How to Use Non-Taxable Income for Kentucky Mortgage Pre-Approval in 2026
If you receive Social Security income, VA disability benefits, military allowances, or other non-taxable income, you have a significant advantage when qualifying for a mortgage that many borrowers don’t realize: lenders can “gross up” your non-taxable income, meaning they count it as if it’s worth 15% to 25% more than what you actually receive. This can dramatically increase your purchasing power and help you qualify for a larger loan amount.
Calculate Your True Mortgage Qualifying Income
I’ll show you exactly how much buying power your non-taxable income gives you across all loan programs.
Call or Text 502-905-3708 Email Me Get Pre-ApprovedWhat is “Grossing Up” Non-Taxable Income?
Grossing up means that mortgage lenders can increase the value of your non-taxable income when calculating how much mortgage you qualify for. Since you don’t pay federal income taxes on this money, you effectively keep more of it compared to someone earning the same amount in taxable wages. Lenders recognize this advantage and allow you to count your non-taxable income at a higher value.
Real-World Example: Social Security Income
Let’s say you receive $2,000 per month in Social Security benefits. With FHA’s 15% gross-up:
Annual difference: $3,600 more qualifying income
This additional $300/month in qualifying income could increase your maximum loan amount by approximately $60,000 to $75,000, depending on your debt-to-income ratio and the loan program.
Types of Non-Taxable Income That Can Be Grossed Up
Eligible non-taxable income sources include:
- Social Security retirement income (portion that is non-taxable)
- Social Security Disability Insurance (SSDI)
- VA disability compensation (100% tax-free)
- Military allowances (BAH, BAS, combat pay, etc.)
- Railroad Retirement benefits
- Federal government employee retirement income (non-taxable portion)
- State government retirement income (non-taxable portion)
- Certain disability and public assistance payments
- Child support (must have 3+ years remaining)
- Other income documented as federally tax-exempt
Pro Tip: You must provide documentation proving the income is non-taxable. This typically includes tax returns showing the income is not taxed, award letters from Social Security or the VA, military Leave and Earnings Statements (LES), or other official documentation.
Gross-Up Percentages by Loan Program (2026)
| Loan Program | Gross-Up Percentage | How It Works |
|---|---|---|
| FHA Loans | 15% or higher | The greater of 15% OR the appropriate tax rate for the income amount |
| VA Loans | 25% | Multiply non-taxable income by 1.25 |
| USDA Loans | 25% | Multiply non-taxable income by 1.25 |
| Fannie Mae (Conventional) | 25% or tax tables | The greater of 25% OR current federal/state tax withholding tables |
| Freddie Mac (Conventional) | 25% or tax tables | The greater of 25% OR current federal/state tax withholding tables |
| Jumbo Loans | 25% (typically) | Check specific lender guidelines; restrictions may apply |
How Much More Can You Qualify For? Program-by-Program Breakdown
FHA Loans
Minimum 15% gross-up, but potentially higher based on your actual tax bracket. Best for first-time buyers with lower credit scores (580+).
Example: $1,500/mo VA disability → $1,725/mo qualifying income
VA Loans
Full 25% gross-up on all non-taxable income. Combined with no down payment requirement, this is extremely powerful for veterans.
Example: $2,000/mo Social Security → $2,500/mo qualifying income
USDA Loans
Full 25% gross-up for eligible rural properties. Zero down payment required if you meet income limits.
Example: $1,800/mo disability → $2,250/mo qualifying income
Fannie Mae
25% minimum or higher based on tax tables. Offers the most flexibility and competitive rates for strong credit profiles (620+).
Example: $2,500/mo pension → $3,125/mo qualifying income
Kentucky-Specific Advantages for Veterans and Disabled Borrowers
Kentucky offers additional benefits for veterans and disabled homebuyers that stack with the income gross-up advantage:
- Kentucky Housing Corporation (KHC) programs offer down payment assistance that can be combined with VA disability or Social Security income grossing up
- Property tax exemptions for disabled veterans in Kentucky can further reduce your monthly housing costs
- VA loan assumption rights mean if you buy with a VA loan, a future buyer can assume your low rate, making your home more valuable
- No mortgage insurance on VA loans means more of your housing payment goes toward principal and interest
Documentation Requirements for Non-Taxable Income
To gross up your non-taxable income, lenders need proof that the income is truly tax-exempt. Here’s what you’ll typically need:
- Social Security Administration (SSA) award letter
- Recent bank statements showing deposits
- Previous year’s tax return (Form 1040) showing non-taxable portion
- VA award letter showing disability rating and monthly amount
- Bank statements confirming deposits
- VA disability benefits are 100% tax-free, making documentation straightforward
- Leave and Earnings Statement (LES) showing BAH, BAS, or other allowances
- Documentation that allowances will continue (at least 3 years typically required)
- Divorce decree or court order
- Proof of receipt for previous 6-12 months
- Documentation showing at least 3 years of continued payments remaining
Common Mistakes That Cost Borrowers Money
Mistake #1: Not telling your lender about non-taxable income sources. Many borrowers assume lenders already know or will ask. Always proactively disclose Social Security, VA disability, military allowances, or other tax-free income.
Mistake #2: Failing to document the income properly. Collect your award letters, bank statements, and tax returns before applying. Delays in documentation can cost you a locked interest rate.
Mistake #3: Not shopping lenders. Some lenders are more aggressive with gross-up calculations than others. A lender experienced with VA disability and Social Security income will maximize your qualifying income.
Mistake #4: Assuming you don’t qualify. Many borrowers with non-taxable income assume they can’t afford a home, not realizing that their $2,000/month in VA disability counts as $2,500/month in qualifying income.
