Can You Gross Up Alimony Income for a Mortgage?

When applying for a mortgage, individuals with diverse income streams often encounter specific financial considerations. One is “grossing up” income, a method lenders use to adjust certain non-taxable income sources. This adjustment reflects the true purchasing power of these funds, which is greater than taxable income because no taxes are withheld. Alimony, depending on when the divorce decree was executed, often falls into this category, making gross-up relevant for home financing.

Alimony as Qualifying Income

Alimony can serve as a valid income source for mortgage qualification, though lenders evaluate it differently from standard employment wages. Lenders require evidence of consistent receipt and a reasonable expectation that payments will continue. For agreements executed after December 31, 2018, alimony received is typically not taxable income to the recipient. This tax-exempt status is why grossing up is a significant factor.

The non-taxable nature of post-2018 alimony means the recipient retains a larger portion of the payment compared to taxable income. This increased net income provides greater disposable funds, which lenders acknowledge by applying a gross-up. Consistent receipt, evidenced by legal documentation, positions alimony as a recognized financial resource for many loan programs.

The Gross-Up Calculation for Alimony

Grossing up is a lender’s adjustment that increases the value of non-taxable income, such as tax-free alimony, to an equivalent pre-tax amount. Lenders apply this process to align non-taxable income with the gross income standard used for loan qualification, leveling the playing field with taxable income sources.

The calculation involves increasing the non-taxable alimony amount by a specific percentage, commonly 15% to 25%. For instance, many conventional loan programs allow a 25% gross-up on verified non-taxable income. If a borrower receives $1,000 per month in tax-free alimony, a 25% gross-up treats this as $1,250 in qualifying income ($1,000 + ($1,000 0.25) = $1,250). This approximates the tax savings a borrower would experience on a taxable income of the same amount, reflecting its true economic value.

Required Documentation for Lenders

To verify alimony income for mortgage qualification, lenders require specific documentation confirming its consistency and likely continuance. A divorce decree, separation agreement, or court order is essential, as it legally outlines the payment amount, frequency, and duration. Lenders also require proof of consistent payment history, typically six to twelve months of documented receipt. This can be demonstrated through bank statements, canceled checks, or direct deposit records identifying the payments as alimony. The alimony must be expected to continue for at least three years after the mortgage application to be considered stable income.

How Grossed-Up Alimony Affects Loan Approval

The primary benefit of grossing up alimony income is its direct impact on a borrower’s debt-to-income (DTI) ratio, a crucial metric in mortgage qualification. By increasing the effective income, the gross-up process significantly lowers this ratio. A lower DTI ratio indicates to lenders more disposable income relative to debt, enhancing borrowing capacity.

This adjustment can make a borrower eligible for a larger loan amount or more favorable terms. For example, if a conventional loan allows a maximum DTI of 45%, grossing up non-taxable alimony can help a borrower meet this threshold. Using grossed-up alimony income strengthens a mortgage application, potentially opening doors to homeownership or better financing options.