Real Estate News

Why Lenders Use Gross Monthly Income vs. Take-Home Pay

Written By: David Reed
Monday, November 23, 2020

It might seem curious to some why mortgage companies use gross monthly income when determining affordability instead of take-home pay. After all, its the take-home pay that consumers use to pay bills including the mortgage but also other monthly expenses as well. Credit card debt and auto loans are paid each month but so are things like mobile phone bills, food, gas and other expenses. But there are a few good reasons why lenders use the gross amount instead of net pay.

First, its a universal application. Everyone is qualified using the very same guidelines. Lender A uses gross monthly income and so does Lender B and Lender C. When calculating debt-to-income ratios to evaluate affordability, the debt ratio guidelines use gross monthly income. There are a few loans that do take into consideration monthly expenses and residual income, but most every other program uses gross monthly income.

Second, lenders arent aware of individual deductions. One person might have a monthly deduction for health care while someone else would have their health care paid for by their employee as a company benefit. Someone else might have a cable bill while another party cut the cord a long time ago. Child support payments, student loans and other monthly expenses can vary from one person to the next. Its almost impossible for those in the secondary markets to individually adjust a single loan program based upon individual choices. Fannie Mae and Freddie Mac for example have debt ratio guidelines but these are also based upon gross monthly income. Net income is flexible whereas gross monthly income is not.

When employers report income each year to the IRS, the amount reported is gross income, not net. When consumers are asked to document their loan application as it >

Another reason is how consumers view their own income. Sure, they will know what the amount will be on each individual paycheck, but when asked how much they make each month or even each year, they know the gross amount automatically. I make 100,000 per year is the gross amount, for example. Consumers who try and figure out their annual pay using net income would be difficult to discern. It can be done, but its the gross income they remember. When employers advertise for a new employee and the subject of pay comes up, its the gross amount. Theres no way an employer would know the financial situation of an individuals deductions and expenses to explain how much they pay each month.

If youre thinking of buying your first home and want to know what you might qualify for, theres no shortage of online prequalification calculators to get started. Sometimes though, consumers can enter their take-home pay instead of gross monthly income not realizing theyre short-changing themselves when they do so. Lenders, believe it or not, want to keep it simple. They use gross income, not net.

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