What Else Do You Need to Qualify for a Kentucky Mortgage in 2026?
Beyond grossing up your non-taxable income, here’s what Kentucky mortgage lenders will evaluate:
1. Credit Score Requirements
- FHA: 580 minimum (500-579 requires 10% down)
- VA: No VA minimum, but most lenders require 580-620
- USDA: No minimum score but 620-640 minimum for streamlined processing
- Conventional (Fannie Mae): 620 minimum, 740+ for best rates
- KHC programs: 620 minimum typically required
Pro Tip: If your credit score is below 620, focus on paying down credit card balances and removing any errors from your credit report. A score increase from 580 to 640 can save you thousands in interest and unlock better loan programs.
2. Employment and Income Stability
Lenders want to see two years of stable income history. For non-taxable income sources:
- Social Security and disability: Must show it will continue for at least 3 years
- VA disability: Permanent disability ratings are ideal; temporary ratings must have 3+ years remaining
- Military allowances: Must have 3 years remaining on service commitment, or show likelihood of re-enlistment
3. Debt-to-Income Ratio (DTI)
Your total monthly debt payments (including the new mortgage) divided by your gross monthly income. With grossed-up income, your DTI improves significantly:
- FHA: Up to 56.99% DTI allowed (45% front-end)
- VA: No hard DTI limit, but residual income test applies
- USDA: 29% front-end / 41% back-end (exceptions up to 45%)
- Conventional: Up to 45-50% DTI with strong compensating factors
4. Assets and Reserves
You’ll need enough for:
- Down payment (0% for VA/USDA, 3.5% for FHA, 3-20% for conventional)
- Closing costs (typically 2-5% of loan amount, can often be covered by seller or rolled into loan)
- Reserves (1-2 months of mortgage payments recommended, for a manual underwrite though not always required for AUS approval DU LP)
Kentucky Homebuyer Advantage: KHC down payment assistance programs can provide up to $12,500 toward your down payment and closing costs, making homeownership accessible even with limited savings.
Should You Refinance to Take Advantage of Gross-Up Income?
If you recently started receiving non-taxable income (like VA disability or Social Security), refinancing your current mortgage could make sense:
- Cash-out refinance: Access your home equity while using grossed-up income to qualify for a larger loan
- Rate-and-term refinance: Lower your interest rate or remove mortgage insurance by switching from FHA to conventional
- VA IRRRL: If you have a VA loan, the streamline refinance requires minimal documentation and could lower your payment significantly
How to Get Started with Your Kentucky Mortgage Pre-Approval
Getting pre-approved is straightforward when you work with a lender experienced in non-taxable income:
- Gather documentation of your non-taxable income (award letters, bank statements, tax returns)
- Pull your credit reports and review for errors (I can help with this)
- Calculate your budget including the grossed-up income to see your true buying power
- Get pre-approved so you know exactly what you qualify for before shopping for homes
- Lock your rate when you find the right property and are ready to move forward
Why Work With a Kentucky Mortgage Specialist?
I’ve been helping Kentucky homebuyers—including veterans, disabled borrowers, and Social Security recipients—for over 20 years. I understand exactly how to maximize your non-taxable income across all loan programs and will ensure you qualify for the largest loan amount possible while keeping your monthly payment affordable.
My commitment: I’ll run the numbers across FHA, VA, USDA, and conventional programs to show you which gives you the best outcome. If grossing up your income doesn’t improve your situation, I’ll tell you that too.
Get Your Free Kentucky Mortgage Pre-Approval
Let’s calculate your true buying power with your non-taxable income grossed up. Same-day approvals available.
Call or Text 502-905-3708 Email: kentuckyloan@gmail.com Start Your Application
Joel Lobb | NMLS #57916 | Company NMLS #1738461
Serving Louisville, Jefferson County, and statewide Kentucky
Equal Housing Lender
Frequently Asked Questions
Can I use VA disability income for a conventional loan?
Absolutely. VA disability income can be grossed up by 25% on conventional loans (Fannie Mae and Freddie Mac) just like it can on VA loans. However, VA loans offer additional benefits like no down payment and no mortgage insurance.
Does the gross-up apply to the entire Social Security payment?
It depends on how much of your Social Security income is taxable. If 85% is taxable (common for higher earners), only the 15% non-taxable portion gets grossed up. If 100% is non-taxable (common for lower-income recipients), the entire amount can be grossed up.
Can I combine grossed-up income with regular W-2 wages?
Yes. Lenders will add your grossed-up non-taxable income to your regular employment income, self-employment income, rental income, and any other qualifying income sources to determine your total qualifying income.
Will grossing up my income affect my taxes?
No. Grossing up only affects how lenders calculate your qualifying income for the mortgage. It doesn’t change your actual income or tax situation in any way.
What if I just started receiving disability or Social Security?
You can use it immediately as long as you can document that the income will continue for at least 3 years. The award letter from Social Security or the VA showing the income is ongoing is sufficient.
Related Kentucky Mortgage Resources
- Kentucky VA Loan Information
- Kentucky FHA Loans
- Kentucky USDA Rural Housing Loans
- First-Time Homebuyer Programs in Kentucky
- Kentucky Housing Corporation (KHC)
Disclaimer: This website is not endorsed by the FHA, VA, USDA, Fannie Mae, Freddie Mac, or any government agency. All information is for educational purposes. Loan approval and terms subject to credit approval and program guidelines. Equal Housing Lender.
Joel Lobb, Mortgage Loan Officer | NMLS #57916 | Company NMLS #1738461
Kentucky Mortgage Loans Only | http://www.nmlsconsumeraccess.org
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“Grossing-Up” Non-Taxable Income for a Kentucky Mortgage Loan Approval