How Lenders Calculate Your Mortgage Qualifying Income: Commission Income and Schedule C (Sole Proprietorship)
Income Basics: How Lenders Calculate Your Qualifying Income for a Mortgage Part Two
Today, we’re continuing our series on calculating qualifying income for a mortgage. We’ve already covered base pay, overtime, and bonus income. Now, let’s talk about commission income and move on to income reported on a Schedule C for sole proprietors.
As a quick reminder: when you apply for a home loan, lenders start with your gross income—the amount you earn before taxes, Social Security, insurance, retirement contributions, or other deductions. Your qualifying income for a mortgage is based on this gross amount, usually converted into a monthly figure.
Commission Income
Commission income is money you earn based on the sales you make. Unlike a regular salary, it can fluctuate a lot from month to month. That raises a key question for mortgage underwriters: how do we figure out qualifying income when it isn’t consistent?
The answer: we average it.
Most lenders want to see at least two years of history to consider commission income stable. Some loan programs allow one year, but we’ll stick with the standard two-year average.
Important note: If a borrower’s commission income is declining year over year, it may be considered unstable or even non-qualifying income. Lenders will look at the trend over the past two years and may start asking questions if the income appears to be falling. For example, if Gary earned $30,000 in 2023 and only $25,000 in 2024, that downward trend could affect whether the income is usable for qualifying. The underwriter will want an explanation, such as a temporary health issue, business slowdown, or seasonal factors.
Example:
Gary works at a furniture store, earning commissions. His income over the past two years and current year-to-date looks like this:
2023: $25,500
2024: $28,600
2025 YTD (through June): $13,600
Step 1: Add total earnings
$25,500 + $28,600 + $13,600 = $67,700 over 30 months
Step 2: Convert to monthly income
$67,700 ÷ 30 = $2,256 per month
Step 3: Check current consistency
$13,600 ÷ 6 months = $2,267 per month
The numbers line up, so the income is considered stable. If the trend had shown a decline instead of stability, the underwriter would investigate the reason and might not count all of it as qualifying income.
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Commission as an Independent Contractor (Schedule C)
Some people earn 100% commission and don’t get a W-2. Instead, they get a 1099 as an independent contractor. This means taxes, Social Security, and benefits aren’t automatically withheld, and their income is reported on a Schedule C.
Technically, these borrowers aren’t self-employed; they don’t own a business, but lenders treat them as if they are. Why does this matter? A Schedule C allows the borrower to write off business expenses, which can lower the final income figure used to calculate qualifying income.
Important note: Just like with W-2 commission, lenders watch for trends. If the borrower’s Schedule C income is declining year over year, it could be considered unstable or non-qualifying. For example, if Gary reported $60,000 in 2023 but only $50,000 in 2024 after expenses, the underwriter may ask questions about the drop and might not count all of the income. Providing an explanation (like a slow season, unexpected expenses, or temporary illness) can help clarify the situation.
Example:
Gary’s 1099 shows $60,000 in earnings
He deducts $10,000 in business expenses (supplies, travel, advertising) on his Schedule C
The qualifying income for the mortgage is now $50,000, not $60,000
Some deductions, like depreciation, can be added back since they don’t actually reduce cash flow. But most business expenses do reduce qualifying income. Lenders usually average two years of Schedule C income to determine stability.
Even though Gary works for a company and isn’t self-employed in the traditional sense, he’s responsible for paying his own taxes, and the Schedule C provides a clear picture of his earnings after allowable business expenses.
If Gary owned the furniture store, the process would be similar: he could deduct advertising, supplies, internet, equipment, and other business expenses. This would reduce both his taxable income and qualifying income, similar to a 1099 contractor.
User-Friendly Example:
Let’s say Gary earns $5,000 on a 1099 and deducts $1,000 for supplies each month. For qualifying income, the underwriter would consider $4,000 per month, not the full $5,000. Over two years, this average gives a realistic, stable picture of what he can count on for mortgage payments.
Wrapping Up
Commission income and Schedule C reporting can seem complicated, but the key points are:
Commission income is averaged to find a stable monthly amount.
Lenders typically want two years of history.
Independent contractors report income on a Schedule C, which accounts for business expenses.
Declining income trends can make income non-qualifying.
Qualifying income may be lower than gross earnings if business deductions are taken.
Understanding these rules now makes it easier to see how mortgage underwriting works behind the scenes.
I hope this breakdown of commission and Schedule C income makes the process more transparent. I know it can feel complicated, and I’d love to hear from you. What questions do you have? Have you encountered any challenges with fluctuating or independent contractor income? Drop a comment or send a note; I read every response and enjoy helping clarify these details.
Next time, we’ll dive into second jobs, side gigs, and seasonal jobs. Stay tuned!
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💡 Practical Tips: Commission & Schedule C Income
Average, don’t guess: Lenders usually average the last two years of commission or Schedule C income to find a stable monthly amount.
Watch trends: If your income is declining year over year, it may not count as qualifying. Be ready to explain why.
Document everything: Keep W-2s, 1099s, paystubs, and Schedule C forms handy to prove your income.
Seasonal swings are normal: Many industries have busy times, like holidays for retail. Show past pay stubs if your income varies.
Know your deductions: Expenses on a Schedule C reduce your qualifying income, but some “paper” deductions, like depreciation, may be added back.
Consistency is key: Lenders want a realistic picture of what you can rely on each month.
