The Quick Read: No single program wins here, because the gross-up is an underwriting step, not a product. It applies only to pension income that is verified as nontaxable. Fannie Mae’s guide lets a lender add 25% of that nontaxable income to develop an adjusted figure, and the program you land in decides how much more it helps. The best program for your situation depends on your pension type, your equity, and your credit.
What Does “Grossed Up” Actually Mean?
Grossing up means a lender raises nontaxable income on paper so it compares fairly with taxable wages. A dollar you keep in full is worth more than a dollar that gets taxed. The lender’s debt-to-income ratio (DTI, your monthly debts divided by your gross monthly income) is built on gross income. So nontaxable income gets bumped up to a “before-tax equivalent.”
Cash-out refinance estimate
The starting figures are an example value with a balance and a cash request in proportion. Replace them with yours.
Editable benchmark: 7.18% as of November 5, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the agency cap on a one-unit principal residence, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a cash-out refinance quote; a cash-out loan is priced by the lender at lock. The cash available is the loan the program cap allows less the balances paid off, before closing costs, which are not included. The HELOC line is the program’s combined loan-to-value ceiling applied to the same value and balance. Taxes and insurance are editable estimates. Licensed in sixteen states for consumer mortgages.
Under Fannie Mae’s Selling Guide on general income, the lender adds an amount equal to 25% of the nontaxable income. If a similar-bracket wage earner would generally pay more than 25% in taxes, the lender may use the larger amount. The income and its tax-exempt status must both be likely to continue.
Two points matter here.
- The gross-up changes underwriting math only. Your actual take-home does not change.
- It applies only to the nontaxable portion. Taxable pension income is used at face value.
Most private-employer pension payments are taxable. For those, there is nothing to gross up. That surprises many borrowers, so check before you build a plan around it.
Is Your Pension Even Nontaxable?
Whether any part of your pension is nontaxable is a tax question, not a mortgage question. The IRS explains how pension and annuity payments are taxed in Publication 575. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Here is how the lender sees it. The lender must verify nontaxable status with documents. Fannie Mae’s guide names award letters, policy agreements, account statements, and tax returns. Proving the pension exists is one job. Proving it is nontaxable is a second, separate job.
Expect three outcomes:
1. Fully taxable pension. No gross-up. The gross amount counts as stated.
2. Partly nontaxable pension. Only the verified nontaxable slice gets grossed up.
3. Fully nontaxable pension. The whole amount can be grossed up, if documented and likely to continue.
Social Security follows different rules from a pension, so do not assume the two are treated alike. A pension gets grossed up only for the portion that is verified as nontaxable, and your loan officer can confirm how the guide treats Social Security on your file.
How Is a Pension Cash-Out Refinance Underwritten, Step by Step?
A cash-out refinance replaces your current mortgage with a larger one and hands you the difference in cash. Because you are borrowing more, the lender fully underwrites your income. Here is the sequence.
1. Classify the pension. Private, federal, state, military, or railroad. Each has its own tax profile.
2. Document the amount and current receipt. An award letter, benefit statement, or account statement works. Fannie Mae’s 2020 announcement added bank and financial account statements as proof of receipt.
3. Document nontaxable status. Use a tax return, award letter, or similar record.
4. Check continuance. The income must be likely to keep coming.
5. Apply the gross-up to the verified nontaxable part.
6. Run the file through automated underwriting. The system weighs income, credit, reserves, and equity together.
7. Appraise the home. The appraised value sets the maximum loan.
Does a Defined-Benefit Pension Need Three Years Left?
No. This is a common mix-up. The three-year continuance test applies to retirement income paid as distributions from a 401(k), IRA, or Keogh account, per the same Fannie Mae announcement. A defined-benefit pension, the kind that pays a set monthly amount for life, is not tested that way.
Distributions from retirement accounts are a different animal. The lender wants evidence the account can keep paying for a set stretch. If your income is a mix of pension and account withdrawals, expect each stream to be reviewed under its own rules.
Fannie Mae has also moved its pension and annuity rules to a new section of the guide, with expanded documentation when retirement income starts after closing. Older articles that cite the previous section number are out of date. Treat the rule as what the guide allows now, and ask your loan officer to confirm the current wording.
Which Cash-Out Program Fits a Pension Borrower?
The best program for your situation depends on what you hold today and how much equity you have. Each path treats the gross-up on its own terms. Freddie Mac’s Guide has a comparable provision for tax-exempt income, covered in its retirement-income section, though the details differ from Fannie Mae’s.
| Path | Best when | Watch out for |
|---|
Rates are not quoted here. The wholesale no-MI cash-out lane is best when you have high equity needs, a 680 score, and a 30-year fixed. Watch out for these requirements: primary residence, conforming balance, 50% ratio, and six months of seasoning.
| FHA cash-out | Credit is thinner and the home is your primary residence | FHA handles gross-up with its own tax-rate-based rule; check the HUD handbook |
|---|---|---|
| VA cash-out | You are a veteran with entitlement | Net tangible benefit test applies; private lender, not VA, makes the loan |
| Jumbo cash-out | Your loan exceeds the conforming limit | Higher score floor and its own guidelines |
Let me be plain about the “best” question. The program that works is the one where your documentation, equity, and credit line up with the guidelines. A broker who shops several wholesale lenders can match the scenario to a program. You can see how that works on Lendmire’s cash-out refinance programs page.
