When a mortgage lender is grossing up non-taxable income for a mortgage, they add a percentage to your tax-free earnings so the figure can be compared fairly to taxable wages. The size of that bump depends entirely on the loan program: Fannie Mae conventional and USDA loans use 25%, FHA uses 15% or your actual tax rate (whichever is greater), and VA lenders pull a rate from the federal tax tables that usually lands near 15%. Treating every gross-up as 25% is a common mistake that overstates qualifying income on FHA and VA files.
Gross-Up Rates by Loan Program
Conventional (Fannie Mae)
The standard adjustment adds 25% to verified non-taxable income. If your actual combined federal and state tax burden is higher than 25%, the lender can use that higher rate when supported by your tax returns.1Fannie Mae. General Income Information Social Security income has an extra wrinkle: grossing up more than 15% requires additional documentation in the loan file.2Fannie Mae. Social Security Income
FHA
FHA caps the gross-up at the greater of 15% or your actual tax rate from the prior year. If you were not required to file a federal return, the lender defaults to 15%.3U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook 4000.1 No additional adjustments for dependents are allowed, so borrowers in the lowest tax brackets get a smaller boost than they would on a conventional loan.
VA
VA lenders use federal tax tables to determine the gross-up percentage. For veterans receiving only non-taxable income, the result typically comes out near 15%.4Veterans Benefits Administration. Grossing Up – Income Underwriting Only non-taxable income qualifies. Taxable military pay such as flight pay or hazard pay cannot be grossed up.
USDA
USDA Rural Development allows a flat 25% gross-up on tax-exempt income, with no other adjustments authorized. The lender must document the adjustment in the file.5USDA Rural Development. HB-1-3555, Chapter 9: Income Analysis
What the Percentage Difference Actually Buys You
On $3,000 in monthly tax-free income, a 15% gross-up produces $3,450 in qualifying income. A 25% gross-up produces $3,750. That $300 monthly gap can decide a borderline debt-to-income ratio, so identifying the right program is the first step in estimating what you can borrow.
The gross-up only ever applies to the non-taxable portion of your income. If part of your Social Security is taxable because your combined income exceeds the IRS thresholds, the lender splits the benefit and applies the gross-up only to the tax-free piece. Your tax return is the primary document for making that split.
Which Income Sources Qualify
An income source is eligible when federal law excludes it from taxation. The most common qualifying sources include:
- Social Security retirement and disability benefits, to the extent they are not taxable, plus Supplemental Security Income, which is always non-taxable.6Internal Revenue Service. Regular and Disability Benefits
- Child support, which is never taxable to the recipient.7Internal Revenue Service. Alimony, Child Support, Court Awards, Damages
- Alimony from divorce or separation agreements executed after December 31, 2018. Alimony under older agreements stays taxable to the recipient and is not eligible unless the agreement was modified after 2018 with a provision expressly adopting the new rule.8Office of the Law Revision Counsel. 26 USC 71 – Alimony and Separate Maintenance Payments (Repealed)
- VA disability compensation and other benefits administered by the VA.9Office of the Law Revision Counsel. 38 USC 5301 – Nonassignability and Exempt Status of Benefits
- Basic Allowance for Housing and Basic Allowance for Subsistence for active-duty service members.10Internal Revenue Service. Treasury, IRS: Supplemental Basic Allowance for Housing Payments to Members of the Military Are Not Taxable
- Workers’ compensation received for personal injuries or sickness.11Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness
- Qualified foster care payments made through a state or local program.12Office of the Law Revision Counsel. 26 USC 131 – Certain Foster Care Payments
- Clergy housing allowances (excluded from income tax, though still subject to self-employment tax).13Internal Revenue Service. Ministers Compensation – Housing Allowance
- Interest on state and local (municipal) bonds.14Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds
Being on this list does not guarantee a gross-up. The lender still has to verify that your specific payments are non-taxable and reasonably expected to continue.
How the Math Works
Multiply the non-taxable monthly amount by your program’s percentage, then add the result to the original.
Say you receive $2,000 per month in tax-free Social Security disability benefits and apply for a conventional loan. The gross-up is $2,000 × 25% = $500, bringing qualifying income to $2,500 per month.1Fannie Mae. General Income Information Add $1,500 from a part-time job and your total qualifying income becomes $4,000.
The same $2,000 on an FHA loan at 15% adds only $300, for $2,300 in qualifying income. On a VA loan, the lender looks up the tax-table rate for a single filer earning $24,000 annually; for tax year 2026 that income sits in the 12% federal bracket, so the gross-up is $240 per month and qualifying income is $2,240.15Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Documentation Your Lender Will Ask For
You need to prove two things about each non-taxable source: that it is genuinely tax-free, and that it will keep coming in.
Social Security and SSI
Download a benefit verification letter from your online account at ssa.gov. It confirms the monthly amount and the type of benefit.16Social Security Administration. Get a Benefit Verification Letter You will also need your Form SSA-1099, mailed each January, which reports total benefits received in the prior year. Replacements are available online.17Social Security Administration. How Can I Get a Replacement Form SSA-1099/1042S
Tax-Exempt Interest
Lenders want the two most recent federal returns. Line 2a of the 1040 reports total tax-exempt interest, and the underwriter grosses up from that figure.
Child Support and Alimony
A fully executed court order or divorce decree is required. Payments must be expected to continue for at least three years from the note date, not the application date.18Fannie Mae. Alimony, Child Support, Equalization Payments, or Separate Maintenance If child support ends when a child turns 18 and that date falls inside the three-year window, the lender cannot count the income.
VA Benefits and Military Allowances
A VA award letter stating the benefit amount and type satisfies most lenders. Active-duty service members can provide a Leave and Earnings Statement showing BAH and BAS broken out from taxable base pay.
Other Sources
Foster care payments, public assistance, and workers’ compensation each need a letter from the paying agency confirming the amount and tax-exempt status. The lender wants documentation that addresses the non-taxable status directly, such as an award letter marked “non-taxable” or “exempt.”1Fannie Mae. General Income Information
Continuity Rules That Can Block a Gross-Up
Lenders will not gross up income that is about to end. Each program imposes its own continuity test, and this is where applications most often stall.
Fannie Mae requires that any income with a defined expiration date be expected to continue for at least three years from the note date.1Fannie Mae. General Income Information FHA uses nearly identical language: the income must be reasonably likely to continue through the first three years of the mortgage. If your disability benefits are scheduled for a medical re-evaluation, FHA specifically prohibits the lender from treating the pending re-evaluation as evidence that payments will continue.3U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook 4000.1
VA is more flexible. There is no minimum time of receipt for disability compensation, and the underwriter simply has to conclude the income will continue for the foreseeable future.19U.S. Department of Veterans Affairs. VA Credit Standards – Disability Income If continuity comes up short, the underwriter may still use the income to offset specific debts rather than counting it as qualifying income, which can salvage a marginal file.
Income with no defined end date, such as a permanent VA disability rating or Social Security retirement benefits, generally clears continuity without extra proof. The harder cases are temporary disability awards, workers’ compensation settlements with expiration dates, and child support tied to a child’s age. Pull any renewal letters or re-certification paperwork together before you apply. A gap in this documentation is one of the easiest problems for a lender to fix, and one of the most common reasons borrowers walk away from a file they could have closed.