Grossing Up Non-Taxable Income: Key Calculations for Family Law Attorneys
Why Not All Divorce Income Is Created Equal!
Whether your divorcing client is refinancing with an equity buyout or purchasing a new residence, “grossing up” non-taxable income can make the difference between a loan approval or denial.
For today’s topic, I will explain why not all divorce income is created equal and review how certain non-taxable income streams may be increased (“grossed up”) for qualifying purposes—lowering debt-to-income ratios and expanding loan options.
Before we get started, don’t forget to take advantage of our free second opinion service “SOS” which is designed to help attorneys and divorcing homeowners get access to an expert second opinion. This is beneficial for both clients that are currently negotiating their marital settlement agreement and for those post-decree situations needing immediate assistance.
Grossing Up Non-Taxable Income: Key Calculations for Family Law Attorneys
What Does “Grossing Up” Mean?
As recently discussed, mortgage qualifying depends upon a borrower’s debt-to-income ratio (DTI) which is based on their gross income before taxes are deducted.
Because of its non-taxable status, “grossing up” allows for an equal comparison against taxable gross income. When non-taxable income is received, lending guidelines provide for a gross-up factor to be applied which has the effect of increasing the qualifying income.
- Important: Gross-up percentages and eligible sources vary by loan program which are subject to change. Typical underwriting guidelines provide for grossed up income to range from 110%–125% of the monthly non-taxable income received.
Why is this important for proper Divorce Mortgage Planning?
Being able to gross-up non-taxable income provides for:
- Lower DTI ratios which improve loan options and provides for increased flexibility.
Higher qualifying loan amounts which increase the amount of settlement funds available- Expanded purchase options for the departing spouse
How does the 6/36 Rule Apply to Non-Taxable Income?
Remember, the “6/36 rule” refers to the conventional mortgage guideline used to determine if certain income streams such as alimony and child support can be used for qualifying income. Where applicable, this guideline requires the recipient to have consistently received the support payments for at least the past 6 months and also be expected to continue receiving them for at least the next 36 months. This timing requirement helps ensure that the income is stable and reliable.
When working with government loan programs this timing requirement can vary so please let us know if you have any specific FHA, VA, or USDA loan questions as to this guideline.
When there is non-taxable income as part of the settlement, here are some helpful drafting tips to consider:
- Specify type of income, amount, frequency, and due dates.
- Avoid payment ranges and use clear monthly amounts that have realistic due dates. Be careful if the required due date for payment ends on a weekend or federal holiday.
- Continuance window.
- Where applicable, confirm that payments are expected to continue for at least 36 months after loan closing and spell out any specific payment terms that are tied to items such as the child’s age or graduation date triggers.
- Payment method & traceability
- Require payments via traceable methods such as ACH, checks, or online transfers and discourage cash payments.
- No offset language
- Avoid provisions that allow unilateral offsets or non-cash substitutions that could undermine “stable monthly income” treatment since this could jeopardize loan approval.
💡 Practice Note: Remember that even perfectly drafted settlement language won’t help if the recipient can’t document receipt through items such as bank statements, checks, or transfers. Encourage clients to begin traceable payments as early in the process as possible to build any required receipt histories
➕ Quick Calculator Example (for Attorneys)
Assume your client receives $2,000/month in non-taxable support and the applicable loan program allows for a 25% gross-up:
- Qualifying income used = $2,000 × 1.25 = $2,500/month
The extra $500 would improve DTI and overall loan eligibility.
Summary
In summary, grossing up non-taxable income can help unlock loan approvals in divorce scenarios but be careful of timing requirements, documentation, and loan program that is being utilized. It is recommended to involve proper divorce mortgage planning as early in the process as possible so you can gain insight into your client’s qualifying ability and the available loan programs that they could be eligible for.
Work With a Team That Understands Both Mortgages and Divorce
At Metroplex Mortgage Services, our Divorce Lending Practice Group works alongside family law attorneys to:
- Draft lender-compliant settlement terms
- Preserve client eligibility for equity buyouts
- Maximize equity and available loan options
- Provide expert insight on credit qualifying, income analysis, and loan requirements
Whether you’re drafting the MSA or troubleshooting post-decree financing, we can help ensure mortgage eligibility aligns with settlement intent.
Let’s Connect Before the Agreement Is Finalized
If your client intends to keep the home, early planning makes all the difference. Contact us to review options, assess qualifying limits, and ensure enforceable, mortgage-compliant terms.
Call/Text: 813-935-8330
Office: 800-806-9836 Ext. 280
Email: SeanS@MPLX.org
📅 Now Scheduling In-Office & Virtual Presentations
Customized sessions for Florida family law firms on:
• Equity-buyout refinance planning
• Purchase options and down payment requirements
• Credit Scores and Debt-to-Income Ratios
• Best practices for drafting enforceable mortgage-related provisions
📥 Contact my office today to reserve your preferred date & time.
