When qualifying for a mortgage, not all income is created equal. If a portion of a borrower’s income is non-taxable, lenders may “gross it up”—meaning they adjust the figure higher to reflect what it would look like if it were taxed. This can significantly improve a borrower’s debt-to-income (DTI) ratio and boost their chances of qualifying.

Let’s explore how to gross up non taxable income based on loan program guidelines from Fannie Mae, Freddie Mac, FHA, VA, and USDA.

What Does It Mean to Gross Up Non Taxable Income?

Grossing up non taxable income means increasing the reported income amount to its pre-tax equivalent. Since this income isn’t taxed, lenders can recognize its full value by adjusting the number upward.

Common Sources of Non-Taxable Income:

  • Child Support
  • Social Security Benefits (retirement, disability, SSI)
  • Workers’ Compensation
  • Military Allowances
  • Section 8 Housing Assistance
  • Public Assistance Programs
  • Government Employee Retirement Income

Example: If a borrower receives $1,000 per month in verified non-taxable income and the gross-up factor is 25%, it may be counted as $1,250 for qualification purposes.

Agency Guidelines for Grossing Up Non Taxable Income

Fannie Mae

  • Gross-Up Factor: 25%
  • Required Documentation: Award letters, account statements, policy docs, or tax returns proving income is non-taxable.
  • Social Security: 15% of Social Security income can be grossed up with no extra documentation.
  • Child Support: Can be grossed up fully without verifying non-taxable status.

Example:
$1,500 Social Security Income x 15% = $225
$1,500 + $225 = $1,725 Qualifying Income (no extra docs needed)

Freddie Mac

  • Gross-Up Factor: 25%
  • Documentation: Most recent tax return or other evidence income is tax-exempt.
  • Social Security: 15% gross-up allowed without additional documentation.

Example:
$1,000 income x 15% = $150
$150 x 25% = $37.50
$1,000 + $37.50 = $1,037.50 total qualifying income

FHA

  • Gross-Up Factor: 15%
  • Documentation: Prior year tax return and other proof of non-taxable status.
  • If borrower did not file taxes: Lender may still gross up 15%.
  • No dependent-based adjustments allowed

Example:
$1,000 x 15% = $150
$1,000 + $150 = $1,150 qualifying income

VA Loans

  • Gross-Up Factor: 25%
  • Purpose: Only applies to DTI calculation
  • Documentation: Tax return and supporting proof

Example:
$1,000 x 25% = $250
$1,000 + $250 = $1,250 qualifying income

USDA Loans

  • Gross-Up Factor: 25%
  • Documentation: Prior year tax return and supporting documentation

Example:
$1,000 x 25% = $250
$1,000 + $250 = $1,250 total qualifying income

Special Note on Alimony Income

Alimony can only be grossed up if it is confirmed to be non-taxable and established on or after January 1, 2019. Make sure to obtain proper documentation confirming tax treatment per IRS rules.

Why Grossing Up Matters

Knowing how to gross up non taxable income can be the difference between qualifying or falling short. At North Star Mortgage Network, we help you navigate the nuances of loan program guidelines to ensure you’re presenting the strongest financial profile possible.

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