Gross Income

Full definition

Gross income is total earnings before any taxes or other deductions are taken out. It differs from net income (take-home pay), which is what actually lands in your bank account after federal income tax, state income tax, Social Security, Medicare, retirement contributions, and other payroll deductions. Why lenders use gross income: Debt-to-income (DTI) ratio calculations, which determine loan affordability, are based on gross monthly income. Lenders use gross income because it's the most standardized measure across different tax situations, deduction choices, and states. Two employees with identical salaries in different states would have different net incomes (due to state tax differences) but the same gross income. Verification: For W-2 employees, gross income can be verified from pay stubs (which show gross pay before deductions) and W-2 forms. The bottom-line of each month's pay stub showing 'current gross earnings' is typically what lenders count. For self-employed borrowers, gross income from Schedule C or K-1 after business deductions is what matters. Gross vs. net for self-employed borrowers: Self-employed borrowers often have lower adjusted gross income on their tax returns after business deductions, which can hurt DTI calculations. Some lenders 'add back' non-cash deductions like depreciation when calculating qualifying income. Income types that are gross: Salary, hourly wages, commissions, bonuses, rental income (before expenses), business revenue (before expenses). Social Security and pension income are sometimes 'grossed up' by 125% by some lenders because these sources are tax-advantaged.

• Debt-to-income ratio (DTI)
• Verification of employment (VOE)
• Underwriting