Not everyone earns the same amount of money each month. Many borrowers have income that goes up and down, which makes it harder for lenders to understand what they can reliably afford.
Recent CFPB analysis shows that variable earnings are becoming more common across many jobs, which makes accurate income reviews even more important.
If you’ve ever wondered how this type of income affects mortgage decisions, you’re not alone. Knowing how variable income works helps lenders make fair, accurate, and compliant decisions.
Main takeaways from this article:
Variable income is money that changes from one paycheck to the next. Examples include commissions, bonuses, overtime, tips, self-employment income, and hours that go up or down.
Lenders usually need two years of records to review this income and look for patterns.
Underwriters must separate each income type, average it correctly, and compare it against pay stubs, W-2s, and employer forms.
Different loan programs have different rules, but all require stable, well-documented income that is likely to continue.
Tools like IncomeXpert make the process easier by applying the rules automatically and reducing mistakes.
What is variable income?
Variable income is money that changes from one paycheck to the next. This is different from a fixed salary, which stays the same every pay period. Variable income can rise or fall based on things like hours worked, job performance, busy seasons, or customer activity.
For mortgage underwriters, this type of income is harder to review because it is not steady. They must look at how stable it has been and whether it is likely to continue.
Common types of variable income include:
Commissions
Bonuses
Overtime pay
Hourly wages that change
Self-employment income
Tips
When reviewing a borrower’s file, underwriters must gather the right documents and use proper calculation methods to make sure the income is accurate and meets agency rules. Knowing how to analyze variable income correctly is important for a fair and compliant loan decision.
Fixed vs. variable income
Fixed income stays the same every pay period, while variable income can change from month to month. This difference matters in underwriting because variable income requires more proof, more history, and more analysis to confirm it is reliable. See the table below for a simple comparison.
Fixed vs. variable income comparison
Characteristic | Fixed Income | Variable Income |
Predictability | Same amount each pay period | Changes from period to period |
Documentation | Current pay stub and VOE are typically sufficient | Requires deeper history (usually 2 years) to confirm stability |
Calculation | Monthly amount × 12 = annual income | Requires averaging, trending, and reviewing multiple documents |
Risk assessment | Lower risk due to consistency | Higher risk because earnings fluctuate |
Many borrowers earn both fixed and variable income. For example, a sales worker may have a steady base salary plus commissions, or an hourly employee may have regular hours plus overtime. Underwriters must look at each income type separately and review it using the correct rules.
Learn more about underwriting income rulesVariable income is only one part of a broader underwriting framework. If your team needs additional clarity on income scenarios, guideline interpretation, and documentation requirements, these resources can help. |
The six major types of variable income
Knowing the different kinds of variable income helps underwriters choose the right way to review and calculate each one. Every income type has its own rules for documentation, stability, and averaging.
Commissions
Commission income is earned from sales or completed transactions. It is common in jobs like real estate, insurance, and retail.
Documents needed: Pay stubs, W-2s, and employer verification
Stability signs: Steady or rising earnings, same employer or industry
How to calculate: Usually averaged over 24 months unless the income is declining
Bonuses
Bonuses are extra payments based on performance or company results. These may be paid once a year, several times a year, or on an irregular schedule.
Documents needed: Pay stubs, W-2s, and employer confirmation of the bonus program
Stability signs: A history of receiving bonuses and employer confirmation that they will continue
How to calculate: Average the past 24 months, considering how often and when bonuses are paid
Overtime
Overtime is extra pay for working more than normal hours, usually at a higher rate (like 1.5x or 2x regular pay).
Documents needed: Pay stubs showing overtime, W-2s, and employer verification
Stability signs: Regular overtime, common in the borrower’s industry, the employer says it will continue
How to calculate: Average the past 24 months and check for trends
Did you know? According to the Bureau of Labor Statistics, industries such as healthcare, retail, and service sectors experience significant monthly variation in hours worked, making accurate trending essential for underwriting.
Hourly wages with fluctuating hours
Some borrowers work different hours each pay period, even if their hourly rate stays the same. This is common in retail, healthcare, and seasonal jobs.
Documents needed: Pay stubs showing hours worked, W-2s, and employer verification
Stability signs: Consistent average hours, steady job history
How to calculate: Find the average number of hours worked, then multiply by the current hourly rate
Self-employment income
Self-employment income changes based on how well the business performs and how many clients the borrower serves. It requires the most detailed review.
Documents needed: Two years of personal and business tax returns, year-to-date profit and loss statement
Stability signs: Strong business history, stable industry, reliable client base
How to calculate: Average net income based on Schedule C, K-1, or corporate returns
Tips
Tips are common in service jobs like restaurants, hotels, and personal care. They may show up on pay stubs or be reported on tax returns.
Documents needed: Pay stubs showing tips, or tax returns with Schedule C if tips are not reported on payroll
Stability signs: Same job or industry, steady history of reported tips
How to calculate: Average the reported tips over 24 months
How variable income appears in payroll documents
Variable income can appear in many different places on a pay stub, so underwriters must know how to spot it. Each line item helps show how much of the borrower’s pay changes from month to month.
