Many people who receive tips in service industries choose not to declare the full amount on their income taxes. We're not going to go into the legalities of this common practice, just the impact it could have on your home buying.
A Saint Paul agent shared that a former client was an "escort" who received huge amounts of "extra" income that was not declared on their income taxes and, of course, did not show up on any pay stubs. The client was most frustrated when told that she could not qualify for the home she wanted. "But I make more than $XXXX a month!" The "tip" income was not declared on the income taxes. Since there was no proof of the income, it was not considered when qualifying for the home mortgage.
If you're in an occupation where you are being paid "under the table" for your services or if you're not declaring your full amount of tips, remember that may benefit you in the short term by not paying taxes on it, but in the long term, there can be repercussions when it comes time to qualifying for your home mortgage. The undeclared income does not exist for qualifying purposes. A stated income loan or "no doc" (no documentation) loan might be the solution, but each scenario is different. Consulting a loan officer before you plan to purchase can help you decide your best solution.
Call me for loan officer names who can help you with qualifying for your home purchase in Saint Paul or Minneapolis.
Interesting twist on the same problem, Norm. Since I don't deal in businesses, I never thought about that. I am very aware of rental income that gets reported and doesn't actually exist though. But that's for another blog post!
Posted by: Bonnie Erickson | January 31, 2007 at 10:45 PM
Interesting post Bonnie. I've heard this is also fairly common with small businesses which commonly deal in cash. The owner pockets large sums of undeclared income and then wonders why they can't sell it for big bucks when the P&L shows no P. Pay now or pay later.
Posted by: Norm Fisher | January 31, 2007 at 09:54 PM