Tip income for a mortgage counts when it is reported: tips on the borrower's W-2s and pay stubs, or tips the borrower declared on a tax return. Lenders want about two years of it and average the total across the period. Cash tips that went straight into a bank account without being reported usually cannot be used.
Which tips count as tip income for a mortgage?
Tips count when a tax record stands behind them. Card tips the employer runs through payroll, cash tips the server reports to the employer, and tips the borrower adds on a personal tax return all leave a paper trail a lender can verify. Cash tips that were spent or deposited but never reported have no such trail.
Three kinds of tips
It helps to sort a borrower's tips before collecting any documents:
- Card tips are added to a card payment by the customer. The employer receives them with the sale and pays them out, usually through payroll, so they appear on pay stubs.
- Reported cash tips are cash the worker received and told the employer about. The employer includes them in wages on the W-2, even though the cash never passed through payroll.
- Unreported cash tips are cash the worker kept without telling the employer. Some workers report these on their own return. Many do not.
Why the reporting matters to an underwriter
An underwriter must show that income is stable and likely to continue, and that it was actually earned. A tip on a W-2 has been reported to the IRS by an employer. A tip on a personal return has been reported by the borrower. A tip that appears only as a 60 dollar cash deposit on a Tuesday is a number with no source, and the underwriter cannot tell it from a gift or a sale of a used bike.
Reported tip income on W-2s and pay stubs
Reported tips show up on the same documents as base pay. The year-to-date pay stub lists tips paid so far this year, often on their own line. The W-2 includes reported tips in wages, and many employers also show them in the social security tips box. The stub and two W-2s hold the whole tip history.
What Fannie Mae asks for
Fannie Mae treats tips like bonus, commission and overtime pay. Its section on bonus, commission, overtime and tip income asks for the most recent pay stub and two years of W-2s, or a completed verification of employment form, plus a verbal verification of employment. For tips the employer did not report, the same section allows two years of personal tax returns with IRS Form 4137 in place of the W-2.
Reading a server's pay stub
A tipped worker's stub can look strange to someone used to salaried files. The base hourly wage may be low, and the net check may be small or close to zero because card tips were paid out nightly in cash and only taxed through payroll. Look at the year-to-date gross and the tip lines, not the net deposit. The bank statements may show modest paychecks while the stub shows much higher earnings.
Where the base pay and tips diverge
Base pay is guaranteed by the hourly rate and the schedule. Tips depend on the shifts, the season and the restaurant's traffic. A lender can usually count base pay from the current rate. Tips need the history described in the next section before they count at all.
How much tip income history do lenders want?
Lenders want about two years of tip income so they can see a full cycle of busy and slow seasons twice. Fannie Mae recommends a two-year history and allows a shorter one of at least 12 months when positive factors offset it. A borrower with under a year of tips will usually qualify on base pay alone.
What counts as a positive factor
A shorter history is easier to accept when the borrower has worked in the same kind of job before. A bartender who moved from one bar to another after six years behind a counter has a long tip history, just not with this employer. A borrower who started waiting tables nine months ago after a career in an office has a short one.
Changing jobs inside the history
A move from a diner to a fine dining restaurant can raise tips sharply. The lender may want to see the new level hold for a while before counting it in full. A move the other way lowers tips, and the lender will use the lower level. In both cases, the verbal verification of employment confirms where the borrower works now.
Cash tips in bank statement deposits
Cash tips the borrower deposits can show on bank statements, but deposits alone do not make them countable. A lender using agency rules needs reported tips on a W-2 or a tax return. The deposits can support the story, by showing that the tips are real and regular, without becoming the income figure on their own.
Why bank statement programs rarely help
Bank statement loans are written for self-employed borrowers, who own the business that brings in the deposits. A server or bartender is an employee. Most lenders will not use a bank statement program for a wage earner, and those that do still have to decide which deposits are tips and which are not. How the expense factor works on a bank statement loan shows why that method is built around business costs an employee does not have.
What the deposits can still show
Statements prove the borrower's pattern. Regular cash deposits after each weekend shift, in amounts that match a server's reported tips, make the W-2 figure more believable. A borrower whose reported tips are 9,000 a year but who deposits 30,000 in cash is a borrower with unreported income, and the lender cannot use the difference. Advise the borrower to report all tips going forward. The file in two years will be stronger.
Reviewing deposits quickly
Tipped workers can have many small cash deposits each month. TrueBankFlow sorts each statement line into categories you can edit and flags deposits that fall outside the borrower's usual pattern, so an underwriter can see the regular cash rhythm and the outliers on one page.
Averaging tip income across slow and busy months
Tip income is averaged over the whole history so that busy and slow months cancel out. For stable or rising tips, Fannie Mae averages year-to-date earnings with the prior year, divided by the months covered, with at least 12 months included. When tips have fallen, the lender must confirm they have stabilized and then averages from that point.
Worked example: a server's monthly figure
The figures below are an example for illustration. The borrower is a server who applies in early July.
| Document (example) | Total pay including tips | Months covered |
|---|---|---|
| Pay stub, year to date through June | 24,600 | 6 |
| W-2, last year | 46,200 | 12 |
| W-2, two years ago | 43,900 | 12 |
Tips are rising, since last year beat the year before and this year's pace of 4,100 a month is above last year's 3,850. The lender averages the year to date with last year: 24,600 plus 46,200 is 70,800, divided by 18 months, which gives 3,933 a month. The older W-2 is used to confirm the trend, not added to the average.
When tips fall
Suppose the same server's restaurant cut its dinner service and this year's pace dropped to 3,200 a month. The lender must decide whether the drop has stopped. If it has, the lender uses the year-to-date figure since the change. If it has not, the tips may not count at all, and the borrower qualifies on base pay.
How this compares with commissions
Commissions follow the same averaging rule and the same concern about decline, but the documents differ, since many commissioned workers are paid in large irregular checks. How commission income for a mortgage is averaged walks through those differences.
When tip income will not help the mortgage file
Tip income will not help when it is unreported, too new, falling without a floor, or earned at a job the borrower is about to leave. In each case the lender will qualify the borrower on base pay alone, or on other income, and the tips become a cushion rather than a number in the ratio.
A borrower near the end of a tipped career
A bartender planning to retire in two years has tip income that will not continue for long. If the household will instead live on a retirement benefit, the lender may look to that income, which has its own rules described in pension income for a mortgage. Be candid with the borrower about which income the file rests on.
Mixing tips with self-employed work
Some tipped workers also run a side business, such as catering or private bartending at events. That income is self-employment, verified with tax returns or business statements, and it does not borrow the tip history from the restaurant job. Keep the two separate in the file and the notes.
Overstating tips from memory
Borrowers often quote their tips from a good week. Ask for the stub and W-2s before quoting a loan amount. The documented average is the number the lender will use, and it is usually lower than the figure the borrower remembers. When you want the deposits reviewed alongside those documents, you can get started with TrueBankFlow.