New Rules: Easier To Qualify Using “Tip Income”
With today's mortgage rates near their lowest of all-time, and home values rising past last decade’s peak, it’s an excellent time to consider homeownership.
And, thankfully, it’s getting easier for buyers to get approved for a loan.
A Federal Reserve survey shows that banks are loosening their reducing their minimum mortgage approval standards, which is increasing the approval rate on loan applications nationwide.
And, according to Ellie Mae, which makes mortgage processing software which is used in more than 3.5 million transactions annually, more than 70% of purchase mortgage applications are currently closing — the highest closing rate since such data has been tracked.
Furthermore, going forward, that closing rate is expected to increase — even for low- and no down payment mortgages.
Fannie Mae and Freddie Mac are changing how they view consumer income, giving a boost to service staff such as waiters, bartenders, and valets and others who earns large amounts of “tip income” each year.
If you earn tip income and have been turned down for a mortgage in the past, consider applying again. This time, new loan standards may help your loan to get approved.Verify your new rate (Jul 7th, 2020)
What Is “Tip Income”?
“Tip income” is defined as income earned by a person which is not included as part of their regular wage.
Tips can be earned in a number of ways, including as a gratuity left by restaurant patrons for a waiter, host, or server; as a thank you paid by a hotel guest to a porter in exchange for carrying luggage, or a concierge in exchange for making reservations; or, as a payment to caddy by a golfer for carrying clubs for a round.
A large percentage of the U.S. workforce earns tip income as part of their work.
According to the Bureau of Labor Statistics, than 11.1 million workers are currently employed in the Food Services and Drinking Establishment industry, whom are heavily reliant on tips.
Several million more work in industries such as Scenic and Sightseeing Transportation; Accommodation; and, Amusements, Gambling, and Recreation, whom also earn income in the form of tips.
The following jobs are associated with tip income, but this is list in non-comprehensive. There are many more workers who earn tip income as part of their everyday jobs.
- Waiter / Busboy / Maître D’
- Taxi Driver
- Casino Dealer
- Pizza Delivery Driver
- Ski Instructor
- Tour Guide
- Golf Caddy
- Dog Walker / Pet Sitter
Tips of the non-cash variety can also be earned. Non-cash tips may include tickets to sporting events, plane tickets, or other items of value.
Since the start of the decade, the number of persons employed in tip-earning positions has grown by more than 20 percent, which means that there’s a large number of workers who may not know that they’re eligible to purchase a home.
Mortgage guidelines regarding tip income has changed, which makes it easier for tip-earning workers to get mortgage-qualified.
You won’t know whether you qualify until you try, however.Verify your new rate (Jul 7th, 2020)
IRS Tip Income
Applying for a mortgage using tip income is no different from applying using any other income source. There are no extra steps, and no additional verifications.
Your mortgage application is evaluated exactly the same as everyone else, which is to say that you should expect to provide proof of income, assets, and employment; as well as show proof of a suitable credit score.
Your mortgage lender will guide you through these steps as part of your mortgage approval.
In general, though, “proof of income” can be satisfied fairly easily.
With a copy of your most recent federal tax returns, your lender will be able to calculate your average monthly income, which will be used to determine your debt-to-income ratio (DTI).
Mortgage lenders prefer to approve applications showing debt-to-income ratios of 43 percent of less, but exceptions are sometimes made.
Tip income can also be verified using a Verification of Employment, which is a routine questionnaire sent to employers by mortgage underwriters.
The Verification of Employment is a request of your employer to verify your dates of employment, your recent wages, and your probability of continued employment.
Tip income reported on the Verification of Employment may not match tip income reported to the IRS, and that’s okay. When in doubt, the underwriter will default to the figures shown on your tax returns.
If you plan to purchase a home within the next few years, then, and your working wage includes tip income, consider keeping a daily tip record.
A daily tip record will help you track and manage the tips you earn so that your tips are accurately reported with your annual filing of taxes. The higher your reported income, the more likely your debt-to-income ratio will be low.
What Are Today’s Mortgage Rates?
Mortgage rates are low and rents are rising nationwide, which makes this an excellent time to consider homeownership.
Take a look at today’s real mortgage rates now. Your social security number is not required to get started, and all quotes come with instant access to your live credit scores.Verify your new rate (Jul 7th, 2020)