VA Loan: Gross Up Non-Taxable Income, Boost Buying Power

What is “Grossing Up” Income?

At its core, “grossing up” is a way for lenders to acknowledge the true value of non-taxable income. When you earn income that isn’t taxed, you keep 100% of it. Taxable income, on the other hand, is reduced by federal, state, and local taxes. To create a level playing field and accurately compare your non-taxable income to someone’s taxable income, lenders can inflate your non-taxable amount by a certain percentage. This “grossed-up” figure is then used in your debt-to-income (DTI) ratio calculation, giving you more qualifying income.

• The Concept: Adjusting non-taxable income upwards to equal a comparable taxable income.
• Why It Matters: Non-taxable income leaves you with more disposable income, as it’s not reduced by taxes.
• Typical Percentage: For VA loans, non-taxable income is commonly grossed up by 25%.

How Grossing Up Works with Your Non-Taxable Benefits

Several types of non-taxable income commonly received by Veterans and Military members are eligible for grossing up. The most prevalent are VA disability compensation, Basic Allowance for Housing (BAH), and Basic Allowance for Subsistence (BAS). Understanding how each is treated can significantly enhance your loan qualification.

VA Disability Compensation

VA disability pay is one of the most powerful non-taxable income sources for VA loan qualification. Since it’s completely tax-free, lenders can apply the gross-up factor to this income. This means your $1,000 monthly disability check could be considered $1,250 (or more, depending on the lender’s specific allowance) for your mortgage application.

• Tax-Free Benefit: VA disability pay is not subject to federal or state income taxes.
• Significant Boost: Allows for a direct and substantial increase in your qualifying income.
• Required Documentation: Lenders will need your official VA award letter confirming the amount.

Basic Allowance for Housing (BAH)

For active-duty service members, BAH is a crucial non-taxable allowance that helps cover housing costs. Because you receive this free of taxes, lenders can gross it up, just like VA disability. This can substantially increase your qualifying income, making a significant difference in the home price you can afford.

• Non-Taxable Housing: Direct impact on your take-home pay for housing.
• Calculation Example: A $2,000 BAH can become $2,500 for qualification purposes.
• Verification: Shown clearly on your Leave and Earnings Statement (LES).

Basic Allowance for Subsistence (BAS)

BAS is a non-taxable allowance for meals, primarily for active-duty personnel. While generally a smaller amount than BAH, its non-taxable status means it also qualifies for grossing up. Every little bit of qualifying income helps, and BAS can contribute positively to your overall borrowing power.

• Meal Allowance: Covers the cost of food, free from taxes.
• Adds to Qualifying Income: Though smaller, it still gets the “gross-up” advantage.
• LES Verification: Also verifiable through your Leave and Earnings Statement.

Other Non-Taxable Income Sources That May Be Grossed Up

While BAH, BAS, and VA disability are common, other non-taxable income sources can also be grossed up for mortgage qualification. These vary by loan program and lender, but are worth discussing with your loan officer.

• Social Security Benefits: A portion of Social Security income (often 15%) is typically non-taxable and can be grossed up.
• Child Support/Alimony: If consistently received and documented, these non-taxable payments may also be grossed up.
• Certain Pensions/Retirement: Some government or military pensions may have non-taxable portions eligible for grossing up.
• Workers’ Compensation: Benefits received from workers’ compensation may be non-taxable and applicable.

The Math Behind the Gross Up

The standard gross-up percentage for VA loans is typically 25%. This means for every dollar of non-taxable income, lenders will count it as $1.25 for qualification purposes. This calculation significantly boosts your reported gross monthly income, which directly impacts your Debt-to-Income (DTI) ratio.

• Simple Formula: Non-taxable income amount x 1.25 = Grossed-up qualifying income.
• Example with VA Disability: $1,500 (disability) x 1.25 = $1,875 (qualifying income).
• Example with BAH/BAS: $2,000 (BAH) + $400 (BAS) = $2,400 (total non-taxable). $2,400 x 1.25 = $3,000 (qualifying income).

Impact on Your Debt-to-Income (DTI) Ratio

The gross-up significantly improves your Debt-to-Income (DTI) ratio. Your DTI is calculated by dividing your total monthly debt payments (including your new mortgage payment) by your gross monthly income. By increasing your gross monthly income through the gross-up, your DTI percentage decreases, making you a more attractive borrower in the eyes of lenders.

• Lower DTI: A reduced DTI signals lower risk to lenders, increasing your approval chances.
• Increased Borrowing Power: A better DTI can qualify you for a higher loan amount, expanding your home search.
• VA Specifics: Especially beneficial for VA loans, which also consider residual income thresholds.

Gross-Up Percentages by Loan Type (General Guidelines)

While the focus here is on VA loans, it’s worth noting that gross-up percentages can vary slightly by loan type. This highlights the unique advantage VA loans offer for non-taxable Military and Veteran benefits. Always confirm with your specific lender.

Required Documentation to Gross Up Income

To benefit from grossing up your non-taxable income, you’ll need to provide clear documentation to your lender. This substantiates the income and proves its non-taxable status.

• VA Disability: Official VA award letter, detailing your monthly benefit.
• BAH/BAS: Your Leave and Earnings Statement (LES) is typically sufficient.
• Social Security: Award letter from the Social Security Administration (SSA) and/or a tax transcript showing the non-taxable portion.
• Child Support/Alimony: Court orders or divorce decrees specifying the payment amount and duration, plus bank statements showing consistent receipt.
• Proof of Non-Taxable Status: In some cases, for less common income types, a letter from a CPA or the awarding entity confirming tax-exempt status may be required.

Maximizing Your Buying Power with Non-Taxable Income

Grossing up non-taxable income is a powerful advantage for Veterans and Military members pursuing homeownership. By understanding which of your benefits qualify and ensuring you have the proper documentation, you can significantly enhance your mortgage application. Don’t leave money on the table – discuss all your non-taxable income sources with a knowledgeable VA loan specialist. They can help you accurately calculate your true qualifying income and unlock the full potential of your VA home loan benefit, bringing you closer to securing your dream home.

The Bottom Line

Grossing up non-taxable income is a powerful advantage for Veterans and Military members pursuing homeownership. By understanding which of your benefits qualify and ensuring you have the proper documentation, you can significantly enhance your mortgage application. Don’t leave money on the table – discuss all your non-taxable income sources with a knowledgeable VA loan specialist. They can help you accurately calculate your true qualifying income and unlock the full potential of your VA home loan benefit, bringing you closer to securing your dream home. This smart strategy ensures your service benefits translate directly into greater homebuying power.