Grossing Up NonTaxable Income

February 11th, 2024

income taxes

Fannie Mae, Freddie Mac, FHA, and VA all qualify mortgage borrowers by using their gross income. When getting a mortgage your mortgage lender can gross up nontaxable income to a higher figure to help in qualifying you.

You would think they would use net income, which is after tax income. Especially since a mortgage payment is paid out of after tax income. But they do use gross income. I am sure if they suddenly shifted the guidelines to solely using net income to qualify mortgage borrowers, the allowable debt ratios would go up to compensate for using the lower after tax income.

What nontaxable income can be grossed up?

Income that is tax exempt, including but not limited to the following:

Nontaxable portion of Social Security Income

Nontaxable portion of Federal Government Employee Retirement Income

Certain Types of Disability Benefits/Income

Child Support, Foster Care

Military Allowances (BAH, BAS)

Other documented Tax-Exempt Income

How Much Are You Allowed to Gross Up?

Fannie Mae rules

25% OR the Current Federal/State Tax Bracket if GREATER than 25%

Freddie Mac rules

25% OR the Current Federal/State Tax Bracket if GREATER than 25%

FHA rules

LESSER of 15% OR the Previous Year’s Tax Rate Based on the Borrower’s Income Amount

VA rules


USDA loans

Last Year’s Tax Rate Based on the Borrower’s Income Amount UP TO 25%

What Documentation Is Required To Gross Up Nontaxable Income?

Most Recent Tax Returns

Most Recent Tax Transcripts


Awards Letter

Social Security Income – the most recent year of the borrower’s federal tax return


If you or someone you know has nontaxable income, make sure they know the above information.

To contact me to discuss your qualifications, mortgage rates, or other mortgage questions, click here to schedule a call or you can email me directly.

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Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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