Using Non-Taxable Income To Qualify For A Kentucky Mortgage Loan
Many Kentucky homebuyers rely on non-taxable income such as child support, Social Security, or workers compensation. The good news: in many cases, these income sources can absolutely be used to help you qualify for a mortgage in Kentucky, as long as they meet the agency rules and documentation requirements.
Non-Taxable Income Types That Can Be Used
The following non-taxable income sources are commonly allowed for mortgage qualifying in Kentucky, subject to program rules:
- Child support
- Social Security income (retirement or disability)
- Workers compensation (long-term or permanent)
- Other verified non-taxable income documented on tax returns or award letters
The 3-Year Continuance Rule
To use non-taxable income for qualifying, lenders must be able to document that the income is likely to continue for at least the next three years from the date of closing. This is a core requirement across the major loan programs.
- Child support: must continue for three years beyond closing based on the court order or agreement.
- Social Security: award letters must indicate ongoing benefits with no known end date.
- Workers compensation: must be permanent or long-term; temporary benefits usually cannot be used.
Special Rule For Child Support In Kentucky Mortgage Qualifying
To use child support as qualifying income on a Kentucky mortgage:
- You must document consistent receipt for the most recent 12 months.
- Bank statements, payment histories, or deposit records must support the pattern.
- The court order or written agreement must show the amount and the end date.
If the payments have been irregular, significantly late, or frequently short, the underwriter may reduce or disallow that income.
Grossing Up Non-Taxable Income To Boost Qualifying Power
Because this income is not taxed, most loan programs allow lenders to “gross up” the amount to show a pre-tax equivalent. This increases your qualifying income on paper and can help you qualify for a higher mortgage amount or keep your debt-to-income ratios within program limits.
Gross-Up Percentages By Loan Program
Here is a simple breakdown of how much non-taxable income can typically be grossed up for Kentucky mortgage programs:
| Loan Program | Gross-Up Percentage Allowed | Example On 1,000 Monthly Non-Taxable Income |
|---|---|---|
| Fannie Mae Conventional | Up to 125 percent | Qualifying income: 1,250 per month |
| USDA Rural Housing | Up to 125 percent | Qualifying income: 1,250 per month |
| VA Loans | Up to 125 percent | Qualifying income: 1,250 per month |
| FHA Loans | Up to 115 percent | Qualifying income: 1,150 per month |
Simple Gross-Up Example
If you receive 1,000 per month in non-taxable Social Security income:
- On a VA, USDA, or Fannie Mae conventional loan, lenders can often use 1,250 per month to qualify.
- On an FHA loan, lenders can usually use 1,150 per month to qualify.
That extra qualifying income can make the difference between an approval and a denial, or can allow you to purchase a more suitable home while staying within safe debt-to-income ratios.
Lender Overlays And Why Your Results May Vary
Agency guidelines (FHA, VA, USDA, Fannie Mae) are one thing, but individual lenders can add their own internal rules, called overlays. A few common overlays around non-taxable income include:
- Limiting the gross-up percentage to less than the agency maximum.
- Requiring a longer history of receipt than the minimum guidelines.
- Being more conservative with temporary or borderline workers compensation income.
This is why it is important to work with a loan officer who understands Kentucky guidelines and individual lender policies.
Conservative Approach: Why Less Is Often More
While grossing up non-taxable income is a powerful tool, it is often wise to qualify using the lowest stable income figure that still gets you approved. This can:
- Provide a safety margin if guidelines or lender interpretations tighten.
- Help keep your payment comfortable if taxes, insurance, or other debts increase in the future.
- Reduce the risk of surprises during the final underwriting review.
In many cases, using a more conservative income number gives you more long-term financial breathing room, even if it slightly lowers your maximum purchase price.
Infographic: Non-Taxable Income Gross-Up Guide For Kentucky Homebuyers
Ready To See How Your Non-Taxable Income Can Help You Qualify?
If you receive child support, Social Security, or workers compensation and want to see how it can be used to qualify for a Kentucky mortgage, reach out and I can run the numbers based on your exact situation and loan program options.
Joel Lobb, Mortgage Broker FHA, VA, KHC, USDA NMLS 57916 EVO Mortgage, NMLS 1738461 Call or text: 502-905-3708 Email: kentuckyloan@gmail.com Website: www.mylouisvillekentuckymortgage.com
