Do mortgage underwriters use gross or net income for qualification?

Simple Answer:

It depends. For most mortgage approvals, underwriters use the gross monthly income for W2 (non-self-employed) borrowers. On the other hand, for self-employed borrowers, underwriters use net income (after deduction) for qualification purposes.

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Longer Answer:

When it comes to qualifying for a mortgage, understanding how your income is evaluated can make a significant difference in your loan approval process. One common question that arises is whether mortgage underwriters use gross or net income when qualifying borrowers.

Gross Income vs. Net Income

Gross Income is the total amount of income you earn before any deductions such as taxes, Social Security, and retirement contributions. It includes your salary, overtime, bonuses, and any other sources of income.

Net Income, on the other hand, is the amount of income left after all deductions have been taken out.

Which One Do Underwriters Use for W2 Employees?

Mortgage underwriters primarily use gross income when qualifying borrowers who are salaried employees. Here’s why:

1. Standardization: Gross income provides a standardized measure that can be consistently applied across all applicants. Since deductions can vary widely based on individual circumstances, using net income would introduce too much variability. Some states charge residents state income taxes, while others do not.
2. Affordability Assessment: Lenders are required by law to ensure that borrowers can afford their mortgage payments. By using gross income, underwriters can apply standard debt-to-income (DTI) ratios to assess affordability. The DTI ratio compares your monthly debt payments to your gross monthly income, helping lenders determine if you can manage additional debt.

Which One Do Underwriters Use for self-employed borrowers?

Mortgage underwriters primarily use net income when qualifying borrowers who are self-employed. Typically, underwriters use a 2-year average of the after-deduction income on the last 2 business tax returns. (Some deductions like depreciation and home use can be added back into the income, as they are paper expenses vs real expenses). Here’s why:

1. Reflects True Earnings: Self-employed individuals often have business expenses that reduce their gross income. Net income, which is the income after all business expenses have been deducted, provides a more accurate representation of the borrower's actual earnings and financial capacity.
2. Consistency with Tax Returns: Self-employed borrowers report their net income on their tax returns. Underwriters use these tax returns to verify income, ensuring consistency and accuracy in the income assessment process.

Conclusion

Mortgage underwriters use gross income when qualifying non-self employed borrowers. On the other hand, self-employed borrower's income is based upon their net (after deduction) income.

If you have other mortgage underwriting questions, please reach out at teamjd@mainstreethl.com

These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact me.

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