Why Lenders Use Gross Monthly Income vs. Take-Home

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Real Estate

It might seem strange that mortgage companies use gross monthly income instead of 'take-home' pay when determining affordability. It's the take-home pay that consumers use for their monthly expenses and bills - including the mortgage - after all. But there are a few good reasons why.

First, it's a figure that most consumers readily know. Calculating net income with taxes, deductions, etc. is complicated and can vary month-to-month. Gross income is stable and easier to quickly calculate monthly. It would be impossible for lenders to adjust their loan programs for each individual's specific expenses and deductions.

Second, employers report income each year to the IRS, and the amount reported is gross income, not net. When consumers are asked to document income on their loan application, the last two years of W2 forms are needed along with recent paystubs. The gross amounts on the paystubs should align with the W2 forms. Trying to parse net income from these documents is impossible.

Third, it's universal. Lenders A, B, and C all use gross monthly income to calculate debt-to-income ratio (and thus affordability), so everyone is qualified using the same guidelines. There are a few loans that do take monthly expenses and 'residual' income into consideration, but most every other program uses gross monthly income.

If you're thinking about buying your first home and want to know what you might qualify for, there's no shortage of online prequalification calculators to help you get started. Just remember to enter your gross monthly income, not your net or take-home pay, so you don't short-change yourself. Feel free to reach out if you need a referral for a good lender. It really is the first step in home shopping since the pre-qualification letter is expected to be attached to any offer.