What is Gross Monthly Income and how is it calculated?
I love talking about money - especially when it helps people understand their path to homeownership! Let's break down gross monthly income in a way that makes sense for everyone.
Gross Monthly Income: The total amount of money earned from all sources in a month before any taxes, insurance premiums, or other deductions are taken out. This includes regular wages, bonuses, rental income, investment returns, retirement benefits, and any other consistent sources of income.
Components of Gross Monthly Income
Your gross monthly income isn't just your regular paycheck - it's the whole enchilada! Primary income typically comes from your main job, including your base salary, overtime pay, and any commissions you earn. But don't stop there!
Here's what else counts:
Rental income from properties you own
Investment dividends
Money from your side business
Retirement or pension payments
Alimony or child support (if regular and documented)
Calculating Gross Monthly Income
For W-2 employees, calculating gross monthly income is straightforward. Take your annual salary and divide it by 12. If you're paid bi-weekly, multiply your gross paycheck by 26 (annual pay periods) and divide by 12.
Self-employed? Your calculation might look different. You'll need to:
Review your Schedule C from tax returns
Add up your total business income
Subtract business expenses
Calculate your monthly average over 24 months
Role in Real Estate Transactions
Your gross monthly income plays a starring role in real estate transactions. Mortgage lenders use it to calculate your debt-to-income ratio, which helps determine how much house you can afford. Most lenders prefer a debt-to-income ratio below 43%.
For renters, landlords often require your gross monthly income to be 3x the monthly rent. This helps them verify you can comfortably afford the payments.
Common Misconceptions
People often mix up net and gross income. Your net income (take-home pay) is what's left after taxes and deductions. Lenders care about your gross income - the bigger number before any deductions.
Variable income, like commissions or seasonal work, requires special consideration. Lenders typically average this income over time to get a clear picture of your earning potential.
Documenting Your Income
Ready to prove your income? You'll need:
Recent pay stubs (usually 30 days' worth)
W-2 forms or tax returns from the past two years
Bank statements showing regular deposits
If you have special circumstances like multiple jobs or seasonal income, keep detailed records of all income sources. Commission-based workers should maintain a trailing history of their earnings.
Final Thoughts
Accurate reporting of your gross monthly income opens doors in real estate. Whether buying or renting, this number helps determine what you can afford and shapes your housing options.
Looking to make your real estate dreams a reality? Bellhaven Real Estate agents know exactly how to help you navigate income requirements for your next home purchase or rental. Get in touch with us to start your journey today!