FHA overtime and bonus income: when it counts

What the rule covers

The Handbook defines Overtime, Bonus or Tip Income as income you receive in addition to your normal salary. It is a separate category from base pay, because base pay is predictable and extras are not. The rule here applies to employees. Commission income is its own category with a sibling standard, and self-employed owners follow the business income rules instead. Each category has a "standard" and a "calculation of Effective Income" that are easy to confuse, so check which one your pay stub describes.

The two-year standard and the one-year exception

The default test is that you have received this income for the past two years and it is reasonably likely to continue. If you have less than two years of it, the Handbook still allows it when the lender documents that you consistently earned it over a period of not less than one year and it is reasonably likely to continue. Under one year, there is no path. A nurse who has picked up overtime shifts every pay period for 18 months qualifies on the exception; one who started eight months ago does not.

The lesser-of calculation

Once the income qualifies, the lender calculates Effective Income by using the lesser of two figures. The first is the average earned over the previous two years or, if less than two years, over the length of time it has been earned. The second is the average earned over the previous year. Using the lesser protects the lender from relying on a peak: if last year was weaker than the longer history, last year is used, and if last year was stronger, the longer average is used. You do not get to pick the better one.

A worked example

Say a driver earned $12,000 in overtime and bonuses over the last 24 months, with $3,600 of that in the most recent 12. The history average is $12,000 divided by 24, or $500 a month. The last-year average is $3,600 divided by 12, or $300 a month. The lesser is $300, so $300 a month is added to base pay. If last year had been the stronger one, say $8,400 of the $12,000 total, the last-year average would be $700 and the longer average of $500 would be the one used. The checker above does this division for whatever totals you enter.

Commission and tips

Commission income is paid contingent on a business transaction or service. The standard asks for at least one year of earning it in the same or a similar line of work and a reasonable likelihood it will continue, with traditional or alternative employment documentation. The calculation uses the same lesser-of structure: the average over two years (or the shorter time if under two), or the average over the previous year. Tip income appears in the overtime and bonus category and follows that standard. This page's checker works for any of them, but confirm which standard your income falls under with the lender.

Verification: why base pay is easier

The Handbook lets a lender skip direct verification of the past two years of employment if the employer confirms a two-year history, only base pay is used, and you sign IRS Form 4506, 4506-C or 8821 for the prior two tax years. Using overtime, bonus or tip income removes that shortcut. Expect to supply W-2s, written verifications of employment or direct electronic verification so the lender can see how the variable pay has moved. Having the documents ready saves time.

When extra income is not countable yet

Variable pay that does not meet the standard can still matter. In manual underwriting, additional income from overtime, bonuses, part-time or seasonal work that is not reflected in Effective Income can be cited as a compensating factor if received for at least one year and it would bring the ratios to 37/47 or less; see the debt-to-income limits page. For second jobs, the part-time rule uses a plain two-year average, without a lesser-of step, and a long break in earnings is covered by the employment gap rules.

Sources

• HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook, Update 18 PDF: Underwriting the Borrower Using the TOTAL Mortgage Scorecard, Overtime, Bonus, or Tip Income and Commission Income, Handbook pp. 224 and 227-231 (heading Income Requirements (TOTAL) (11/10/2026)(04/10/2025)). Read November 2, 2026.
• HUD, Single Family Housing Policy Handbook 4000.1 information page. Read November 2, 2026.

Text read: HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook, the clean Update 18 PDF that HUD links from its Handbook 4000.1 information page (HUD lists it as the August 12, 2026 update). Section headings carry their own effective dates, given above for this page. Confirm current dollar limits and premium rates with an FHA-approved lender. This page paraphrases the Handbook and does not replace it. Page numbers cited are the Handbook's own and may be approximate; use the section headings to locate the text.