Certain types of non-taxable income, such as Social Security benefits and military allowances, can be "grossed up" by lenders—typically by 15-25%—to help borrowers qualify for a mortgage by effectively increasing their income for debt-to-income calculations.
There is a little-known mortgage rule that says you can increase the amount of non-taxable income received to qualify for a mortgage.
This guideline is accepted for FHA, VA, USDA, and conventional loans.
For those with non-taxable income, this rule could make the difference between qualifying and not.
What Does It Mean To “Gross Up” Income For A Mortgage?
As a rule, mortgage lenders use “gross” or before-tax income to determine your debt-to-income ratio, or DTI.
It wouldn’t be fair, then, for applicants with non-taxed income to be evaluated the same way. To level the playing field, lenders can increase non-taxed income, usually by 25%, to account for the fact that taxes are not paid.
For example, $1,500 per month in non-taxable income would be considered $1,875 as far as mortgage qualification.
$1,500 X 1.25 = $1,875
Here’s an example on how that adjustment can help.
Before Gross-Up | After Gross-Up | |
Taxable income | $4,000 | $4,000 |
Non-taxable income | $1,500 | $1,875 |
Home payment | $2,640 | $2,640 |
DTI | 48% | 45% |
If this was a conventional loan, which allows a maximum DTI of 45% in most cases, grossing up income could result in approval.
What Types of Income Can Be Grossed Up?
Most types of income that are recognized by the IRS as non-taxable can be grossed up for a mortgage application. A sample of income types are as follows, according to IRS Publication 525. Keep in mind that your income level may affect whether a certain type of income is taxable. Only non-taxable, continuing income may be grossed up.
Social Security Benefits
Benefits received from the Social Security Administration such as retirement and disability that are non-taxable may be grossed up.
Some Retirement and Pension Income
While many types of retirement and pension income are taxable, some may not be, such as federal employee pensions, railroad retirement income, and state retirement income.
Military Allowances
Non-taxable military allowance income such as Basic Allowance for Subsistence (BAS) and Basic Allowance for Housing (BAH) may be grossed up.
Disability Payments
Non-taxable disability payments from Social Security and other sources may be grossed up.
Child Support
Income from child support is typically not taxable.
Foster care income
In most cases, income received from government sources for foster care is not taxed and therefore grossed up.
Public Assistance
Regular, ongoing assistance that is expected to continue may be grossed up if it is not taxed.
Worker’s Compensation
Payments for injuries on the job may be grossed up, however, keep in mind that the income needs to be expected for at least three years to be counted as qualifying income for the mortgage.
Non-Continuing Income Sources
While most non-taxable income sources can be grossed up, there is an exception: income that is not expected to continue for three years.
If you received a one-time payout such as an inheritance, for example, and it is not taxable, you can’t claim that as income on a mortgage application.
What Gross-Up Percentage Is Used?
Conventional loans: 25%; higher if the applicant pays more in taxes.
FHA loans: 15% or the tax rate paid on the previous return.
VA loans: Lenders will review current income tax withholding tables to determine a gross-up amount. Grossed-up income can’t be used to meet the VA loan residual income requirement.
USDA loans: 25%
Grossing Up Income For A Mortgage: Bottom Line
When lenders gross up income, it can mean a big advantage for those with non-taxable income. It can turn their denial into an approval.
If you think you might qualify for a loan thanks to non-taxable income, apply to see if you can be approved.
