Do Mortgage Lenders Use My Net or Gross Income?

by Don Rafner

    Mortgage lenders will analyze your income and debts -- along with other factors -- when deciding whether to approve your application for a mortgage loan. And when lenders study your income, they're studying your gross income, not your net.

    Gross Income vs. Net Income

    When determining how your debt relates to your income, lenders use your gross monthly income, not your net monthly income. Net monthly income is your monthly income after all taxes, Social Security payments and deductions for retirement accounts are taken out of your paycheck. Gross monthly income is the amount of money you earn each month before these items are deducted from your paycheck. Your gross monthly income can also include other income streams, such as rental income, alimony or dividends. If you have an annual salary of $36,000 and no other regular income sources, your gross monthly income is $3,000. Your net monthly income, though, could be far lower depending on how much money you contribute to Social Security, taxes and retirement accounts.

    Why Gross Income?

    It might seem strange that lenders use gross income instead of net income when determining whether borrowers can afford a mortgage loan. After all, net income is the actual amount of money you bring home each month. But lenders use gross income when qualifying individuals because this is a figure that most consumers readily know. If you make a salary of $72,000 a year, you quickly know that your gross monthly income is $6,000. You might not be able to quickly figure your net income, unless you have your paycheck stub in front of you. Your gross income is also stable, while your net income could change from month to month.

    Debt-to-Income

    Lenders rely on two debt-to-income ratios, your front-end and back-end ratios, to determine how much of a mortgage loan you can afford. Lenders want your total monthly mortgage payment, a payment that includes your principal, interest and taxes, to equal no more than 28 percent of your gross monthly income. That's the front-end ratio. Lenders also want all of your monthly debts, including mortgage payment, car-loan payment, credit-card minimum monthly payments and student-loan payments, to equal no more than 36 percent of your gross monthly income. This is known as the back-end ratio.

    Other Factors

    While your gross monthly income is a key factor in determining whether you qualify for a mortgage loan, it's not the only one that lenders consider. They will also look at your credit score, which tells lenders how well you've handled credit in the past, and your employment history. Lenders will also look at your savings. And when you're considering whether you can afford a mortgage loan, you need to look at your net monthly income. After all, that's the money coming into your budget each month. If you're not comfortable that your net monthly income is high enough to support a particular loan, you might reconsider closing on it.

    Photo Credits

    • John Foxx/Stockbyte/Getty Images

    About the Author

    Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.

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