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VA disability compensation, and any other income the file documents as non-taxable.

Principal, interest, taxes, insurance, and association dues. Used only to show the ratio movement.

Clears every field back to the starting example.

Qualifying value of the non-taxable income

$2,500

Face value $2,000 plus a 25% gross-up.

  • Monthly lift$500
  • Annual grossed-up value$30,000
  • Total qualifying monthly income$2,500
  • Debt-to-income at face value125.0%
  • Debt-to-income with gross-up100.0%
  • Ratio improvement25.0 pts
× 1.25 conventional

Estimate · educational only · not a loan offer, financial advice, or insurance quote.

How it works

Four moves, in order

  1. Confirm the income is actually non-taxable

    VA disability compensation is exempt from federal income tax and never appears on a 1040. Military retired pay is taxable. When a veteran receives both, only the compensation portion is eligible for a gross-up, and the award letter is what separates them.

  2. Pick the factor your program allows

    Conventional agency guidance supports a 25% gross-up. FHA supports 15%. USDA supports 25%. Investor overlays can be tighter than the agency floor, so the factor is a product question, not a preference.

  3. Multiply, then re-run the ratios

    The grossed-up figure replaces face value in the income line. That number lands in the denominator of the debt-to-income ratio, which is where most marginal files are won or lost.

  4. Document continuance

    The income has to be likely to continue for at least three years. A permanent and total rating, or a rating with no future examination scheduled, is the cleanest evidence a file can carry.

The formula

Qualifying income = Non-taxable income × (1 + factor)
$2,000 × 1.25 = $2,500

The part most files get wrong

A gross-up is not a tax calculation. It does not attempt to model the veteran's actual bracket. It is a flat underwriting convention that puts non-taxable income on comparable footing with taxable income. That is why the factor is fixed by program instead of by income level, and why arguing for a higher number based on a marginal rate goes nowhere.

For Partners

What a professional does with this

Mortgage Lenders

Qualify the file correctly the first time

Most veterans have no idea their compensation counts for more than face value. Running the number in front of them converts an abstract benefit into buying power.

  • Show the ratio before and after in the same conversation
  • Request the benefit summary letter at first contact
  • Flag rating exams that fall inside the continuance window

Financial Advisors

Re-baseline the household cash flow

Non-taxable income changes the shape of a plan. It shifts withdrawal sequencing, Roth conversion headroom, and how much taxable income the household can absorb before a bracket edge.

  • Model compensation separately from taxable retired pay
  • Recheck bracket capacity in conversion years
  • Revisit the emergency reserve target against a fixed floor

Insurance Agents

Size the protection gap honestly

Compensation is not survivable income in every case. Understanding what stops at death, and what continues through DIC, is the difference between a right-sized policy and a guess.

  • Separate what continues from what ends
  • Review survivor eligibility before quoting
  • Document the assumptions used in the illustration

Common mistakes

Where the number goes sideways

MistakeWhat it costs
Applying 25% on an FHA fileOverstated income, denial at underwriting
Grossing up military retired payTaxable income treated as exempt
Skipping the three-year continuance testIncome excluded late in the file
Assuming the same factor across investorsOverlay conflict at purchase review
Using a gross-up on VA loan qualificationWrong analysis, residual income governs

Nuance worth knowing

The VA home loan program itself leans on residual income analysis rather than a fixed gross-up convention. The tax-free character of the compensation is accounted for inside that framework. If a file is going VA, the gross-up question is often the wrong question, and the residual income worksheet is the real one.

Questions

Frequently asked

Does every lender gross up non-taxable income?

No. The agencies permit it, but individual lenders and investors can apply tighter overlays or decline to apply it at all on certain products. Ask the question before the application, not after.

What documents prove the income is non-taxable?

The VA benefit summary letter, sometimes called the award letter, together with evidence of receipt such as bank statements showing the deposit. Some lenders will also accept the annual benefit verification letter.

Does a temporary rating count?

It depends on the continuance evidence. A rating with a scheduled future examination inside three years invites scrutiny. A permanent and total rating, or one with no future exam scheduled, is the strongest posture.

Can Social Security Disability be grossed up too?

The portion that is not subject to federal income tax can be, under the same conventions. The portion that is taxable cannot. That split has to be documented, not assumed.