2 Numbers Decide How Far FHA Can Gross Up Nontaxable Income
Two numbers decide how far your nontaxable income can be grossed up on an FHA loan, and most borrowers never hear either one. Here is how they play out for Nicole, a fictional, illustrative borrower near Hanahan, SC. She is not a real client, but her situation comes up often.
Nicole's income is real, but it is counted flat
Nicole has income that is not taxed. Her lender counts it dollar for dollar, exactly like any other dollar. That sounds fair until you think about what a taxable dollar really is. A borrower with taxable income pays tax before spending it. Nicole keeps every dollar of hers. The FHA guideline recognizes that difference and lets a lender account for it by grossing the income up. But it only helps if the lender actually does it.
What the FHA guideline says
The rule is in FHA guideline Section II.A.4.c.xii.P, part of HUD 4000.1. Here is the text, word for word:
"The amount of continuing tax savings attributed to Nontaxable Income may be added to the Borrower's gross income. The percentage of Nontaxable Income that may be added cannot exceed the greater of 15 percent or the appropriate tax rate for the income amount, based on the Borrower's tax rate for the previous year. If the Borrower was not required to file a Tax Return for the previous tax reporting period, the Mortgagee may Gross Up the Nontaxable Income by 15 percent."
The two numbers
Number one is 15 percent. Number two is the borrower's tax rate from the previous year, the appropriate rate for the income amount. The guideline says the percentage added cannot exceed the greater of the two. If Nicole's tax rate for the previous year was lower than 15 percent, 15 percent is the ceiling. If her rate was higher, her rate is the ceiling. I will not guess at what her rate would be, because it depends on her actual return.
When no return was required
Some borrowers with nontaxable income were not required to file a return at all. The guideline covers that too. If the borrower was not required to file a Tax Return for the previous tax reporting period, the lender may gross up the nontaxable income by 15 percent. In that case there is no prior-year rate to compare against, so the 15 percent figure is the one that applies.
A ceiling, not a promise
Notice the wording. The percentage "cannot exceed" the greater figure, and the lender "may" gross up. This is a limit on how far a lender can go, not an instruction that every lender goes all the way. It also says the amount added is the continuing tax savings, so the income needs to be the kind that continues. That is why the conversation matters. If nobody raises it, the income can simply be counted at face value.
The question Nicole asks
This is the part you can use today. Nicole asks:
"Is any of my income nontaxable, and are you grossing it up under FHA guideline Section II.A.4.c.xii.P? Which percentage are you using, and what is it based on?"
Each piece of that question does work. The first part makes the lender identify the income. The second part points to the exact section. The last part forces a clear answer on which of the two numbers is in play, and why.
What Nicole brings
The guideline ties the percentage to the previous year, so Nicole brings the previous year's tax return. If she was not required to file one, she says so plainly. Either way, the lender has what it needs to pick the right number and document it.
Why this matters
Grossing up can raise the income a lender counts without changing what a borrower actually earns. I am not going to promise an outcome, because every file depends on the income, the return, and the lender. What I can tell you is that the rule exists, it has two numbers, and you are allowed to ask about it.
I am Jason Sharon, a licensed mortgage broker with Home Loans Inc. If you have nontaxable income and an FHA loan in mind, call me at 843-LOW-RATE. I find the path.
Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.
Learn more about this loan program: 2 Numbers Decide How Far FHA Can Gross Up Nontaxable Income
