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Income before or after deductions qualify for mortgage?

Do lenders use your gross income or taxable income from your W-2 for your mortgage application? My gross income is higher than my taxable income because I make pre-tax 401(k) and health insurance contributions.

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

Most lenders use your gross income before any deductions including pre-tax deductions such as 401(k) contributions or health insurance fees to determine what size mortgage you qualify for. For example, if your annual gross income is $50,000 but your taxable income on your W-2 is only $45,000 due to pre-tax deductions, lenders typically use the higher $50,000 gross income figure. The reason most mortgage lenders use the pre-deduction gross income figure is because many of the pre-tax deductions you take are elections that you could stop making if you need money to pay your mortgage.  We provide a comprehensive overview of the difference between your gross income and net income on FREEandCLEAR.

To verify your gross income, lenders usually request your pay stubs for at least one month prior to submitting your mortgage application. The pay stubs include your gross income before any deductions and lenders use this information to confirm the income figure you provide on your mortgage application. You can also provide a letter from your manager with your annual salary to the lender as supporting documentation.

Please note that your gross income is only one factor that lenders use to determine if you qualify for a mortgage. Lenders also review your personal and financial profile including your credit score, debt-to-income ratio, employment history and other borrower mortgage qualification guidelines. You can also use our Mortgage Qualification Calculator to determine what size mortgage you can afford based on your monthly gross income and debt payments.

Finally, we always recommend that you shop multiple lenders as qualification guidelines vary.  You can review lenders in your area by clicking INTEREST RATES  We advise you to contact at least four lenders to find the mortgage that is right for you.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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