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.
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.
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.
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.