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[Ask an RU] Underwriting a Mortgage with Tip Income

If you’ve ever worked in the service industry or know someone who has, you may have an inkling for the importance of tip income for those workers. Many borrowers who work in the service industry such as waiters and waitresses, bartenders, hair stylists, taxi and ride share drivers, and hotel workers depend heavily on tip income because those types of jobs typically pay minimum wage.

In terms of reporting and taxation, borrowers who receive tip income report their earnings to their employer and are taxed on the income which then appears on their IRS W-2 form. Unreported tip income is reported to the IRS on Form 4137, Social Security and Medicare Tax on Unreported Tip Income which is then filed with the borrower’s tax returns.

When it comes to applying for a mortgage with tip income, Enact aligns with the GSEs and allows for the use of tip income and accepts the documentation requirements of both GSEs. Tip income is considered variable or fluctuating income and must be calculated by an averaging method.

Lenders should look at various aspects of this type of income to determine if it can be used in qualifying for a mortgage. These aspects include the history of receipt, the frequency of payment, and the trending of the amount of the income being received. Fannie Mae and Freddie Mac both require a two-year history of receipt.

Below we’ll highlight key differences between Fannie Mae and Freddie Mac on underwriting mortgages with tip income.

Fannie Mae Guidelines on Tip Income

Tip income is covered in the Selling Guide in Section B3-3.1-09, Other Sources of Income. Tip income can be documented in the following ways:

  • A completed verification of employment, or
  • The borrower’s most recent paystub and IRS W-2 forms covering the most recent two-year period; or
  • The most recent two years tax returns with IRS Form 4137, Social Security and Medicare Tax on Unreported Tip Income.

As you can see, these requirements are fairly straight-forward and are used across all types of tip income and scenarios.

Freddie Mac Guidelines on Tip Income

Tip income is covered in the Selling Guide, Section 5303.3, Additional Employed Income. For tip income to be considered stable, there must be a consecutive two-year history and must be likely to continue for at least three years. It’s the lender’s responsibility to evaluate the income trend and use the amount that is most likely to continue for the next three years. Freddie Mac breaks down how to document reported and unreported tip income.

Tip income reported by the employer can be documented with the following:

  • YTD paystubs(s) documenting all YTD earnings, W-2 forms for the most recent two years, and 10-day pre-closing verification (PCV); or
  • Written Verification of Employment (VOE) documenting all YTD earnings and the earnings for the most recent two years and a 10-day pre-closing verification (PCV)

Cash and charge tips reported on IRS Form 4137 can be documented with any of the following:

  • IRS Form 4137 for the most recent two years
  • Complete federal individual income tax returns covering the most recent two-year period
  • A 10-day Pre-closing verification (PCV)

Enact stays current on all GSE guidelines and the many industry changes we face on a consistent basis. If you have any questions about underwriting tip income, feel free to reach out to your Enact Regional Underwriting at 800-444-5664, Option 2.

Liz Monteiro

Elizabeth Monteiro is a Regional Underwriting Manager for Enact with over 30 years’ experience in the mortgage industry. She has worked at Enact for 15 ½  years. Liz is a Certified Residential Underwriter and an Accredited Mortgage Professional through the Mortgage Bankers Association.


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