How Mortgage Lenders View Tip Income

For workers in industries like hospitality, personal services, and food service, tip income can represent a substantial portion of total earnings. When applying for a mortgage, tip income can be used to help qualify, as long as it meets specific documentation and consistency requirements.

What Qualifies as Tip Income?

Tip income refers to any money received by an employee from customers in addition to their base wage. It can be cash tips, credit card tips, or tips pooled and distributed by an employer. To be considered in mortgage qualification, the income must be reported to the IRS and documented accordingly.

Documentation Requirements

To use tip income in qualifying for a mortgage, borrowers must provide:

• Recent pay stubs showing year-to-date earnings that include tip income
• W-2 forms for the past two years reflecting reported tip earnings
• Tax returns if the tip income is not clearly broken out on W-2s
• A verification of employment (VOE) confirming the tip income history and likelihood of continuance

The more clearly the tip income is reported and consistent over time, the more likely it will be included.

History and Stability

A two-year history of receiving tip income is generally required for it to be included in qualifying income. Lenders want to see that the income is not only part of the borrower’s compensation but also stable and likely to continue.

If a borrower has less than two years of documented tip income, the underwriter may still consider it if there is a solid year-to-date history and an explanation for the shorter timeframe, especially if the borrower has a prior history in similar work.

Averaging Tip Income

Lenders typically average tip income over the most recent two-year period or over the actual period it has been received if less than two years. For instance, if a borrower reported $9,000 in tip income one year and $10,500 the next, the average used for qualification would be $9,750 annually, or about $812.50 monthly.

A downward trend in tip income can be a red flag. If current year earnings are significantly lower than previous years, underwriters may use the lower figure or exclude the income altogether.

Consistency and Continuance

Tip income must be expected to continue. This is usually verified by the employer through the VOE. If the income is seasonal or highly irregular, it may not be included in qualifying calculations.

Borrowers should also ensure they consistently report all tips to the IRS, as under-the-table earnings that are not documented cannot be counted.

Loan Program Considerations

Conventional, FHA, and VA loans all allow for tip income as part of qualifying income, provided it is properly documented and consistent. Each loan program may have slightly different documentation preferences, but the basic principles remain the same.

Bottom Line

Tip income can help borrowers qualify for a mortgage if it’s consistent, documented, and expected to continue. A solid paper trail, via pay stubs, W-2s, and employer verification, is key to ensuring this income is considered during underwriting.