What does the borrower have to offset to determine their net effective income?

What does the borrower have to offset to determine their net effective income?

• A. Monthly housing expenses
• B. Federal income tax
• C. Secured debt obligations
• D. Living expenses

Answer: (B)

To determine their net effective income, a borrower typically offsets their federal income tax. This is because net effective income reflects the actual amount of income the borrower has available after accounting for taxes. By subtracting federal income tax from the gross income, the lender can assess the borrower's financial capacity more accurately. Unlike monthly housing expenses, secured debt obligations, or living expenses, which are also important for assessing a borrower's financial situation, federal income tax directly impacts the take-home pay. The net effective income is a critical figure used by lenders to determine the borrower's ability to repay the mortgage, as it gives a clearer picture of the disposable income available after mandatory tax payments. Thus, focusing on federal income tax provides a precise method for assessing the viability of the borrower’s income in relation to their potential mortgage obligations.

To determine their net effective income, a borrower typically offsets their federal income tax. This is because net effective income reflects the actual amount of income the borrower has available after accounting for taxes. By subtracting federal income tax from the gross income, the lender can assess the borrower's financial capacity more accurately.

Unlike monthly housing expenses, secured debt obligations, or living expenses, which are also important for assessing a borrower's financial situation, federal income tax directly impacts the take-home pay. The net effective income is a critical figure used by lenders to determine the borrower's ability to repay the mortgage, as it gives a clearer picture of the disposable income available after mandatory tax payments. Thus, focusing on federal income tax provides a precise method for assessing the viability of the borrower’s income in relation to their potential mortgage obligations.