How Lenders View Tip Income

Written by Posted On Monday, 22 November 2021 00:00

When tips play a big part in someone’s take-home pay, it can be used to help qualify for a mortgage. The kicker is that many don’t report all of the tip income or simply lose track of the amount. Tips are issued to the recipient directly either in cash or added onto the credit slip. Either way, it must be accounted for. 

It’s the recipients’ job to not only keep track of the daily amounts as well as report the income when filing income tax returns. And here is where things can sometimes get a little off track. Most such jobs pay a minimum wage and it’s the tip income that really matters. But when it comes time to qualify for a home loan, that tip income must be accounted for.  Accounting for tips means depositing the funds into a bank account on a regular basis. It also means keeping a personal, written record of tip income. 

When someone gets paid from their employer, it’s common for income to be paid out on the 1st and 15th. The bank account statements will then show these deposits from the employer using direct pay. But what the employer won’t show is how much tip income was distributed. In fact, the employer might have a general idea but there isn’t any way for the employer to get an exact number on the amount of tips. It’s important to also deposit tips in a regular manner. Someone might deposit last week’s tip income on a Monday, for example. Weekly, consistent deposits that are verified by bank statements and even deposit slips may be counted.

However, as we recently mentioned, all income must have a history and tip income is no different. Income in general must be documented to having been received for at least the last two years. This provides the lender with enough confidence the income will continue well into the future, typically for at least three years. Verifying a consistent, two year history helps lenders make this determination. Tip income must also be shown being received for at least two years. The income reported to the IRS is the amount of tip income lenders will use when qualifying. That’s the final verification lenders need in order to use tip income when qualifying for a mortgage and probably the most important. If this income doesn’t show up on your tax returns, that’s going to be a problem. Even if you keep solid personal records.

If you’re planning on buying a home in the future and your tips play an important part, make sure we speak together about how to document this important piece of your financial profile before you get too much further. In essence, it’s just like any other income as it relates to how it can be verified. Your W2s from the last two years will be needed but they will only report your hourly wages from the employer. It’s up to you to take the next step and report this income on your federal tax returns each year. If you’ve done all these things in advance, you can certainly use tip income to help qualify. It’s a bit more paperwork to document these transactions but in reality it’s not really that big of a deal. But it must be done.

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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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