts it.
- A jump this year gets diluted by the lower year before it.
- Commission paid on a 1099 can be read like self-employed income, so ask each lender how it counts yours.
- In my files, one lender's no has been one lender's answer, so I shop the same file across a network of lenders.
That covers salespeople, nurses and anyone else paid partly in bonus or overtime. Lenders usually work from that average. Each lender's own rules still decide your qualifying income, meaning the income it counts when it sizes your loan, so the same paycheck can count differently from one lender to the next.
Why a raise this year counts less than you expect
Your lender adds up two years of variable pay and divides it out, so a strong year gets diluted by the weaker one before it. Your best year never stands alone.
Say, as an example, you earned $20,000 in bonus last year and $30,000 this year. $20,000 plus $30,000 is $50,000.
| Example (round numbers) | Bonus income |
|---|---|
| Last year | $20,000 |
| This year | $30,000 |
| Two-year total | $50,000 |
| Average per year ($50,000 ÷ 2) | $25,000 |
| Average per month ($25,000 ÷ 12) | About $2,083 |
| This year alone, per month ($30,000 ÷ 12) | $2,500 |
Now compare. If you were counting on this year alone, you'd divide $30,000 by 12 to get your monthly figure. The average gives you less a month to qualify with. Less counted income means a smaller loan you can qualify for, which is why the surprise stings.
Lenders do this because extra pay can disappear. Overtime gets cut. A bonus pool shrinks. One big year could be a fluke, and a lender is betting on years of your future income, not the last 12 months.
A falling year needs a question too. If this year came in lower than last, ask each lender how it treats a drop, because it decides whether that pay still looks likely to continue.
If your commission comes on a 1099
If your commission comes on a 1099, many lenders read it the way they read self-employed income, from your tax returns after write-offs, and that can shrink what counts. This is where my self-employed readers get stuck. Your accountant cut your taxes, and the same write-offs cut your qualifying income.
How those write-offs should be handled for taxes is a question for your CPA, not me.
A lender's own rules decide how 1099 commission gets counted, including how many years of returns it wants, so ask that up front. We're a mortgage broker, so I shop one file across a network of wholesale lenders, the ones that work through brokers, instead of living with one bank's rulebook. Different lenders want different deals.
Bank statements can be another way to show what you earn. We close bank-statement loans that retail banks turn away, because the deposits hitting your account can tell a fuller story than your returns. I walk through that route in how bank-statement loans work for self-employed buyers.
What my files show about contract and bonus income
I've seen one lender call contract income too unstable and another count it once the file told the whole story. A travel nurse came to me after another lender balked at the gaps between her thirteen-week contracts. We gathered her contracts, pay stubs, tax returns and a short letter for each gap, and I shopped it across lenders at Rate Rebel (NMLS #282828). The lender counted her contract income.
Should you apply now or wait for a longer history?
Ask whether your extra pay has a steady history behind it before you apply, and bring every document that shows it will continue. If this year's jump is new, a lender may count much less of it.
These are the papers I'd ask a lender about up front:
- Recent pay stubs that show year-to-date bonus, overtime or commission.
- Your W-2s, the yearly wage form from an employer, or tax returns for the years the lender averages.
- Your contracts if you work assignment to assignment; in my travel nurse's file, they showed the same line of work.
- A short letter about a gap, like the ones we wrote for each break in that file.
Then ask each lender two questions: which years are you averaging, and what monthly figure did you land on? Put two lenders' answers side by side on the same file. If one says too unstable, that's one lender's answer.
Here's my decision rule. With two steady years of bonus, overtime or commission, you can apply now and expect the lender to use the average, not this year's number. If your variable pay is new or just jumped, figure your income on the average first and weigh whether more history is worth waiting for. Paid commission on a 1099? Compare the tax-return route with a bank-statement route. My free calculators on this page let you run your numbers on that average in a few minutes, with no credit pull.
Questions people ask
How do lenders count bonus, overtime and commission income?
Lenders usually average it over two years and count it only when it looks like it will continue. Each lender's own rules decide the final figure, so the same pay can count differently at two lenders.
Does a raise or bigger bonus this year count toward my mortgage?
It counts, but usually blended with last year. As an example, $20,000 last year and $30,000 this year average to $25,000 a year, a lower monthly figure than this year alone would give.
Spot something out of date? Tell Sophia.
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