The Difference Between Gross and Net Income for Mortgage Borrowers
If you’re looking into applying for a mortgage, it is important to know the difference between gross income and net income. Both impact the mortgage process differently.
What Is Gross Income?
Gross income is the total amount of money a person makes before taxes or other items get deducted.
What Is Net Income?
Net income is the take-home pay. It’s the amount of money that gets deposited into the bank account after deductions like taxes, social security, 401(k) contributions, and health insurance get taken out.
Most borrowers look at their net income to figure out how much they can afford to spend on a monthly mortgage payment. Going by the gross income to budget their spending doesn’t make sense since a good amount of their earnings go towards deductions.
Still, you may be surprised to know that mortgage qualification guidelines mostly depend on your monthly gross income and your debt. Lenders find it easier to use gross income since it is defined the same for everyone. Net income varies across the board depending on the amounts of deductions.
Income is not the only thing lenders consider when deciding whether or not to approve a loan. The applicant’s debt-to-income ratio and credit score also play a part in the process. Those numbers give a more accurate look into an applicant’s finances and how much money they can pay toward their mortgage.
If you’d like more information about what a lender looks at before approving a loan, give us a call at 810-373-2150 or submit your application for pre-qualification. We are here to help you through the process and answer any questions you may have.