Mortgage  Question?
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
Edited by Harry Jensen

Lenders use your gross income before any deductions, including pre-tax deductions such as retirement account or health insurance contributions, 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 contributions, lenders typically use the higher $50,000 gross income figure to calculate the mortgage you can afford.

The reason most mortgage lenders use the pre-deduction gross income figure is because many of the pre-tax contributions you make are elective, which means that you could stop making them if you need money to pay your mortgage. For example, if you are in a financial pinch, you could pause contributions to your retirement account and use that extra income to help pay your mortgage.

Use ourMORTGAGE QUALIFICATION CALCULATORto determine the mortgage you can afford based on your gross income

It is important to highlight that in addition to excluding retirement account, health insurance and health savings account elective contributions, lenders also look at your gross income before mandatory deductions for federal and state taxes, social security (FICA tax) and medicare. In short, lenders typically use the highest gross income figure possible to evaluate your mortgage application.

The example below shows the income lenders use when you apply for a mortgage. In this case, the lender uses $5,000 in monthly gross income instead of net income to determine if the applicant qualifies for the loan despite numerous elective contributions and deductions. Please note that this example is provided for informational purposes only and your income and deductions vary based on your federal and state tax rates, elective contributions and other factors.

Mortgage Applicant Income Example

Monthly Gross Income: $5,000 --> figure lender uses to determine mortgage qualification

   (-) Federal Tax: $1,000

   (-) Social Security: $200

   (-) Medicare: $75

   (-) Retirement Account Contribution: $100

   (-) Health Insurance Contribution: $100

Monthly Net Income: $3,525

To verify your gross income, lenders usually request your pay stubs for the prior two months and your W-2s and tax returns for the prior two years. Your W-2s and tax returns confirm your annual gross income while your pay stubs verify your current income level.

These documents also include your gross income before any deductions and lenders use this information to determine your mortgage amount. In some cases, you may also be asked to provide a letter from your employer that outlines your income as supporting documentation, although this is relatively unusual.

Review The Difference Between Gross and Net Income When You Apply for a Mortgage

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 credit score, down payment, debt-to-income ratio, employment history and other borrower mortgage qualification guidelines.

If you have questions about qualifying for a mortgage, we recommend that you contact lenders in the table below to evaluate your situation. Comparing proposals from multiple lenders is also the best way to save money on your mortgage.

Current Mortgage Rates in Ashburn, Virginia as of May 18, 2024
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Rate data provided by Displayed by ICB, a division of Mortgage Research Center, NMLS #1907, Equal Housing Opportunity. Payments do not include taxes, insurance premiums or private mortgage insurance if applicable. Actual payments will be greater with taxes and insurance included. Read through our lender table disclaimer for more information on rates and product details.


"B3-3.1-01, General Income Information."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, August 7 2019.  Web.

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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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