Definition:
Gross monthly income is the total amount of money a person earns each month before taxes and other deductions are taken out. It includes wages, salaries, bonuses, and other sources of income.
Example:
Maya earns $60,000 a year at her job. To calculate her gross monthly income, she divides that by 12, which equals $5,000 per month. Her lender uses this number to figure out how much home she can afford.
Explanation:
In real estate, gross monthly income is a key number lenders use when deciding how much money to loan a buyer. It forms the basis for calculating important ratios, like the debt-to-income (DTI) ratio, which helps lenders assess how much of a borrower’s income goes toward paying debts, including a new mortgage.
Gross income includes all sources of consistent monthly income: salary or hourly wages, overtime, bonuses, commissions, rental income, Social Security, and in some cases, child support or alimony. It does not include taxes, health insurance, retirement contributions, or other paycheck deductions.
Lenders prefer that a borrower’s total monthly debts—including the mortgage—do not exceed a certain percentage of their gross monthly income (often around 43%, depending on the loan type).
Why is Gross Monthly Income Important in Real Estate Transactions?
Gross monthly income is important because it helps determine loan eligibility and affordability. For buyers, understanding their gross monthly income helps set a realistic budget for how much home they can afford. For lenders, it provides a standard way to evaluate the borrower’s financial strength.
For sellers and agents, knowing that a buyer’s income has been properly verified gives confidence that the transaction will move forward smoothly and that financing won’t fall through before closing.