VA loans review income as part of the loan approval process and while income for VA loans is examined in much the same fashion as application for other loans such as FHA or conventional mortgages, such as using gross monthly income to establish affordability instead of “take home pay.” This method has long been established as part of the loan approval process. And while it sort of doesn’t make sense, one would think a lender would use net income instead of gross income, it’s still the tried and true approach.
Deductions and withholdings can vary based upon a variety of factors. But if you’re trying to boost your income in order to help qualify, there’s the notion of increasing your monthly income if you have some or all of your income that is non-taxable.
Lenders will take a borrower’s non-taxable income listed on a pay check stub and multiply that amount by 1.25 and use that figure when reviewing the loan. Simply, if the borrower has $1,000 per month in non-taxable income, the lender will use $1,250 as the qualifying income instead of $1,000. So what types of income is considered non-taxable?
If you’re active duty, your base allowance for housing is non-taxable. Your base pay is taxable, but your BAH, BAS and COLA is not. If you receive disability payments, those payments might be increased for qualifying purposes as are certain annuities, retirement income and other qualified non-taxable funds such as tax-free municipal bonds.
While this list provides you with a general description of income that can be considered non-taxable, it’s important to address any income tax related issues with a professional tax adviser. If you think you might have income that is non-taxable, make sure you point that out to your loan officer and ask if they do in fact “gross up” non-taxable income to help qualify.