Can You Gross Up Tax Exempt Income When Qualifying for a USDA Loan?
Can You Gross Up Tax Exempt Income When Qualifying for a USDA Loan?
Today’s video tip will cover a very important topic which can go a long way when determining your loan qualifications, maximum sales price, and what properties you can search for.
Certain types of income are considered tax exempt (or, non-taxable income) and this holds unique qualifying ability with USDA loans.
While standard USDA loan qualifying ratios (otherwise known as debt ratios) assume that income is taxable, USDA guidelines calculate tax exempt income differently.
When certain sources of income are not subject to federal tax, they can then be grossed up by 25%. Examples of this income are:
- Social Security Income
- Disability Income
- Child Support
In other words, taking the gross amount of their income and multiplying it by 125% or “grossing up”.
For example, we have a Homebuyer who has the following monthly income which is tax exempt:
- Social Security: $1,000
- VA Disability: $2,000
- Total monthly tax exempt income: $3,000
Next, take the total tax exempt income of $3,000 X 1.25 = $3,750 (this is the grossed up monthly income)
Remember, this only helps the qualifying ratios, and does NOT count additionally towards the total household income when it comes to USDA income limits.
Because USDA guidelines calculate tax exempt income differently than other programs, this can offer a qualifying advantage to the borrower.
