The reason why this question might be extremely important for those who do receive such income comes in the form of qualifying for a home loan. In general, when mortgage lenders review a loan application and it is evaluated via an automated underwriting system, or AUS, the decision-maker needs to know how much qualifying income exists within the loan file.  This of course is one of the key factors when determining affordability. Someone might have credit scores in the stratosphere but if there is not enough income verified to qualify, credit won’t matter. The other pillar is income.

But so what’s the deal with non-qualifying income? When an underwriter reviews a loan application and looks at the income appearing on the application, lenders use gross income, not ‘take-home.’ Sometimes, when borrowers fill out the loan application and come across the income section, they put down whatever amount that appears on their paycheck or what was automatically deposited in their bank account on the 1st and 15th. But lenders however don’t use take-home pay. They use gross pay, without any withholdings at all. There are just too many variables that come into play as it relates to how much money is taken home each pay period. Instead, gross income is used. One important thing to note here, is qualifying income ignores any income taxes that will be deducted from the paycheck each payday. There’s no way a lender can know the individual’s filing status just from a loan app.

Non-taxable income, as the name implies, doesn’t have any taxes taken out. What sort of income might that be? An inheritance might be non-taxable. So too are spousal support and child support income.
Death benefits and certain financial gifts might fall into the non-taxable category. Important aside, please consult your tax professional for any individual filing or tax status, not this column.

So, if taxable income takes the gross amount, how does that compare to income that is not taxable? In this instance, most lenders will ‘gross up’ the stated income to account for the non-taxable status. Often, lenders increase the applicant’s income that appears on the application by 25%. If the application says $5,000 per month, the lender may use $6,250. In this fashion, the income from both filing statuses is on an even keel.