Mortgage Rates
Refinance Rates
FHA Rates
VA Rates
Jumbo Rates
Adjustable Rate Mortgage Rates
Interest Only Mortgage Rates
Non-Owner Occupied Rates
Home Equity Loan Rates
The Difference Between Gross and Net Income When You Apply for a Mortgage

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

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

    It is important to understand how gross and net income impact the mortgage process.  Knowing the difference between your gross income, or your income before any deductions, and your net income or take home pay, helps you understand what size mortgage you qualify for and how lenders evaluate you when you apply for a loan.  Most borrowers think about how much of their net income they should spend on their monthly payment when determining what size mortgage they can afford.  From the borrower's standpoint, thinking about mortgage affordability in terms of gross income makes less sense because a significant portion of your earnings goes to pay taxes, social security medicare, retirement contributions and other deductions. 

    On the other hand, lender mortgage qualification guidelines are almost always based on borrower's monthly gross income as well as their debt expenses. From the lender's perspective, it is easier to determine what size loan you can afford by looking at your gross income before adjusting for any deductions. This is mostly because deductions and how net income is calculated varies based on numerous factors while the definition of gross income is the same for all applicants.

    Please note that some borrowers have items such as 401(k) contributions and health insurance costs deducted from from their gross income on a pre-tax basis and the gross taxable income reported on their W-2 tax form reflects these deductions.  For example, if you earn $80,000 in annual gross income and make $10,000 in 401(k) and health insurance contributions using pre-tax dollars, the gross taxable income reported on your W-2 is $70,000.  In this case, the lender uses the higher gross income figure of $80,0000  to determine what size mortgage you can afford.  The reason most mortgage lenders use the higher 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.

    The table below outlines the difference between gross and net income explains the role of both in the mortgage process.

  • Understanding Gross and Net Income for a Mortgage
  • Gross Income
    • Monthly gross income is the amount of money you make before any deductions
    • Your paycheck states a gross income for the period worked as well as all of the deduction that are subtracted from the gross income
    Net Income
    • Net income is what most of us refer to as take-home pay
    • Net income is the money we actually get to keep and spend on things like mortgages
    • The difference between gross income and net income are the various deductions that are subtracted from our paychecks. Some of the most common deductions include federal and state income taxes, Social Security tax (also known as FICA), Medicare tax, as wells as health insurance and 401K contributions
    Which Figure is More Important: Gross or Net Income?
    • Both. The reason we cover both gross and net income is because they are both used in the mortgage process – just by different parties
    • Most borrowers think about their net income when determining their ability to make a mortgage payment
    • Lenders, on the other hand, look at a borrower’s gross income to determine the mortgage someone can afford
    Calculating Your Monthly Income
    • If you are paid on a monthly basis, then it is pretty straightforward to determine your monthly gross and net income. Many people, however, are paid weekly, bi-weekly or bi-monthly, in which case it may be a bit tricky to calculate your monthly income figures
  • CalculatorUse our MONTHLY GROSS INCOME CALCULATOR to calculate your monthly gross income
  • To verify your gross income, lenders usually request your pay stubs for the two months prior to submitting your mortgage application. The pay stubs include your gross income before any deductions and lenders use this information to verify the income figure you provided on your mortgage application. You can also provide a letter from your employer with your annual gross income to the lender as a supporting document.  Lenders also request that you provide your W-2s for the prior two years to confirm your past gross income.

    Using your application and supporting documents, lenders determine the loan amount you qualify for based on your monthly gross income, debt payments, credit score and other inputs. If you are self-employed, have fluctuations in earnings or earn a significant portion of your income from bonuses or commissions, lenders typically use your average monthly gross income over the prior two years, as opposed to your income for the most recent month.

    It may seem odd that lenders use your higher gross income figure instead of your net income as you actually end up not receiving a significant chunk of your gross earnings. But lenders apply a debt-to-income ratio that limits how much of your gross income you can spending on your mortgage and other monthly debt payments and this ratio factors in your income deductions.

  • CalculatorUse our Mortgage Qualification Calculator to determine what size mortgage you can afford based on your gross income
  • Gross and Net Income Example
  • Below is an example that shows the various deductions that are subtracted from gross income to calculate net income.  The individual in this example makes $6,250 in monthly gross income.  After subtracting federal and state taxes, social security (FICA), medicare, a 401k contribution and health insurance cost, the individual in this example makes $4,235 in monthly net income, or take-home pay.

    Please note that deductions vary by individual and location due to differences in federal and state tax brackets and rates. For example, some states do not charge income taxes. Additionally, you have discretion over the size of deductions you take for items such as retirement account contributions and health insurance, if applicable. You can review your pay stub to understand what deductions are subtracted from your gross income to arrive at your net income.

    • $6,250
    • $1,250
      Federal Tax
      border border
    • $220
      State Tax
      Some states have
      no income tax
    • $265
      FICA Tax
    • $90
    • $125
    • $65
      Heath Insurance
    • $4,235

    Gross Income

    Net Income

  • The table below shows mortgage rates and closing fees for top lenders in your area.  We recommend that you contact multiple lenders to learn more about their mortgage qualification process.  Shopping lenders and comparing loan proposals also enables you to find the mortgage and program that are right for you.

  • %
    Current Mortgage Rates as of February 16, 2019
    • Lender
    • APR
    • Loan Type
    • Rate
    • Payment
    • Fees
    • Contact
    View All Lenders


    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.
  • Great Mortgage IdeaRelated FREEandCLEAR Resources
  • Sources

    Mortgage Income Requirements:

About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry


Get Free Personalized Mortgage Quotes

First Name:
Last Name:
Phone Number:

My Mortgage Info

Mortgage Type
Credit Score
Loan Amount
Property Value
FREEandCLEAR.comThank you for submitting your information!
FREEandCLEAR.comYour mortgage quote request has been sent to our lending partners and you should receive emails from multiple lenders shortly
FREEandCLEAR.comComparing proposals from multiple lenders is the best way to save money on your mortgage!