Plenty of people rely on tips for a significant part of their income. Right now, more than 16 million Americans work in the kinds of service and hospitality industry jobs that have traditionally relied on tips for compensation. And that number is expected in increase in the coming decade.
You might think that buying a home is just for people with desk jobs and salaried gigs. But that’s not the case: servers, bartenders, blackjack dealers, and Uber drivers become homeowners everyday. Tipped income does come with some special considerations for would-be homeowners, but qualifying for a mortgage with significant tipped income isn’t impossible.
If you bring home most of your income as cash in your pocket at the end of your shift, here’s what you need to know about buying a home as a tipped employee.
Be Ready to Show Proof of Income
Mortgage lenders don’t really care too much about how you earn a living. Dog walker? Showgirl? Professional balloon artist? Cool.
How you make your money is not all that important—but how much money you make is. Mortgage lenders want to verify your income because they want to be reasonably sure that you can afford to make your future mortgage payment every month. For folks with tipped income, it’s especially important to be able to document the money you’re bringing in.
(In the past, it was possible to secure a mortgage by just stating your income. But we’ll-take-your-word-for-it mortgages were part of the trouble that led to the 2008 housing crisis. Now, everyone’s got to back up their income claims with proof.)
Square Up With Uncle Sam
The first way mortgage lenders will want to verify your income is by taking a good, hard look at your tax returns. So if you’re even thinking about buying a home, you’ll want to make sure that every bit of income you need to qualify for that mortgage is reported to the IRS on your tax return, including every last dollar of your tipped income.
Of course, we definitely don’t know any servers or bartenders who maybe underreport their tip earnings to try and save a few bucks come tax time. We’re sure you don’t know any folks like that, either. Good thing, too: trying to convince your mortgage lender that your real earnings are actually much higher than you reported to the IRS isn’t going to help your case for getting financing for a home. (It’s also not wise, generally, to lie to the IRS: audits are a pain, penalties are stiff, and jail time is a real possibility, even for relatively low-level tax evasion.)
Don’t Make Any Sudden Changes
Mortgage lenders will want to see proof of how much money you bring in each year. But lenders will also want some reasonable assurances that you’ll continue to make that much money consistently in the years to come.
If you’ve held the same restaurant job for the last five years, and your records can show that your tips only vary about 10% month-to-month? Then you’re going to have a stronger mortgage application than someone who has had six serving jobs in five years, even if that person makes a little more money in tips right now.
Generally, mortgage lenders want to see that you’ve had the same employer for at least six months and that you haven’t made any sudden career changes in the last two years or so. You’ll probably be asked to provide a verification of employment letter from your boss. The letter will include information about how long you’ve worked at your current job and your earnings.
Check Your Bank Statements
As a part of verifying your assets, your mortgage lender is going to ask to take a look at your bank statements. Lots of cash deposits are generally a red-flag for mortgage underwriters. For folks with salaried jobs and regular paychecks, lots of cash deposits can indicate unreported or illegal sources of income, under-the-table loans, or other shady business. But if your earnings are primarily cash tips, you may well be making multiple legitimate cash deposits every week.
In the months leading up to your mortgage, save yourself some time and trouble by keeping your own record of cash deposits. When a mortgage underwriter asks about them, you’ll be ready to provide documentation.
Also, as mentioned above, you’ll want to double-check to make sure that your bank statements dovetail with your tax statements. If you’ve told the IRS and your mortgage lender that you’re only earning $35,000 a year, but you’re depositing $1,200 each week in cash, you’ll probably have some explaining to do.