When applying for a mortgage, lenders consider your total income to determine eligibility. If a portion of your income is non-taxable, lenders may “gross up” that income, increasing the effective amount used for qualification. This guide explains how to gross up non-taxable income and the requirements for different loan programs.

What is Grossing Up Non-Taxable Income?

Grossing up non-taxable income means increasing the reported amount to account for the lack of tax liability. Since non-taxable income is not subject to federal or state taxes, lenders adjust it to reflect what it would be if it were taxable, helping borrowers qualify for larger loan amounts.

Common Sources of Non-Taxable Income

Several income types may be considered non-taxable, including:

• Child Support Income
• Social Security Benefits
• Worker’s Compensation Benefits
• Certain Public Assistance (e.g., Section 8 Housing)
• Food Stamps
• Federal and State Government Employee Retirement Income
• Military Allowances

To determine if an income source is non-taxable, borrowers should refer to the IRS Income Quick Reference Guide or consult a tax professional.

Gross-Up Factors by Loan Program

Each loan program has specific guidelines for grossing up non-taxable income. Below are the gross-up percentages and requirements for major mortgage agencies:

Fannie Mae (FNMA)

• Gross-Up Factor: 25%
• Verification: Must be documented as non-taxable (award letters, policy agreements, tax returns, etc.).
• Social Security Income: 15% may be grossed up without additional documentation.
• Child Support & Section 8 Vouchers: Considered fully non-taxable, no additional documentation required.
• Example Calculation:
  • $1,000 non-taxable income × 25% = $250
  • Total Adjusted Gross Income = $1,250

Freddie Mac (FHLMC)

• Gross-Up Factor: 25%
• Verification: Most recent tax return or supporting documentation showing tax-exempt status.
• Social Security Income: 15% may be grossed up without documentation.
• Example Calculation:
  • $1,000 non-taxable income × 25% = $250
  • Total Adjusted Gross Income = $1,250

FHA (Federal Housing Administration)

• Gross-Up Factor: 15%
• Verification: Most recent tax return and supporting documents.
• Limitations: Cannot exceed the greater of 15% or the borrower’s prior-year tax rate.
• Example Calculation:
  • $1,000 non-taxable income × 15% = $150
  • Total Adjusted Gross Income = $1,150

VA (Veterans Affairs)

• Gross-Up Factor: 25%
• Verification: Tax return and additional documentation showing income is non-taxable.
• Limitation: Used only for Debt-to-Income (DTI) calculations.
• Example Calculation:
  • $1,000 non-taxable income × 25% = $250
  • Total Adjusted Gross Income = $1,250

USDA (United States Department of Agriculture)

• Gross-Up Factor: 25%
• Verification: Most recent tax return and supporting documentation proving non-taxable status.
• Example Calculation:
  • $1,000 non-taxable income × 25% = $250
  • Total Adjusted Gross Income = $1,250

Key Considerations for Grossing Up Income

• Documentation Requirements: Borrowers must provide proof that income is non-taxable to qualify for gross-up adjustments.
• Alimony Considerations: Alimony can only be grossed up if it is verified as non-taxable (established after January 1, 2019).
• Verification of Public Assistance Income: Some assistance programs qualify as income for mortgage purposes, but agency guidelines must be checked.

Final Thoughts

Grossing up non-taxable income can significantly impact a borrower’s mortgage qualification. By understanding agency guidelines and providing proper documentation, borrowers can maximize their income for loan qualification purposes.

For further assistance, consult your lender or use tools like the Grossing Up Social Security Income Calculator to estimate the adjusted income for mortgage qualification.