Many borrowers want to know how bonus, commission, or overtime income actually gets calculated for a mortgage. They are concerned that a strong recent bonus or a good sales year won’t count the way they expect. This guide explains the basics so you can move forward with confidence.
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Using Bonus, Commission, or Variable Income to Qualify for a Mortgage
SHORT ANSWER
Bonus, commission, and overtime income generally need a 2-year history, averaged over 24 months rather than counted at the highest figure. A shorter 12-month history may qualify with strong compensating factors. RSUs follow their own separate rules, including a cap on how much of your income they can represent. Smart Loan Savings Educational Content
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| Income Type | History Required |
|---|---|
| Bonus Income | 2 years standard, averaged over 24 months |
| Commission Income | 2 years standard, averaged over 24 months |
| Overtime Income | 2 years standard, treated the same as bonus and commission |
| Restricted Stock Units | 2 years vesting history; vested shares only, publicly traded company required |
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| Variable Income Deep Dive | What This Means for Your File |
|---|---|
| How the Math Actually Works | The actual math is straightforward once the numbers are in hand: a lender pulls two years of W-2s and year-end pay stubs, subtracts base salary to isolate the bonus or overtime portion, then divides that total by 24 to produce a monthly average. A borrower with $18,000 in combined bonus income across two years would show a $750 monthly average added on top of base salary. This average, not the highest single month, is the figure that actually counts toward qualifying income. |
| The 12-Month Exception | A documented 2-year history is the standard rule, but Fannie Mae allows an exception down to just 12 months when strong continuation of income factors are present, such as excellent credit and a low debt-to-income ratio. This exception applies specifically to variable income like bonus, overtime, and commission, not to every income type across the board. A borrower relatively new to a bonus-eligible role should ask a loan officer directly whether this shorter history option might apply to their specific file. |
| Restricted Stock Income Follows Its Own Rules | Restricted stock units follow a meaningfully different rule set than a cash bonus or commission check. The issuing company generally must be publicly traded, only vested shares count toward qualifying income, and restricted stock income is commonly capped at no more than 35% of the borrower’s total qualifying income. Some lenders also apply a 20% to 30% discount to account for stock price volatility, using an average share price rather than the current market value when calculating the figure. For a borrower whose income also includes self-employment earnings, the Self-Employment Income Guidelines page covers how that separate income type gets calculated. |
| A Declining Trend Changes Everything | A common misconception is that a two-year average always works in the borrower’s favor, when a declining pattern actually works against it. If bonus or commission income dropped from year one to year two, a lender generally uses the lower, more recent figure instead of the average, and a consistent three-year decline can sometimes exclude the income entirely rather than just reducing it. Reviewing this trend honestly before applying helps set a realistic expectation for how much of this income will actually count. |
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| Variable Income Factor | What Lenders Check |
|---|---|
| History Length | 2 years is standard, though a 12-month exception can apply with strong compensating factors. |
| Income Trend | Rising or flat income gets averaged; declining income uses the lower, more recent figure instead. |
| Documentation | W-2s, year-end pay stubs, and an employer verification letter are the standard proof required. |
| Restricted Stock Rules | Publicly traded company, vested shares only, and a cap near 35% of total qualifying income all apply. |
| Sources Used on This Page | Fannie Mae Selling Guide, B3-3.1-01 — fanniemae.com | Freddie Mac Selling Guide — freddiemac.com |
| This page is provided for educational purposes only. Smart Loan Savings Educational Content | |
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| Main Loan Types | Primary Income & Target Qualification Fit |
|---|---|
| Conventional Loans | Standard W-2 income with strong credit profiles. |
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| People Also Ask | Why This Question Matters |
|---|---|
| How is bonus and commission income calculated for a mortgage? | Lenders subtract base salary from two years of total earnings, then divide the remainder by 24 to get a monthly average. This matters because a single strong bonus year doesn’t raise your qualifying income the way a base salary increase would. |
| Can RSU or restricted stock income be used to qualify for a mortgage? | RSU income can count, but only vested shares from a publicly traded company, generally capped near 35% of total income. This matters because unvested grants and private company stock typically don’t count at all, regardless of expected future value. |
| What happens if my bonus or commission income declined from last year? | A declining trend leads lenders to use the lower, more recent figure instead of a two-year average. This matters because a consistent multi-year decline can reduce this income’s weight in your file or exclude it from qualifying entirely. |
| Explore Our Learning Center | What You’ll Find Inside |
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| Mortgage Basics Guide | Simple explanations of core terms like principal, interest, escrow, and PMI |
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| Credit & Approval | Credit score requirements, how to improve your score, and how lenders approve a file |
| Homebuying Tips | Preparing for a mortgage, choosing the right program, and avoiding common mistakes |
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