Imagine your income being worth more on paper than what actually hits your bank account each month.
For Veterans and Military members, this isn’t a fantasy—it’s a powerful reality thanks to a mortgage lending practice called “grossing up” non-taxable income.
If you receive VA disability pay, Basic Allowance for Housing (BAH), or Basic Allowance for Subsistence (BAS), you might be able to qualify for a larger VA home loan than you initially thought possible.
This guide will demystify the concept of grossing up, explain how it works with your specific non-taxable benefits, and show you how to leverage this unique advantage to maximize your homeownership potential.
What is “Grossing Up” Income?
“Grossing up” income refers to the process where a lender increases the value of your non-taxable income for loan qualification purposes. Since non-taxable income isn’t subject to federal (and often state) income taxes, you effectively have more spendable income than someone earning the same gross amount from taxable sources. Lenders account for this by applying a multiplier (typically 1.15x to 1.25x, or 115% to 125%) to your non-taxable income.
This “grossed-up” figure is then used in your debt-to-income (DTI) ratio calculation, giving you more qualifying income. This process is particularly beneficial for Veterans, helping them understand how their non-taxable benefits affect eligibility and lender requirements, such as minimum credit score needed for VA loans.
Common Non-Taxable Income Sources for Veterans That Can Be Grossed Up
VA Disability Compensation
VA disability compensation is one of the most common non-taxable income sources for Veterans. If you receive monthly disability payments from the Department of Veterans Affairs, lenders can gross up 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. This substantial boost can also be a key factor if you’re navigating options for a VA loan with bad credit. It can also significantly improve your chances if you’re aiming for a VA home loan with a 580 credit score, as a higher effective income helps offset credit challenges.
Basic Allowance for Housing (BAH)
For active-duty service members, BAH is a significant non-taxable allowance designed to help with housing costs. Like VA disability, BAH can be grossed up by lenders. This is particularly impactful for those living in high-cost areas where housing expenses are substantial. It’s an important part of using military pay for VA loan qualification. Understanding how all your financial factors combine is key, including how your credit score impacts VA loan rates, as this can affect your overall loan terms.
Basic Allowance for Subsistence (BAS)
BAS is a non-taxable allowance for active-duty service members intended to offset the costs of a service member’s meals. 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.
Other Non-Taxable Income Sources That May Be Grossed Up
Beyond VA disability, BAH, and BAS, other non-taxable income sources might qualify for grossing up, depending on the lender’s policies and the stability of the income. These can include:
- Social Security benefits (if non-taxable portion)
- Certain pension or retirement income (non-taxable portion)
- Child support or alimony (if documented and stable)
For instance, understanding your comprehensive financial stability, including VA mortgage cash reserves for Veterans, is also vital for loan approval. Managing all aspects of your credit is important, including addressing issues like settling charged-off credit cards or negotiating pay-for-delete with collection agencies which can negatively affect your overall financial profile.
The Math Behind the Gross Up
The gross-up percentage typically ranges from 15% to 25%. So, if you have $1,000 in non-taxable income and the lender applies a 25% gross-up:
$1,000 (Non-Taxable Income) x 1.25 (Gross-Up Multiplier) = $1,250 (Grossed-Up Income)
This calculation significantly boosts your reported gross monthly income, which directly impacts your Debt-to-Income (DTI) ratio.
Impact on Your Debt-to-Income (DTI) Ratio
Your DTI ratio is a critical factor in mortgage approval. It’s calculated by dividing your total monthly debt payments by your gross monthly income. By grossing up your non-taxable income, you effectively increase the “income” side of this ratio, thereby lowering your DTI. A lower DTI indicates to lenders that you have more disposable income to manage your mortgage payments, making you a less risky borrower.
This can be particularly helpful when navigating the VA automated underwriting system, which favors lower DTI ratios, or even when considering manual underwriting for a VA loan in more complex cases. If you’re working to improve your credit quickly for a better DTI, a rapid rescore for VA mortgage credit might be an option to consider with your lender.
Gross-Up Percentages by Loan Type (General Guidelines):
While the VA does not set a specific gross-up percentage, lenders often follow conventional loan guidelines or their own internal overlays. Here are typical gross-up percentages:
| Loan Type | Typical Gross-Up Percentage |
|---|---|
| VA Loan | 15% – 25% (Lender Discretion) |
| FHA Loan | 15% – 25% (Lender Discretion) |
| Conventional Loan | 15% – 25% (Lender Discretion) |
Required Documentation to Gross Up Income
To gross up your non-taxable income, lenders will typically require documentation proving the income is indeed non-taxable and stable. This usually includes:
- VA award letters: For disability compensation.
- LES (Leave and Earning Statement): For BAH/BAS for active duty.
- Social Security award letters or pension statements: For other non-taxable benefits.
- Proof of consistent receipt: Such as bank statements showing regular deposits over time.
Maximizing Your Buying Power with Non-Taxable Income
Leveraging the gross-up feature for your non-taxable income is a smart way to maximize your homebuying potential. It can be especially beneficial if:
- You have a high percentage of your income from non-taxable sources.
- Your DTI ratio is borderline for approval.
- You are looking to qualify for a larger loan amount.
This smart strategy is key to overall improving your credit for a VA loan, as higher qualifying income can often strengthen your overall application.
The Bottom Line
Grossing up non-taxable income is a valuable benefit for Veterans applying for a VA loan. It allows lenders to recognize the true purchasing power of your tax-free benefits, potentially helping you qualify for a home loan when you might not otherwise, or to secure a larger loan amount. Always discuss your specific income situation with a knowledgeable VA loan specialist who can accurately assess your eligibility and help you make the most of your earned benefits.
This smart strategy ensures your service benefits translate directly into greater homebuying power. For Veterans exploring all options, considering an FHA alternative to a VA loan for Veterans or planning to refinance FHA to VA loan for Veterans in the future are also valuable pathways to homeownership.
Additionally, a deeper understanding of mortgage options, including the nuances of mortgage credit scores vs. Credit Karma, can provide a clearer picture for your homebuying journey. In some unique situations, even considering a non-occupying co-borrower FHA loan might be an avenue to explore for homeownership.
FAQ: Grossing Up Income for VA Loans
Q: Can all non-taxable income be grossed up?
A: Most stable and verifiable non-taxable income sources can be grossed up. This commonly includes VA disability, BAH, BAS, and sometimes Social Security or certain pensions. Always confirm with your lender.
Q: Is there a maximum percentage my income can be grossed up?
A: While the VA doesn’t set a maximum, lenders typically cap the gross-up at 125% (a 25% increase). Some might use a lower percentage like 115%.
Q: Does grossing up income affect my VA entitlement?
A: No, grossing up your income for qualification purposes does not affect your VA loan entitlement. Your entitlement is based on your service history, not your income.
Q: What if I have some taxable and some non-taxable income?
A: Lenders will only gross up the non-taxable portion of your income. Your taxable income will be used at its face value.
Q: Do all lenders gross up non-taxable income the same way?
A: No. While it’s a common practice, the specific percentage and documentation requirements can vary between lenders. It’s always best to work with a lender experienced in VA loans.
The VA Loan Network Editorial Team is comprised of dedicated mortgage specialists and financial writers committed to providing veterans and service members with accurate, up-to-date information on VA loan benefits, eligibility, and the home-buying process.