Identifying variable income on payroll documents
Underwriters should look closely at pay stubs to find all types of variable income. This includes checking the year-to-date (YTD) totals and comparing them to past pay periods or W-2s.
Pay stubs may list variable income in sections such as:
Overtime hours and pay
Commissions
Bonus payments
Reported tips
Shift differentials
Piece-rate pay
Early in the calendar year, year-to-date (YTD) figures can be confusing. A January or February pay stub may look unusually high because of year-end bonuses or holiday work. That’s why it’s important to compare current YTD totals with the borrower’s past W-2s to make sure the numbers make sense.
Agency rules for evaluating variable income
As of September 30, 2025, Fannie Mae had $4.3 trillion in total assets, highlighting the significant resources supporting the U.S. housing market. These rules ensure consistent analysis and appropriate risk assessment across the industry.
Conventional loans (Fannie Mae & Freddie Mac)
For most conventional loans, borrowers need a two-year history of variable income. Underwriters look for stable or increasing earnings and review trends to choose the right averaging method.
Two-year history: Standard requirement for most variable income
One-year exception: Allowed only with strong proof that the income will continue
Declining income: Must use the most recent 12-month average
Required documents: Pay stubs for 30 days, two years of W-2s, and employer verification
Did you know: Freddie Mac’s Seller/Servicer Guide explains how to document and average income types like commissions, overtime, and bonuses, stressing the need for a stable history.
Government-backed loans (FHA & VA)
FHA and VA loans follow similar rules but have a few differences.
FHA: Usually needs two years of income history, but may allow one year with strong compensating factors
VA: Focuses heavily on stability and whether the income is likely to continue
Documentation: Similar to conventional loans, but may require extra verification for certain income types
See how Blueprint handles variable incomeIf you’re evaluating tools to improve accuracy and consistency, Blueprint offers a deeper look at how automated income analysis streamlines trending, averaging periods, and guideline alignment. |
How to calculate variable income correctly
Accurate calculation of variable income follows a systematic approach to ensure compliance with agency guidelines.
1. Identify all income types
Review all documentation to identify each distinct type of variable income. Each category must be analyzed separately according to appropriate guidelines.
2. Review historical documentation
Gather and examine at least two years of income history through:
Pay stubs showing YTD earnings
W-2s for previous years
Tax returns, if necessary
Written verification of employment
3. Determine trends
Analyze whether the income is:
Increasing: May use the most recent 12 months if substantially higher
Stable: Use a 24-month average for the most consistent calculation
Declining: Must use the most recent 12 months or explain the temporary decline
Seasonal/Irregular: Need to establish a predictable pattern
4. Apply the appropriate averaging period
Based on the trend analysis, select the correct calculation method:
Standard calculation: 24-month average for stable or increasing income
Declining income: Most recent 12-month average
New variable income: May require a 12-month history with strong justification
5. Validate continuance
Confirm that the income is likely to continue for at least three years:
Obtain written confirmation from the employer
Verify the stability of the income source
Consider industry and economic factors
Real-world calculation examples
These examples illustrate proper analysis of common variable income scenarios.
Example 1: Hourly worker with fluctuating hours
A retail employee works between 25-40 hours weekly with varying schedules. The underwriter collects two years of pay stubs and W-2s, calculates the average monthly hours (32 hours), and multiplies by the current hourly rate ($18) to determine the qualifying income of $2,304 monthly.
Example 2: Sales employee with commissions
A sales professional earns a $4,000 monthly base salary plus commissions. Commission history shows $36,000 in year one and $42,000 in year two. The underwriter averages the commissions ($39,000 ÷ 24 = $1,625 monthly) and adds it to the base salary for a total qualifying income of $5,625 monthly.
Example 3: Annual bonus recipient
A corporate employee receives an annual performance bonus. The past two years show bonuses of $12,000 and $15,000. The underwriter averages these amounts ($27,000 ÷ 24 = $1,125 monthly) and adds it to the base salary after confirming the bonus program will continue.
Example 4: Mixed income sources
A healthcare worker has base pay, overtime, and shift differentials. Each component is analyzed separately, with stable base pay taken at face value and variable components (overtime and differentials) averaged over 24 months to calculate total qualifying income.
Transform how your team calculates incomeIncomeXpert applies agency guidelines automatically, reduces manual errors, and brings transparency to every income calculation—variable income included. |
Improve accuracy with IncomeXpert
Calculating variable income can be challenging because the numbers change so often, and it’s easy for humans to make mistakes. Common problems include picking the wrong averaging period, missing signs of declining income, or not collecting the right documents.
IncomeXpert helps solve these issues by:
Automatically applying the correct agency rules
Choosing the right averaging period based on income trends
Creating clear, easy-to-read income worksheets
Keeping calculations consistent across all underwriters
This automation reduces errors, improves compliance, and makes the underwriting process faster and smoother. Request a demo to see how IncomeXpert can help with variable income calculations.
FAQs about variable income
What are examples of variable income?
Variable income includes commissions, bonuses, overtime, changing hourly wages, self-employment earnings, seasonal work, and tips.
What is an example of a variable salary?
A variable salary might include a base wage plus commissions—for example, a sales worker who earns $3,000 a month plus 5% of their sales, causing total earnings to change each month.