Why Lenders Use Gross Monthly Income vs. Take-Home Pay

Dated: December 10 2020

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It might seem strange that mortgage companies use gross monthly income when determining affordability instead of 'take-home' pay. After all, it's the take-home pay that consumers use for their monthly expenses and bills - including the mortgage. But there are a few good reasons why lenders use the gross amount. 


First, it's universal. Lenders A, B, and C all use gross monthly income to calculate debt-to-income ratio (and thus affordability), so everyone is qualified using the same guidelines. There are a few loans that do take monthly expenses and 'residual' income into consideration, but most every other program uses gross monthly income. 

Second, it's a figure that most consumers readily know. Calculating net income with taxes, deductions, etc. is complicated and can vary month-to-month. Gross income is stable and easier to quickly calculate monthly. It would be impossible for lenders to adjust their loan programs for each individual's specific expenses and deductions. 

Third, employers report income each year to the IRS, and the amount reported is gross income, not net. When consumers are asked to document income on their loan application, the last two years of W2 forms are needed along with recent paystubs. The gross amounts on the paystubs should align with the W2 forms. Trying to parse net income from these documents is impossible. 

If you're thinking about buying your first home and want to know what you might qualify for, there's no shortage of online prequalification calculators to help you get started. Just remember to enter your gross monthly income, not your net or take-home pay, so you don't short-change yourself.

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Brendan Campos

Brendan, the Bearcat, is a graduate from the University of Cincinnati with a bachelors in Marketing, Business Analytics and Sports Administration. He is from New Jersey and enjoys traveling to differe....

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