Net Income

Full definition

Net income is the amount of money remaining after all deductions have been subtracted from gross income. For employees, deductions include federal and state income taxes, FICA taxes (Social Security 6.2% and Medicare 1.45%), health insurance premiums, 401(k) contributions, and other voluntary deductions. Net vs. gross for loan purposes: Most personal loan lenders use gross monthly income to calculate your debt-to-income ratio (DTI). This is consistent and comparable across borrowers regardless of their withholding choices. However, your net income is what you actually have available to make loan payments, so it's useful for your own budgeting even if it's not the primary underwriting metric. Example: An employee earning $6,000/month gross might take home $4,200/month net after taxes and deductions. If a lender qualifies them at a 40% DTI based on gross income, they could have $2,400/month in total debt payments (40% x $6,000). But from a cash-flow perspective, $2,400 out of $4,200 take-home is a 57% burden, which may be tighter than it appears. Self-employed net income: For self-employed borrowers, 'net income' often refers to Schedule C net profit (gross business revenue minus business expenses). This is distinct from personal net income. Lenders for self-employed borrowers typically use Schedule C net income or sometimes tax return AGI as the qualifying income base, not gross business revenue. Budgeting with net income: When assessing whether a personal loan payment is affordable, use your net income as the basis, not gross. A payment that is 15% of gross income might be 25% of net income, which is the real cash-flow constraint.

• Gross Income
• Debt-to-income ratio (DTI)
• Underwriting