For those in the service industry, getting tips certainly helps the overall pay. Most people who do earn tips work in a restaurant, hotel or similar industries. But can it be counted when helping to qualify for a new mortgage? We recently spoke about various types of income but getting tips is a bit different in some ways but validating and using tip income is surprisingly similar with other types.
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. Lenders won’t use your notebook showing regular tip income as verification but it may be used as a backup. Instead, it’s the bank account that matters. ‘Cash on hand’ can be used when qualifying for a mortgage but such amounts must be shown as both consistent and regular.
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.
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.