When applying for a mortgage, lenders evaluate your income to determine how much loan you can afford. Freddie Mac Exempt Income is a guideline that allows lenders to increase, or “gross up,” certain non-taxable income by up to 25% when calculating qualifying income. This adjustment reflects the fact that non-taxable income isn’t reduced by federal income taxes, thus providing a more accurate picture of a borrower’s financial strength.
Understanding Taxable vs. Non-Taxable Income
Taxable income such as wages and salaries are reported before taxes are deducted, whereas non-taxable income includes benefits like Social Security, disability payments, and some public assistance. Since non-taxable income is received without deductions for federal taxes, grossing it up aligns its value closer to taxable income on a pre-tax basis.
How Does the Gross-Up Process Work?
Freddie Mac allows lenders to increase eligible non-taxable income by up to 25%, based on verification and documentation. For example, if you receive $1,500 per month in disability benefits, a lender can calculate it as $1,875 ($1,500 × 1.25) when assessing your loan qualification.
Common Types of Exempt Income Eligible for Gross-Up
- Social Security Benefits (verified by SSA award letters)
- Disability Benefits (award letters and proof of continuance)
- Child Support Payments (court orders and proof of receipt)
- Military Allowances (e.g., Basic Allowance for Housing)
- Public Assistance (official award documentation)
- Certain Retirement Income (pensions with corresponding tax forms)
Documentation must show the income is stable and expected to continue, usually for at least three years.
Important Notes and Frequently Asked Questions
- Grossing up is not mandatory; lenders may choose whether to apply it. Always ask your loan officer if they offer this benefit.
- Proper documentation is critical; claims of non-taxable income must be supported with official paperwork.
- This guideline applies primarily to conventional loans purchased by Freddie Mac, but Fannie Mae has a similar rule.
Example Scenario
Alex earns $2,500 monthly from a part-time job and $1,500 from non-taxable disability benefits. Without gross-up, qualifying income totals $4,000. With a 25% gross-up on disability benefits, his qualifying income increases to $4,375, potentially improving his loan eligibility.
Freddie Mac Exempt Income is a valuable tool that ensures borrowers receiving non-taxable income are evaluated fairly, recognizing their true purchasing power. For detailed guidelines, see the Freddie Mac Seller/Servicer Guide section 5304.1.
For more information on qualifying income and loan evaluation, visit our Qualifying Income article.
References:
- Freddie Mac Seller/Servicer Guide, Section 5304.1: https://guide.freddiemac.com/app/guide/section/5304.1
- IRS Publication 525, Taxable and Nontaxable Income: https://www.irs.gov/publications/p525
- NerdWallet: Grossing Up Income for Mortgages: https://www.nerdwallet.com/article/mortgages/grossing-up-income-mortgage
