Net Monthly Income

Full definition

Net monthly income is what lands in your bank account after your employer withholds federal income tax, state income tax, Social Security (6.2%), Medicare (1.45%), and any pre-tax benefit contributions (health insurance, 401k). Why lenders use gross income instead: Debt-to-income calculations in the mortgage and personal loan industry use gross (pre-tax) income because tax burdens vary significantly between borrowers and tax situations change. Using a consistent pre-tax number makes lender comparisons more standardized. Practical planning using net income: Even though lenders approve you based on gross income DTI, you make payments from your net income. A $500/month loan payment on a $5,000/month gross income looks manageable at 10% DTI. But if your net income after taxes and deductions is $3,500, that same $500 payment is 14.3% of take-home pay - a more honest picture of your monthly cash flow. Self-employed borrowers: When you are self-employed, 'net income' often means profit after business expenses (net profit on Schedule C). Lenders may use 2-year average net profit from tax returns. This can be significantly lower than gross revenue. Budgeting with net income: When deciding if a loan is affordable, compare the monthly payment to your net income, not your gross. Most financial planners suggest keeping total debt payments under 25-30% of net (take-home) income for comfortable repayment.

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