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#1537047 - 04/18/11 04:14 PM "Grossing Up" Social Security Income
Thrift Star Offline
Junior Member

Registered: 03/11/11
Posts: 37
I am trying to wrap my head around how "Grossing Up" works.
Any help would be greatly appreciated.

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#1537054 - 04/18/11 04:26 PM Re: "Grossing Up" Social Security Income [Re: Thrift Star]
arye23 Offline
Gold Star

Registered: 03/09/11
Posts: 294
"Grossing up" means taking non-taxable sources of income (social security as an example), and adding a percentage (I've seen anywhere from 15-25%) to give it equal footing with gross W-2 wages.

Example:

Someone earning $24,000 in gross W-2 Income would have $2,000/month in gross monthly income.

Someone earning $19,200 in non-taxed social security annually would have gross monthly income of $1,600. Taking the $1,600 x 1.25 would provide a "taxable equivalent" of $2,000/month for determining "gross monthly income".

Usually, social security, disability, other types of public assistance, etc are recieved without being subject to income tax withholding. Grossing up that amount puts it on equal footing with W-2 earnings; comparing "apples to apples".

When doing this, a bank needs to be consistent in treatment, by either grossing-up or not grossing-up all types of non-taxed income.

Hope this helps...
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#1537114 - 04/18/11 05:44 PM Re: "Grossing Up" Social Security Income [Re: arye23]
Thrift Star Offline
Junior Member

Registered: 03/11/11
Posts: 37
Thank you! That was the best explanation I have yet read.

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#1537158 - 04/18/11 08:49 PM Re: "Grossing Up" Social Security Income [Re: Thrift Star]
Rocky P Offline
Power Poster

Registered: 06/24/03
Posts: 4309
Loc: South Carolina
Arye gave a great explanation.

Just think of it as the additional buying power of the non-taxable income - where the lender can actually use a percentage to determine what the buying power would be.
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#1537234 - 04/19/11 09:45 AM Re: "Grossing Up" Social Security Income [Re: Rocky P]
RR Joker Offline
10K Club

Registered: 11/15/02
Posts: 15753
Loc: The Swamp
To take the consistent treatment one step further...if you base your DTI's off of net income...use net. However, if you base your DTI's off of gross income, then to be fair and consistent you must gross up non-taxed income so that you are using a 'gross' income on everyone and each type of income.
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#1537238 - 04/19/11 09:49 AM Re: "Grossing Up" Social Security Income [Re: Rocky P]
arye23 Offline
Gold Star

Registered: 03/09/11
Posts: 294
You're welcome. The key is consistency. Section 202.6(b) requires that in considering the separate components of an applicant's income, the creditor may not automatically discount or exclude from consideration any protected income. Any discounting or exclusion must be based on the applicant's actual circumstances.

If you use gross W2 wages, not "grossing-up" non-taxed income can be considered discrimination based on a protected income source.



Edited by arye23 (04/19/11 09:56 AM)
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#1538488 - 04/20/11 07:16 PM Re: "Grossing Up" Social Security Income [Re: arye23]
Avanti Offline
100 Club

Registered: 02/03/10
Posts: 139
One point that I was made aware of when I first started doing this, years ago. I was instructed to always "gross up" Social Security. That is incorrect. You really need to see their tax returns to see if they pay taxes on the Security or not. If it not listed as a taxed item on page 1 of the 1040, then you can gross up. If the pay taxes on it, then you cannot gross up.

Hope I haven't confused you more...

ETA: if they do not provide the tax returns you can't assume they don't pay taxes and gross up. If they don't file taxes at all than that needs to be addressed.


Edited by Avanti (04/20/11 07:17 PM)

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