Lenders consider your gross monthly income when evaluating what kind of mortgage you can afford. In other words, they’re looking at your major monthly debts in relation to your pre-tax income.
That would seem to create a financial disadvantage for would-be buyers who receive non-taxable income, like disability payments, military allowances, child support and more. But the VA allows lenders to adjust a borrower’s non-taxable income upward, basically creating a pre-tax or gross figure.
This technique is known as “grossing up” a borrower’s income. Guidelines and policies for how to gross up non-taxable income may vary by lender.
Grossing Up & DTI Ratio
Lenders can gross up your income when calculating your debt-to-income ratio. This key metric looks at the relationship between your gross monthly income and your major monthly debts. Lenders will often have an in-house cap for DTI ratio, so grossing up non-taxable income can prove a big benefit for prospective buyers.
At Veterans United, we can gross up non-taxable income by 15 percent.
For example, let’s say the only income you receive is non-taxable. If your monthly non-taxable income is $2,000 and your major monthly debts are $900, that’s a 45 percent DTI ratio (900/2,000).
Grossing up the income by 15 percent hikes the monthly income figure to $2,300. In turn, that lowers your DTI ratio to 39 percent -- which is a big deal in this example, because buyers whose DTI ratio exceeds 41 percent have to meet a higher benchmark for residual income.
Grossing Up & Residual Income
Residual income is another key guideline for VA lending. Basically, VA borrowers must have a minimum amount of discretionary income remaining each month after paying major expenses. That minimum cushion varies by family size and where you’re buying.
VA lenders cannot gross up non-taxable income when calculating your residual income figure. The VA and lenders want a clear look at your remaining discretionary income each month, in large part because that surplus helps ensure veterans are well positioned to weather financial storms.
Tax Returns & Non-Taxable Income
Just like with our example, it’s possible to obtain a VA loan if the only income you receive is non-taxable. Depending on the nature of your non-taxable income and other factors, lenders may want to see a letter from the IRS indicating you didn’t file tax returns.
Talk with a Veterans United loan specialist at 855-259-6455 if you have any questions about how your non-taxable income can help you get a VA home loan.