Do Banks Look at Adjusted Income or Gross Income? (2024)

FAQs

Do Banks Look at Adjusted Income or Gross Income? ›

When lenders look at your financial situation, they will often calculate your adjusted gross income (AGI), which determine the amount of your income that is taxable. Your AGI is your gross income minus IRS calculations — or “tax deductions.”

When lenders look at your financial situation, they will often calculate your adjusted gross income (AGI), which determine the amount of your income that is taxable. Your AGI is your gross income minus IRS calculations — or “tax deductions.”

In addition to your monthly income from wages earned, this can include social security income, rental property income, spousal support, or other non-taxable sources of income. Your work history: This helps lenders understand how stable your income is and how likely you are to repay your mortgage.

An underwriter will calculate your income by taking your current yearly salary and breaking it down to a per-month basis. You will need to provide your most recent pay stub and IRS W-2 forms covering your most recent two-year period of employment. If there are any gaps in your employment, you will need to explain them.

Mortgage lenders typically use net income when assessing self-employed borrowers for home loans. Net income is the amount earned after deducting business expenses, taxes, and other deductions from gross income.

Lenders don't look at your gross income or revenue — the amount you bring in before expenses and other deductions. They also don't use your adjusted gross income on your tax return. Instead, they look at your net business income — the amount you bring in after you subtract relevant business expenses.

Very simply, a tax return or paystub will do the trick. Since most paychecks are deposited electronically, you may have to log into your company's payroll system and print a recent paystub. Be aware that the lender may call your employer to confirm that you work where you say you work.

Gross income is the sum of all your wages, salaries, interest payments and other earnings before deductions such as taxes. While your net income accounts for your taxes and other deductions, your gross income does not. Lenders look at your gross income when determining how much of a monthly payment you can afford.

They just want to know how much money you have coming in available to pay your bills in a worst-case scenario. J.R. Whalen: Is that the primary reason they want to know all this? Imani Moise: Yes, it's a form of risk assessment.

Mortgage lenders usually verify income and employment by contacting a borrower's employer directly and reviewing recent employment and income documentation. These documents can include an employment verification letter, recent pay stubs, W-2s, or anything else to prove an employment history and confirm income.

How do banks verify self-employment income? ›

Most lenders only require verbal confirmation, but some will seek email or fax verification. Lenders can verify self-employment income by obtaining tax return transcripts from the IRS.

For self-employed workers, however, qualifying for a loan may be more complex. Whether you're a freelancer, independent contractor, or business owner, lenders often need additional documentation to prove that your income and assets are risk-free.

Bank Statements

Bank statements are your best bet. If you only use one account for both business and personal banking, you must clearly highlight the business-related payments and expenses to indicate what's relevant as income.

Your adjusted gross income (AGI) is your total (gross) income from all sources minus certain adjustments such as educator expenses, student loan interest, alimony payments and retirement contributions. If you use software to prepare your return, it will automatically calculate your AGI.

Lenders use this net profit figure to evaluate how much you can afford to borrow. Most lenders require at least two years of accounts or tax returns as proof of income. They consider this figure alongside other factors such as credit score and trading history.

Mortgage lenders ask for tax returns, often two years, to verify that you have the income, investments, and other holdings that you say you do. Mortgage lenders will also ask for proof of employment and salary, as well as retirement holdings.

You don't have to share your income, but if you are among the Americans whose wages have risen recently, doing so can improve both your spending power and credit score, industry analysts said.