How to Calculate Social Security and Pension Income

How to Calculate Social Security and Pension Income

Overview

  1. These are usually fixed income sources awarded by the Social Security Administration or a private retirement plan, or employer sponsored plan.
  2. The Lender must verify proof of current receipt of the income.
  3. Pensions, and 401k and IRA income will require documentation to support continuance for at least 3 years.
  4. Pension income can be verified with 1099’s, tax returns, or bank statements showing recent deposits.
  5. Social Security Income is verified with a current Award Letter, Tax Returns or bank statements showing recent deposits.
  6. If the borrower is drawing SSI benefits from their own account, no continuance is required.
  7. If the borrower is drawing SSI benefits from another person’s account, proof of at least 3 years continuance is required.
  8. If Social Security income is verified to be non- taxable; Award letter, Tax returns, the non-taxable portion may be what we call “grossed-up”.
  9. The lender may develop an “adjusted gross income” for the borrower by adding an amount equivalent to 25% of the nontaxable income to the borrower’s income.
  10. If the actual amount of federal and state taxes that would generally be paid by a wage earner in a similar tax bracket is more than 25% of the borrower’s nontaxable income, the lender may use that amount to develop the adjusted gross income, which should be used in calculating the borrower’s qualifying ratio
  11. To obtain the ‘grossed-up’ income, calculate as follows:
  12. If the borrower has other income such as wages, obtain the borrower’s most recent two years 1040 Federal Tax returns.
  13. From page 1, subtract line 20B from 20A. This will be the non-taxable income.
  14. Multiply the result by 1.25%. The result will be the ‘grossed-up’ portion.
  15. Use the same calculations for the second year taxes. Add the two results together and divide by 24 (months).

Example



Year 1
  1. Line 20a = $21,600, Line 20b = $12,137
  2. 21,600 - $12,137 = $9,463
  3. $9,463 x 125% = $11,828.75
Year 2
  1. Line 20a = $22,500, Line 20b = $11,462
  2. $22,500 - $11,462 = $11,038
  3. $11,038 x 125% = $13,797.50
Total
  1. $11,828.75 + $13,797.50 = $25,626.25
  2. $25,626.25 / 24 = $1,067.76 per month grossed-up income

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