Do you receive commissions, a bonus, or tips as part of your income? If so, here is important information.
With variable income, lenders are looking for stability. They want to see you consistently receive this extra income and that it hasn’t taken a nose-dive this year compared to last year (without a very good reason).
Here are specifics:
BONUS INCOME
You must receive bonus income for 24 months to include it on your loan application. The same applies to restricted stock (RSU) income. Future bonuses do not count; it’s based on the average over the past two years.
COMMISSION INCOME
If commissions make up 25 percent or more of your income, then you need to submit two years’ tax returns in addition to your W2s and paystubs. Why? To see if you deduct a lot of your income with required expenses.
A two-year history of receiving commissions is preferred, but one year can be accepted with make-sense circumstances. It’s an individual underwriter decision, so best to speak with your mortgage broker who knows all the underwriters (and who is most common sense oriented).
TIPS
Tip income can be included as long as it is verified. You’ll need to show the tip income on paystubs and W2s. The lender will most likely ask your employer to fill out a Verification of Employment form to confirm.
You cannot hide cash tips, pay no taxes on the income, and then suddenly declare it on your loan application. The income you state to the IRS needs to match the income you state to your loan officer.
Your experienced loan officer will help you calculate and determine your income for qualifying to buy a home. If you are in California or Washington, I am state-licensed and happy to help. (NMLS License # 1284134)
I’m an experienced server working at a high volume lucrative restaurant where my tipped income is roughly 200 dollars a night 5 nights a week plus my hourly of 13 dollars. I have worked their one year and have been declaring all my tips for the last 2 months since deciding to buy a house (I know I should have done this earlier but didn’t know better). The people we have spoken to all insist I need to work there for 2 years and since I had a 2 year gap of employment where my wife was teaching they can’t help us. Is this accurate or is there something else I can try? I am in California.
William, you have a good question. Here is a copy-and-paste from the Fannie Mae Guide for underwriters: Tip income may be used to qualify the borrower if the lender verifies that the borrower has received it for the last two years.
And to be clear, you need to claim your tips for income tax purposes. A person cannot tell the IRS that make a low income and then tell the mortgage lender they make a higher income. All mortgage lenders are required by federal law to verify income with the IRS to avoid the type of fraud that caused the mortgage meltdown in 2008.
If you can find a seller who will give you a personal loan for two years, then you could refinance into a conventional loan later.