Does the Bank Use Taxable Income or Gross Income to Determine if You Qualify for a Loan?

Many lenders ask for copies of your tax returns to verify your income.
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Before a bank will approve any type of loan, you have to convince the underwriter that you have enough cash to make the minimum payment. To determine whether your income is high enough, lenders typically use your gross monthly income, along with information about the bills you pay every month.

About Gross Income

Gross monthly income is the amount you earn each month before subtracting for taxes, retirement contributions and other employer deductions. You can find your annual gross income in Box 1 of your W-2 form. To calculate your gross monthly income, divide your annual gross income by 12. You can also find gross monthly income on your pay stub. If you are self-employed, your gross monthly income is the profit you claim on Schedule C divided by 12.

Debt-to-Income Ratio

In addition to your income, lenders consider the debts you pay each month. Mortgage lenders have strict rules when it comes to the ratio of your gross monthly income to your revolving debts, which typically include mortgage payments, credit cards and other loans. For example, conventional lenders want your monthly debts to be no more than 43 percent of your gross monthly income, and they won't give the go-ahead to make a loan until they have plenty of documentation proving that you meet this requirement. Lenders for car and personal loans usually aren't as strict, but they still ask about other debts.

Special Circumstances

Most lenders verify your gross monthly income using tax returns. However, some income that you don't include on your tax return still might help you qualify for a loan. If you get child-support payments, public assistance or non-taxable Social Security that doesn't appear on your tax return, lenders must include it in your gross monthly income when reviewing your application. Lenders may ask for other proof of this income, such as a child-support agreement or bank statements showing regular deposits.

Other Factors

Other factors, such as your credit history, also can affect your ability to get a loan. Even if your gross monthly income is high enough to cover the payment, the lender may not approve your application if you have a low credit score or a history of late payments to other creditors. Likewise, some banks may deny loans if your income doesn't seem reliable because of a short or variable employment history.

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