QandAs: Loans

What is Effective Gross Income?

Answer:
When applying for any type of loan program, a potential

lender takes several factors into account. Not surprisingly, the lender wants to ensure that all applicants are able to afford the loan and make timely monthly payments. Thus, it is customary for a lender to carefully evaluate an applicant’s income and debts.

Getting a mortgage or personal loan isn’t easy, and lenders outline several requirements. Before approving a loan request, the lender will consider the applicant’s effective gross income. Effective gross income isn’t just an applicant’s annual salary. Rather, this income includes all regular payments made to the applicant. These are guaranteed payments that the applicant receives monthly, which can serve as basis for loan approval.

Effective gross income also relates to rental properties. Real estate investors and landlords are very familiar with this type of income. In essence, the effective gross income is the total potential income minus vacancy loss and other expenses.

Unfortunately, finding tenants for a new rental property takes time. What’s more, tenants can give notice and move out of the property. As a result, some landlords experience loss of income. Prior to getting a rental property, all investors should consider the risk of unoccupied units.


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