IncomeXpert supports the grossing up of income outlined in the guidelines. The amount the income can be grossed up depends on the agency guidelines selected. The reason for this adjustment of income is that mortgage qualification is based on gross income, not net income. Since the ratios used in the mortgage industry (commonly 28/36 for manual underwriting or up to 45% for AUS approved loans) include the consideration of payment of taxes we need to adjust up the incomes that are not taxed to bring the income equal to standard taxed income.
Common incomes that can be grossed up
- Child Support
- Alimony
- Social Security Income
- VA Benefits
- Interest Income
- 401K/Pension Income
- Income that can be documented as non taxable
Guidelines require evidence that the income is non taxable, and will continue to be non taxable.
Guidelines for amounts to gross up
- 25% Fannie Mae B3-3.1-01
- 25% Freddie Mac 5305.2
- 15% FHA 4000.1 II.A.4 (P)
- 25% VA Handbook Chapter 4 Section 9
- 25% USDA HB-1 3555.1 Ch 9
Special Note –
Fannie Mae and Freddie Mac allow lenders to gross up the untaxed portion of Social Security (SS) income when calculating qualifying income for a borrower. Since only 85% of Social Security benefits are taxable, the remaining 15% can be grossed up based on the applicable gross-up percentage. When you set the gross up question to NO, on social security and disability, the box will show 3.75%. This is the “shortcut” method to get the answer that Fannie / Freddie allow as shown in their guidelines.
Example from the guidelines
First Determine the Non-Taxable Portion:
15% of the SS income is non-taxable.
Formula: SS Income × 0.15
Example: $1,000 × 0.15 = $150
Second Apply the Gross-Up Rate:
The gross-up rate is typically 25%.
Formula: Non-Taxed Amount × Gross-Up Rate
Example: $150 × 25% = $37.50
Third Calculate the Final Income:
Add the grossed-up amount to the original SS income.
Example: $1,000 + $37.50 = $1,037.50
Our Shortcut Method
Instead of performing multiple steps, we use a simplified formula:
Formula: SS Income × 3.75% = Gross-Up Amount
Example: $1,000 × 3.75% = $37.50
Final Income: $1,000 award letter + $37.50 gross up = $1,037.50 final answer