Nontaxable Income Types to Gross Up Income for Mortgage Approval
Depending on the loan program, your nontaxable income can be grossed up. Income comes in many forms whether is taxable or nontaxable. It is important to maximize nontaxable income types to increase effective income for a higher mortgage approval.
What is Nontaxable Income
Some income types are tax exempt by law and can be found on the IRS website. Taxable income must be reported on your return. Here are some examples of nontaxable income types that are not usually taxed:
- Adoption expenses that are qualified and reimbursed.
- Child support payments.
- Disability benefits.
- Eligible settlement income.
- Gifts or inheritances.
- Physical injury or sickness damage awards.
- Qualified Medicaid waiver payment when you receive providing care for an individual.
- Receiving cash rebates from a dealer or manufacturer.
- Social Security benefits.
- And many others.
Nontaxable Income Types are Found on IRS Publication 525
Certified public accountants refer to IRS Publication 525 when preparing tax returns. To increase your approval odds, it is important to understand agency guidelines and income calculator. Luckily, this is done during the pre-approval process when calculating debt-to-income ratios.
Gross Up Income Calculator
It is important to gross up nontaxable income for a mortgage approval because it can increase the amount you are pre-approved for. The more effective income you can use, the lower the debt-to income ratios are on your mortgage application, which may make the loan transaction go smoother. In most cases, lenders want to know that the continuance of income is going to continue for 3 years, but there are exceptions.
Gross Up Income Calculator for Conventional Loans
Lenders give special considerations to regular sources of income and nontaxable, such as:
- Social Security benefits.
- Workers compensation benefits.
- And certain types of public assistance payments.
The gross up income calculator is 25% for conventional loans when verified it is nontaxable and tax-exempt are likely to continue.
For example, a borrower makes $1,000 a month on Social Security benefits. The adjusted gross income would be $1250 for qualifying purposes.
Gross Up Nontaxable Income Percentage for FHA Loans
For FHA loans, the guidelines for grossing up income can be found on page 226 of the Handbook 4000.1. The guideline refers to nontaxable income types not subject to federal taxes if exempt by taxes:
- Child support.
- Certain types of disability payments.
- Federal government employment retirement income.
- Military allowances.
- Public Assistant payments.
- Social Security payments.
- And other income exempt from deferral income taxes.
The gross up income calculator is 15% or the appropriate tax rate for the income amount.
For example, say you make $1,000 a month in social security payments. The adjusted gross income would be $1,150 for qualifying purposes.
Gross Up Income Calculator for USDA Loans
In Chapter 9: Income Analysis of the USDA handbook, if income is tax exempt, the calculator would be grossed up to 25%.
If a borrower was to make $1,000 a month, the effective include would be $1,250.
Gross Up Income for VA Loans
The gross up income calculator can be found on page 64 of chapter 4 of the Lenders Handbook -VA Pamphlet 26-7. For a VA loan, a figure of 125% can be used when grossing up income.
For example, if a Veteran made $1,000 in Social Security payments, the grossed up income calculator would be $1,250.
Getting Pre-approved for a Mortgage
It is important to get pre-approved from a Loan Originator that has access to the Automated Underwriting System (AUS). Underwriters and often Loan Originators have access to AUS and it makes for a more solid pre-approval.
The first step is to contact a licensed Loan Originator to go over you case scenario and put together a list of documentation required for underwriting and processing.
Once all the information is gathered, the second step for a Loan Originator is to put together a complete credit application so the AUS can be ran to determine the pre-approved amount and eligibility results.
The last step is issuing the pre-approval letter, connecting with a realtor, and shopping for a home.
