Income is usually broken down into two categories.
Net and gross income.
Gross income is your income before taxes and other deductions.
Net income is your income after taxes, pre-tax benefits and other deductions.
As an example: If you are paid an annual salary of $60,000.
Your monthly gross income is $5,000 before taxes. After taxes your paycheck comes out to $820, then $820 is your net income.
Gross Income for a Loan
Whether you’re applying for a mortgage loan or auto loan, creditors always ask for your gross income in the loan application. However, when it comes to lending, there are only certain types of income that qualify.
Types of Qualify Income for a Loan
- Salary and hourly wages paid by your employer
- Part-time employment
- Tips that are reported and taxable
- Earned commissions
- Self-employment income minus business expenses
- Social security
- Child support
- Investment income
- Rental income
Your gross income is used by a mortgage lender to calculate your debt-to-income ratio (DTI ratio). Your DTI ratio determines how much of a loan you qualify for.
Front-end DTI ratio – Your debt-to-income ratio before adding your mortgage payment. No higher than 28%
Back-end DTI ratio – Your DTI ratio after factoring in your mortgage payment. No higher than 36%
Gross Income on Your Tax Return
For tax purposes all income earned during the year qualifies as gross income. When calculating your gross income for filing your tax return you need to deduct things like business expenses and alimony.
Adjusted Gross Income
Your adjusted gross income (AGI) is your total income after deductions. Your adjusted gross income is your taxable income for a calendar year.
Gross Income Deductions
- Business expenses (gas, supplies, materials)
- School tuition
- Student loan interest
- Up to half the self-employment tax
What is Net Income?
Net income is your income after Federal taxes, social security, medicare, and pre-tax benefits have been deducted. Pre-tax benefits are items such as health insurance, dental, 401k and IRA contributions.
What is Annual Income?
Your annual income is the total amount of income earned over the course of one fiscal year. Gross annual income is your total income from all sources before any deductions.