Grossing Up Non-Taxable Income
Social Security, disability, VA benefits and child support are often untaxed. Underwriting can count them at more than face value, and it changes what you qualify for.
Quick answer
Saxton Mortgage does. At least one conventional program we offer follows Fannie Mae, which adds 25% of verified nontaxable income to your qualifying income when the income and its tax-exempt status are likely to continue. If a wage earner in a similar tax bracket would pay more than 25%, the lender may use that higher amount. At least one FHA program we offer adds up to the greater of 15 percent or your tax rate from the previous year.
Untaxed income counts for more
A dollar you keep is worth more than a dollar you are taxed on.
- Guidelines allow certain non-taxable income to be increased before it goes into your qualifying calculation.
- Named non-taxable sources include some portion of Social Security, some federal and state government retirement income, Railroad Retirement Benefits, certain disability and public assistance payments, child support and military allowances.
- Fannie Mae sets the adjustment at 25%, and allows more where your actual tax bracket justifies it. Other programs use their own percentages.
- One program treats a set share of Social Security as non-taxable without requiring documentation of that status, then applies the adjustment to that portion.
- The file has to support the number. Guidelines require documentation of the amount grossed up and generally point to the tax rate used on your last return.
- Not every program offers it. Many guidelines are silent on grossing up entirely, which effectively means it is not available there.
Social Security income
Disability and VA benefits
Retirement and pension
Child support received
Military allowances
Child support grossed up in full
Why The Percentage Is Not One Number
This is the most inconsistently treated calculation in the entire guideline set.
Some programs apply a flat uplift to non-taxable income. Others cap the uplift at the borrower’s actual tax bracket, using whichever is less. One agency program applies a smaller adjustment. Another treats a fixed share of Social Security as presumed non-taxable and grosses up only that portion, which produces a much smaller number but requires no extra documentation. One jumbo guideline sets no fixed percentage at all: the amount added cannot exceed the appropriate tax rate for the income, with a specified default only where the borrower is not required to file a return. And one lender uses a table that varies by state tax level and income band.
The practical consequence is that the same borrower with the same benefit statement can qualify for materially different loan amounts at different lenders, purely because of how each one performs this calculation. That is not a loophole; it is a documented difference between guidelines, and it is worth checking before assuming a number.
There is a related rule that catches people. At least one program prohibits grossing up non-taxable income when calculating residual income, even though it permits the gross-up for the debt ratio. So the same income can be counted two different ways in two different tests within the same file.
Who this actually helps
Six situations where the adjustment moves the needle.
Retirees On Social Security
Often the largest single beneficiary. A meaningful share of Social Security is untaxed for many households, and the adjustment can be the difference between qualifying for the house you want and the one you settle for.
Disabled Veterans
VA disability compensation is not taxed. Where a program permits the adjustment, that income counts for more than its face amount in your ratios.
Parents Receiving Child Support
Child support appears by name in the itemized list of non-taxable income in at least one jumbo guideline, and one lender treats VA award letters and child support together as non-taxable benefits income.
Military Families
Military allowances are named as non-taxable income. For a service member with substantial housing and subsistence allowances, this is not a rounding error.
Public Assistance And Long-Term Disability Recipients
Certain disability and public assistance payments are named as non-taxable. Whether they qualify as income at all is a separate question, but where they do, the adjustment applies.
Anyone With A Mixed Income Picture
If part of your income is taxed and part is not, the untaxed portion gets the adjustment. Identifying which portion is which is worth doing carefully rather than lumping it together.
Hear From Homeowners Like You
Frequently Asked Questions
Questions about the gross-up.
Saxton Mortgage does. At least one conventional program we offer follows Fannie Mae, which adds 25% of verified nontaxable income to your qualifying income when the income and its tax-exempt status are likely to continue. If a wage earner in a similar tax bracket would pay more than 25%, the lender may use that higher amount. At least one FHA program we offer adds up to the greater of 15 percent or your tax rate from the previous year.
Grossing up adds an allowance on top of verified non-taxable income before your DTI ratio is figured. Fannie Mae calls the result an adjusted gross income and uses it in your qualifying ratio. FHA describes the add-on as the continuing tax savings from non-taxable income.
Fannie Mae adds 25% of verified non-taxable income, or more if a wage earner in a similar bracket would owe more in federal and state tax. FHA caps the add-on at the greater of 15% or your tax rate from the prior year. Fannie Mae treats 15% of Social Security as non-taxable without extra paperwork.
Named sources include some portion of Social Security, certain federal and state government retirement income, Railroad Retirement Benefits, certain disability and public assistance payments, child support, military allowances, and other income documented as exempt from federal income taxes.
Yes, the lender must verify that the income source is non-taxable before any gross-up. Fannie Mae accepts award letters, policy agreements, account statements and tax returns as proof. The income and its tax-exempt status also need to be likely to continue.
No, not on every loan. Fannie Mae and FHA allow a gross-up, and at least one non-QM program adds 25% to non-taxable income. FHA reverse mortgages are the exception: non-taxable income may be added to effective income but may not be grossed up.
No, at least one program says income may not be grossed up when residual income is calculated. A residual income review already accounts for federal taxes, which is why FHA reverse mortgage rules skip the gross-up. Its benefit shows up in the qualifying ratio instead.
FHA lets the lender gross up non-taxable income by 15% when you were not required to file a tax return for the previous year. Fannie Mae’s standard add-on is 25%. FHA also bars any extra allowance based on how many dependents you have.
Yes. VA disability compensation is not taxed, which is exactly what makes it eligible to be grossed up. What underwriting needs is evidence of the award and a reasonable expectation that it continues. It is one of the most commonly missed opportunities on a veteran file, because a lender who counts the benefit at face value is understating what you can afford.
Under Fannie Mae it is 25% of whatever portion is non-taxable, and more than that where your actual tax bracket justifies it. Other programs set their own figure, so which one your file goes to still matters. Some programs apply a set percentage, some cap the amount added at your actual effective tax rate, and at least one jumbo guideline sets no fixed percentage at all and limits the increase to what the tax would have been. Tell us which program you are going for and we will tell you the figure that applies to your file.
Find out what you qualify for
If a meaningful share of your income is not taxed, ask before you accept a loan amount. Send us your award letters or benefit statements and we will run the calculation across programs and show you where it lands highest.
Get Pre-QualifiedGross-up treatment for non-taxable income varies substantially by loan program and investor and is subject to change. Many programs do not address or permit grossing up. Documentation supporting the non-taxable status and the amount adjusted is required. Saxton Mortgage does not provide tax advice. Not all applicants will qualify. This is not a commitment to lend.