If you are in the service industry, a significant portion of your compensation may be from tips. In some cases tip income comprises the majority of your total income.
If you are in this category, you may be wondering if you can use your tip income to qualify for a mortgage. The short answer to this question is yes but you need to document the income according to mortgage industry guidelines.
You have two options for documenting tip income so that you can include it in your mortgage application: 1) an industry standard employment verification form or 2) a recent pay stub plus tax documents. We discuss each method below and explain how lenders calculate tip income when you apply for the loan.
Employment Verification Form
The employment verification form -- -- also known as a form 1005 -- includes detailed information on your income for the current year and the prior two years. The form notes how often you are paid and provides a breakdown of your total gross income including your base pay, overtime, commissions and bonus. It is a little confusing because there is no specific field on the form for tips but your employer can add that information separately or in a different field.
Please note that the employment verification form must be provided directly to your employer by the lender. Your employer fills out the form without your involvement and returns it to your lender.
Using an employment verification form usually works best if you report your tips to your employer or if your employer pays you tips out of a pool and documents your earnings. It is also helpful if you have worked for your employer for at least two years so the form includes the required tip income history.
Recent Pay Stub Plus W-2 or Tax Return for Prior Two Years
If using an employer verification form is not possible you can provide the lender your most recent pay stub and your W-2 or personal tax returns, including form 4137, for the past two years. Form 4137 is used to report tip income on your tax returns and includes both your total tip income and the income you reported to your employer. If you want to use W-2s instead of your tax returns, the forms must show your tip income as reported by your employer.
If you receive tips and do not report this income to your employer or on your tax returns then you cannot use that income to qualify for a mortgage.
How Lenders Calculate Monthly Tip Income for a Mortgage
Lenders average your monthly tip earnings over the prior two years -- the required period of time to include tip income in your application -- to determine the amount that is added to your other monthly gross income. So if you made $3,000 in tips last month, that does not mean that the lender automatically uses that figure.
Instead, the lender adds your annual tip income for the prior two years and divides that figure by 24 months to calculate your average monthly income. The example below demonstrates how monthly tip income is calculated.
Example: Tip Income Calculation for Mortgage
Current Year Tip Income: $30,000
(+) Prior Year Tip Income: $25,000
= Total Tip Income for Prior Two Years: $55,000
(÷) 24 months
= Average Monthly Tip Income: $2,290
In the example above $2,290 in monthly tip income is added to your other monthly gross income, including your base pay, to determine the mortgage you can afford. If your other income is $3,000, the total monthly income for your application is $5,290. The higher your income, the higher the mortgage amount you qualify for.
Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you can afford including tip income
Please note that if your tip income declined in the past but has since stabilized, the lender uses the lower current income figure instead of the average. If your income continues to decline and has not flattened, the lender may exclude it from your application.
Now that you understand how to use tip income to qualify for a mortgage, including the documents you are required to provide, we recommend that you contact multiple lenders in the table below to confirm their guidelines. Including extra income in your application should boost the loan you can afford. Plus, shopping lenders and comparing loan terms is the best way to save money on your mortgage.
"B3-3.1-09, Other Sources of Income, Tip Income." Selling Guide: Fannie Mae Single Family. Fannie Mae, October 2 2019. Web.
"B3-3.1-01, General Income Information, Variable Income." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 7 2019. Web.