Fannie Mae, Freddie Mac and USDA allow non-taxable income to be grossed up by 25%, FHA by no more than the greater of 15 percent or the borrower's tax rate for the previous year, and VA by using 125 percent of non-taxable income for the debt-to-income ratio only. Fannie Mae allows a higher figure when actual federal and state taxes would exceed 25%, and Freddie Mac allows the rate from current withholding tables instead. Fannie Mae, Freddie Mac and VA require the non-taxable status to be verified or documented, and FHA requires documentation of the amount grossed up and the tax rate used.
Fannie Mae (conventional)
- If income is verified as nontaxable and it and its tax-exempt status are likely to continue, the lender should add 25% of the nontaxable income to develop an adjusted gross income. Fannie Mae B3-3.1-01
- If federal and state taxes paid by a wage earner in a similar bracket would exceed 25% of the nontaxable income, the lender may use that amount instead. Fannie Mae B3-3.1-01
- Nontaxable status must be verified with documents such as award letters, policy agreements, account statements or tax returns. Fannie Mae B3-3.1-01
- For Social Security, the lender need not document that 15% of the income is nontaxable; grossing up more than 15% needs supporting documentation. Fannie Mae B3-3.4-15
Freddie Mac (conventional)
- The Seller may add 25% of the tax-exempt income (or tax-exempt portion), or the tax rate from current federal and State withholding tables. Freddie Mac 5305.1(r)
- The income must be likely to remain tax exempt, documented by the most recent year's complete federal return or other evidence. Freddie Mac 5305.1(r)
- No evidence of tax-exempt status is needed for child support, Section 8 Housing Choice Voucher income, or 15% of Social Security income. Freddie Mac 5305.1(r)
FHA
- The amount added cannot exceed the greater of 15 percent or the appropriate tax rate for the income, based on the borrower's tax rate for the previous year. FHA 4000.1 II.A.4.c.xii(P)
- If the borrower was not required to file a return for the previous year, the lender may gross up by 15 percent. FHA 4000.1 II.A.4.c.xii(P)
- The lender must document the amount being grossed up and the current tax rate applied. FHA 4000.1 II.A.4.c.xii(P)
- Nontaxable income includes, for example, some Social Security and government retirement income, Railroad Retirement benefits, certain disability and public assistance payments, and child support. FHA 4000.1 II.A.4.c.xii(P)
VA
- Tax-free income, such as certain military allowances, child support, workers' compensation and disability retirement payments, must be verified as tax-free and may be grossed up for the debt-to-income ratio only. VA Pamphlet 26-7, Ch. 4 Topic 9.f
- Use 125 percent of the non-taxable income, do not add it to taxable income first, and note the grossed-up ratio in Remarks. VA Pamphlet 26-7, Ch. 4 Topic 9.f
- Residual income must be calculated with the borrower's actual income only. VA Pamphlet 26-7, Ch. 4 Topic 9.f
USDA
- For repayment income, lenders may gross up income that is not subject to Federal taxes by 25 percent. USDA HB-1-3555 9.8
- The income matrix repeats that tax-exempt income may be grossed up 25 percent for repayment income; lenders must obtain and maintain documentation in the loan file supporting their income calculations. USDA HB-1-3555 Attachment 9-A
- When analyzing a self-employed applicant's tax returns, the non-taxable portion of IRA distributions, pensions, annuities and Social Security may be added back to adjusted gross income if expected to continue for the first three years. USDA HB-1-3555 Attachment 9-E
The USDA handbook in Strata does not name specific documents for proving that income is tax exempt before it is grossed up; it only requires documentation supporting the lender's income calculations.
Quick comparison
| Loan type | Gross-up allowed | Source |
|---|---|---|
| Fannie Mae | 25%, or a higher actual tax amount | Fannie Mae B3-3.1-01 |
| Freddie Mac | 25%, or the withholding-table tax rate | Freddie Mac 5305.1(r) |
| FHA | Up to the greater of 15 percent or the prior-year tax rate | FHA 4000.1 II.A.4.c.xii(P) |
| VA | 125 percent, debt-to-income ratio only | VA Pamphlet 26-7, Ch. 4 Topic 9.f |
| USDA | 25 percent | USDA HB-1-3555 9.8 |
Sources
- Fannie Mae Selling Guide, September 2, 2026 version: B3-3.1-01, General Income Information (p. 302); B3-3.4-15, Social Security Income (p. 356)
- Freddie Mac Single-Family Seller/Servicer Guide, September 16, 2026 version: 5305.1(r), Tax-exempt income requirements (p. 5305-38, 5305-39)
- FHA Single Family Housing Policy Handbook 4000.1, August 12, 2026 version: II.A.4.c.xii(P), Nontaxable Income (Grossing Up) (TOTAL) (p. 248)
- VA Lender's Handbook (VA Pamphlet 26-7), August 12, 2026 version: Chapter 4, Topic 9.f Debt-to-Income Ratio – Item 44 (PDF p. 119, 120)
- USDA HB-1-3555 Guaranteed Loan Program Handbook, March 2, 2026 version: Chapter 9, 9.8 Stable and Dependable Income (p. 9-12); Chapter 9, Attachment 9-A Income and Documentation Matrix (p. 9-14); Chapter 9, Attachment 9-E Information for Analyzing Tax Returns for Self-Employed Applicants (p. 9-59)
Agency guides set the baseline; individual lenders can add stricter overlays. Sources are the guideline versions in Zeitro Strata as of October 29, 2026.