Military Tax-Free Income Gross-Up for VA Loan Qualifying

The VA Loan Analysis (residual income worksheet) must show your ACTUAL nontaxable income — not a grossed-up figure. VA underwriting is primarily residual-income driven, with debt-to-income as a secondary consideration.

Some underwriters may separately consider a grossed-up ratio as supplemental information, but if that happens, the actual (non-grossed-up) figure still belongs in the ratio box, and any supplemental ratio appears in remarks. There is no single universal gross-up percentage that applies automatically to every file.

Whether and how any adjustment is considered depends on eligibility, documentation, income continuance, tax treatment, and individual lender policy. See the VA's official guidance for details.

VA disability compensation — any rating, from 10% to 100%. Fully tax-free at the federal level, and tax-free in every state.

BAH (Basic Allowance for Housing) — nontaxable while on active duty.

BAS (Basic Allowance for Subsistence) — nontaxable. Smaller dollar amount, but it counts.

Combat pay, hazardous duty pay, hostile fire pay, imminent danger pay — nontaxable while serving in a designated combat zone. If it appears on the LES and there's a reasonable continuance, it may be eligible for a gross-up under the applicable guideline.

Clothing allowance and family separation allowance — nontaxable where documented.

Military retirement pay — taxable federally, but state-tax-free in a growing number of states (and fully tax-free in some). The state-exempt portion may be eligible for a gross-up depending on the applicable guideline; check with your loan officer for the exact treatment on your file.

SSDI and other nontaxable disability benefits — grossed up when documented as nontaxable on tax returns or a benefit letter.

Nontaxable child support and alimony (post-2018 divorces) — grossed up with a court order and 6+ months of receipt.

VA disability is the most familiar gross-up example, but BAH, BAS, and combat pay may also be nontaxable, and together they can exceed the disability payment.

Loan origination systems also require nontaxable income to be entered on a specific line for a gross-up review to be triggered, so how the income is keyed matters.

Third, policies on nontaxable income vary by lender and guideline. If you receive nontaxable income, ask how your lender documents and treats it.

SFC Alvarez is retiring after 22 years. His monthly income: $2,800 VA disability (70% rating), $2,400 BAH for his post-retirement zip code, $460 BAS, and $3,100 pre-tax military pension. Total: $8,760/month.

Without any adjustment, his qualifying income is $8,760. Using a 41% debt-to-income guide with $650 in existing debts, that illustrates roughly $2,942/month of housing payment. VA underwriting is residual-income driven, and 41% is a guide rather than an automatic cutoff — actual qualifying depends on the lender's full analysis.

If a gross-up applies to his nontaxable income under the guideline his lender uses, his qualifying income and housing-payment capacity could increase — the exact amount depends on the percentage (if any) permitted and how his lender documents it. This is illustrative only, not a guaranteed underwriting result.

The bottom line: ask your loan officer whether a gross-up applies to your file, under what guideline, and how it changes your qualifying income before you rely on any specific number.

There is no single universal percentage that applies to every borrower or every lender. The VA Loan Analysis form must always show your actual nontaxable income; any supplemental adjustment an underwriter chooses to consider is documented separately and does not replace the actual figure.

VA disability: award letter from the VA (Form 27-125 or a benefits summary), plus your most recent bank statement showing the deposit.

BAH and BAS: current LES. Guard and Reserve: last 12 months of drill LESs, since income can vary.

Combat pay: LES showing the pay, and reasonable continuance (typically documented orders extending 12+ months).

Military retirement: retirement award letter and the DD 214 showing years of service.

For state-tax-exempt retirement: proof of residence in the exempting state (utility bill, driver's license).

Ask your loan officer how your nontaxable income is being documented and underwritten. VA underwriting is residual-income driven, with DTI as a secondary factor — ask how your file's residual income compares to the required minimum for your region and family size.

Run your own numbers with the calculator on this site before your next conversation. When you show up knowing what your qualifying income should look like, the conversation goes very differently.