When it comes to buying or refinancing a home, lenders figure the borrowers’ debt to income ratio. In calculating the total income, there are two main categories. Foremost, there is taxable income which covers most types. Examples of taxable income include w2, most retirement pay, or self employment. Additionally, there is non taxable income, which is exempt from federal income tax. When borrowers have non taxable income, there could be advantages in getting a mortgage approval.
What is Non Taxable Income?
All mortgage loans allow for grossing up certain types of non taxable income. It can be grossed up is because mortgage loans go by a borrower’s gross income. The amount that non taxable income can be grossed up depends on the loan type and sometimes the borrower’s tax rate. If the borrower(s) do not have to file a tax return, then the standard is grossing up income by 15 or 25%. So the grossed up figure is determined by multiplying the income by the percentage. Although there are ways to gross up income higher than these percentages!
Non Taxable Income List
Below are examples of non taxable income sources. Do you have any of the following? Then it may help your mortgage loan approval!
- Pastoral housing allowance. Check out our blog on using the pastoral housing allowance to qualify for a mortgage
- Car allowance paid for a period of 2 years or more (must have documentation of receipt)
- Social security (if not taxed on the tax returns)
- Disability income like social security, VA, or other forms of disability income
- Nontaxable pension
- Railroad retirement income
- Non Taxable Combat Pay – Military Housing, clothing, and rations allowances
- Foster Care Income
- Indian Act Exemption
- Child support
Often using the grossing up technique may be the difference between a denial and loan approval. Actually we receive questions across the country on this topic. Many are looking for a way to overturn a debt ratio denial by talking to a lender that understands these income sources.
Hopefully you find this article helpful and we encourage you to reach out to our dedicated team of loan officers. So let us help you buy your next home!