"My W-2 says one number. Why is the underwriter using a smaller one?"
When I was underwriting loans at two banks, that question sat behind a lot of files. It usually came from nurses, sales reps, skilled tradespeople and anyone else whose paycheck changes from one pay period to the next. Around Cincinnati, that's a lot of people: hospital shifts, plant overtime, year-end bonuses, commission checks.
Here's the short version. Base pay is easy to count. The part of your pay that moves around gets read for two things: how long you've earned it, and which direction it's heading. Two people with the same total pay can end up with different qualifying income because of those two things.
(For the basics, start with our earlier post, Understanding Bonus and Commission Income. This one goes a level deeper, into the analysis an underwriter actually does, with the guideline behind each step.)
Why the part that varies is read differently
Every income question in underwriting comes back to one thing: is this income likely to continue? Fannie Mae's Selling Guide (B3-3.1-01) says the lender has to document that income is stable, has a documented history of receipt, and is reasonably expected to continue.
A salary answers that on its own. Overtime, bonus and commission don't. They depend on your employer's schedule, the company's results or your own sales. So the underwriter looks back at your history to judge what's likely going forward.
First: how long you've earned it
The standard is two years.
- Fannie Mae (B3-3.3-02) recommends a two-year history of bonus, commission, overtime and tip income. A shorter history can be considered, but never less than twelve months, and only when there are positive factors that reasonably offset it.
- Freddie Mac (Guide Section 5303.3) takes the same approach. Most income that fluctuates needs two years of history. A shorter history can be treated as stable only with a written analysis and supporting documents, and it can't be less than twelve months.
- FHA (HUD 4000.1, II.A.4.c.v) allows overtime, bonus or tip income you've received for the past two years that's reasonably likely to continue. Less than two years can work if it's been earned consistently for at least one year. For commission (II.A.4.c.ix), FHA looks for at least one year in the same or a similar line of work.
So if you moved into a commission role or started picking up regular overtime this spring, that income may not count yet, even if it's a big part of your paycheck today. That isn't a judgment about you. There just isn't enough history yet for the guidelines.
Second: which direction it's moving
This is the part that surprises people. The underwriter doesn't simply average your overtime or commission. They compare this year's pace with prior years.
Under Fannie Mae's B3-3.3-02:
- Stable or increasing: the lender averages your year-to-date earnings together with the prior year's, using at least twelve months of income.
- Decreasing: the lender has to confirm the income has stabilized after the decline. If it hasn't, that income isn't eligible to use at all. If it has, the calculation starts from when it leveled off.
Two more details from the same section. An annual bonus gets spread across the whole year so it fits the trend analysis. And when a documented, one-time event outside your control kept you from earning for a while, the lender may leave that stretch out of the calculation.
How FHA handles a dip
FHA writes the conservative approach directly into its handbook. Under the updated income sections that take effect today, November 10, 2026, the lender uses the lesser of two figures:
- the average over the previous two years (or over the whole time you've earned it, if that's shorter), or
- the average over the previous year.
That's II.A.4.c.v for overtime, bonus and tips, and II.A.4.c.ix for commission. If last year was your softer year, last year sets the number. If last year was your stronger year, the two-year average does. Either way, the underwriter works from the more conservative figure.
The documents to have ready
For overtime, bonus or commission, expect to provide:
- Your most recent pay stub, showing year-to-date earnings. Fannie Mae (B3-3.2-01) wants it dated no earlier than thirty days before your application.
- Your W-2s for the past two years.
- A verification from your employer. Fannie Mae accepts a written verification of employment (Form 1005) in place of the pay stub and W-2s, and it requires a verbal verification of employment late in the process (B3-3.1-04). FHA's handbook lists similar options, including a written or electronic verification covering two years.
- Tax returns, in some cases. When commission makes up a large share of your pay, Freddie Mac also asks for two years of personal tax returns, because unreimbursed work expenses can reduce the income an underwriter uses.
One practical tip: the breakdown on your pay stub matters. When base pay, overtime and bonus are lumped together on one line, the underwriter usually needs your employer to separate them in writing. A stub that lists each one makes the file easier to read.
A new job or a new pay structure
Changing employers or pay plans resets part of this analysis. Overtime or commission you earned with a previous employer doesn't automatically carry over if the new role pays differently. And Fannie Mae's B3-3.1-01 says that when the lender learns you're moving to a lower pay structure, such as a new job, it has to use the lower amount.
Moving from salary to commission in the same field was one of the more common examples I saw. The work is the same, but in the underwriter's eyes the income is new.
If you're weighing a job change and a home purchase in the same year, talk with a loan officer before you make the move. The order can matter.
What I tell people who are paid this way
- Keep every pay stub and W-2. Especially your last pay stub of the year, which shows the full year's breakdown.
- Know your own trend. Compare this year's year-to-date overtime, bonus or commission with where you were at this time last year. If you're behind, know why before an underwriter asks.
- Put the reason for any dip in writing now. A specific, documented explanation reads very differently from a vague one written months later.
- Ask before changing jobs or pay plans. A raise in total pay can still mean less income an underwriter can use at first.
- Ask how your loan program reads it. Fannie Mae, Freddie Mac, FHA, VA and USDA each have their own rules for this income, so the same pay stub can come out differently by program.
If you work for yourself, the analysis is different. Last week's post, How Underwriters Calculate Self-Employed Income, walks through it. For how income fits into the rest of the review, see how underwriting works overall.
If part of your pay changes from check to check and you're thinking about buying in Greater Cincinnati, send us your last two W-2s and a recent pay stub. We'll read them the way an underwriter would and tell you what we see. You can reach our team whenever you're ready.
— Eddie Cohen, President, Cohen Mortgage (NMLS #437457)
Sources
- Fannie Mae Selling Guide, B3-3.1-01, General Income Information
- Fannie Mae Selling Guide, B3-3.3-02, Bonus, Commission, Overtime, and Tip Income
- Fannie Mae Selling Guide, B3-3.2-01, Standards for Employment and Income Documentation
- Fannie Mae Selling Guide, B3-3.1-04, Verbal Verification of Employment
- Freddie Mac Single-Family Seller/Servicer Guide, Section 5303.3, Additional Employed Income
- HUD Handbook 4000.1 (FHA), II.A.4.c.ii Employment Related Income, II.A.4.c.v Overtime, Bonus, or Tip Income, and II.A.4.c.ix Commission Income. Section numbers and text follow the handbook update whose income sections take effect November 10, 2026.
This post is general education about underwriting guidelines. It isn't a commitment to lend, and guidelines change and differ by loan program.