Using Income from Tips to Help Qualify

Written by Posted On Monday, 16 November 2020 00:00

For those in the service industry, getting additional income from tips for many accounts for quite a bit of an employee’s take-home pay. In fact, it’s not unusual for someone working in a restaurant to get the majority of the income from tips as the employer pays a minimum wage. Tip income is a big deal. But when it comes to getting approved for a home loan, while tip income can be rather significant, borrowers need to be aware of how that tip income can be used to help qualify.

First, there needs to be a history of receiving it. Borrowers must be able to show receiving income over the previous two years. In addition, this income must also be consistent. Providing a two-year history helps lenders make the determination the income will continue into the future. But how the borrower treats the income is significant. Tips can come in the form of a few dollars left at the table or nightstand or included on the credit card slip. What the employee does next is critical.

Tip income must be logged. When an employer sends out W2 forms, the wages shown will typically be the minimum wage paid. Employers don’t keep track of an employee’s tips, it’s up to the borrower to track it. There can be a manual log kept that keeps track of how much tip income was received and when. In addition, the tip income deposits must be verified. 

This is accomplished by reviewing past bank statements. For instance, an employee can collect tips on a daily basis but deposit the tip income weekly. These deposits must show up on these past bank accounts.

Further, the tip income must be reported to the IRS for the past two years. The income reported is the income lenders will use when qualifying, regardless of how much tip income has actually been received. For some, all the tip income might not make it to any bank account at all but instead spent on everyday expenses. Here again, while the tip income is in fact received, there is no third party record of having received it. Unless the income is deposited on a regular, consistent basis, it might not matter how much tip income is being received if there is no third party verification.

In general, lenders treat tip income just like any other in the way it can be verified and used for qualification. Lenders want to see a two year history of employment while showing the income is likely to continue. The income needs to come from a qualified source. The income must be received at relatively regular intervals.

If this sounds like you or someone you know and buying a home is definitely on the radar screen, it’s important to know ahead of time how to use this additional income. Lenders, employers and employees all know it’s there and available, but how it’s documented is important. If you don’t really need tip income to help qualify, then there’s no issue. But if tip income must be used, it’s crucial to properly document the receipt and keep an eye on reporting requirements.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

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