What Are the Core Conventional Cash-Out Numbers?
Across the conventional programs we place files with, the limits below are the ones that matter. Every figure is subject to lender guidelines and full file review, and none of it is a commitment to lend.
- Leverage: Up to 80% LTV (loan-to-value, the loan as a share of the home’s value) on a one-unit primary residence. Two- to four-unit primary residences, second homes, and investment properties go up to 75%. Occupancy sets the leverage.
- Seasoning: The first mortgage being paid off must be at least 12 months old, measured note date to note date. You generally must also have been on title for six months. Delayed financing, inheritance, and legal-award exceptions exist.
- Credit: The wholesale conventional programs start at a 620 decision score. The automated finding governs most files, with a total ratio ceiling of 50%.
- The no-MI lane: One wholesale lane reaches 89.99% LTV with no mortgage insurance. It needs a 680 score, a 50% ratio, a 30-year fixed on a primary residence at a conforming balance, plus its own six months of seasoning.
- Mortgage insurance: Required above 80% LTV on the agency path, except in that wholesale no-MI cash-out lane. You can request cancellation at 80% of original value with good payment history. The servicer must end it automatically at 78%.
- Texas homestead: A cash-out on a Texas homestead is capped at 80% of the home’s value by the state constitution. The no-MI wholesale lane is not written there.
Cash-out loans also carry loan-level price adjustments, which the Fannie Mae cash-out section describes. They depend on LTV and credit score. Those adjustments are one reason a smaller cash-out amount can be a smarter ask.
Where the Rule Breaks: Edge Cases
The gross-up story has sharp corners. Here are the ones that trip borrowers up.
Taxable pension, nothing to gross up. Many borrowers assume a pension automatically earns the 25% bump. It does not.
Mixed taxability. Only the verified nontaxable piece is adjusted. A pension that is partly taxable, plus Social Security, plus an account withdrawal gets three separate reviews.
A pension that has not started. If payments begin around or after closing, the file needs extra documentation of the start and the amount.
A tax bracket above 25%. Fannie Mae allows the larger figure when the similar-bracket tax amount exceeds 25% of the nontaxable income.
Survivor and lump-sum situations. Survivor benefits, lump-sum elections, and pensions that decline over time each raise a continuance question. The lender asks whether the income will last, and a gross-up only works if it does.
Limited cash-out versus cash-out. A rate-and-term refinance, called limited cash-out at Fannie Mae, pays off your existing first mortgage, closing costs, and a purchase-money second lien. Take more, or pay off a non-purchase-money second, and the loan becomes a true cash-out. Buying out a co-owner under a written agreement is a limited cash-out transaction at both agencies.
Streamlines. The FHA Streamline and VA IRRRL are designed for people who already hold those loans. They generally skip full income re-qualification. That means a gross-up usually does not come into play, and they do not hand you cash. For the gross-up to matter, the loan has to be fully underwritten.
VA cash-out. The VA’s cash-out page explains that you work through a private lender, not VA, and that a funding fee may be due at closing. A net tangible benefit test applies to cash-out loans.
What Does the Gross-Up Do to Your Numbers, and What Doesn’t It Do?
Picture a retiree whose pension is partly nontaxable. The lender grosses up only that part, which lowers the DTI shown on the file. A file that sat just over the ceiling can move under it. That is the real value. It can turn a “capped or denied” outcome into an approval.
But it does not change what lands in your bank account. Here is the catch. A cash-out loan is larger than your old one, so the monthly obligation usually rises. A DTI built on grossed-up income can look fine on paper while your real take-home budget is tight. Test the new payment against your net income, not the adjusted figure.
Reserves also count. Fannie Mae’s eligibility matrix sets minimum reserves for cash-out files in certain cases, such as DTI above 45% on DU casefiles. Gross-up can help the ratio, but it does not replace savings in the bank.
Then there is the cost side. A cash-out refinance can swap a lower-rate mortgage for a higher-rate one, and closing costs can be substantial. If your current loan is well priced, ask whether the cash is worth giving it up. Costs can be financed into the loan, and your Loan Estimate shows that line.
Common Mistakes to Avoid
- Assuming all pension income gets the 25% bump. Only verified nontaxable income does.
- Not telling the lender up front. If you never raise it, the file may be built on the smaller, ungrossed number.
- Skipping proof of tax status. A lender cannot guess. Bring the award letter, statement, or return.
- Treating the adjusted income as spending power. It is an underwriting figure, nothing more.
- Taking the maximum cash. More cash means a bigger loan, more price adjustments, and a heavier budget.
- Relying on old guide section numbers. Pension rules have moved.
What If the Gross-Up Isn’t Enough?
You still have paths. Each is subject to lender guidelines and full file review.
- Take less cash. A smaller loan lowers both the payment and the ratio.
- Add a co-borrower. A second qualifying income can help, though FHA cash-out has its own limits on non-occupant co-borrowers.
- Document other income. Combined pension, Social Security, and account distributions can each count when properly proven.
- Keep your current loan. If your existing mortgage is well structured, sometimes the best move is not to refinance.
- Consider a different program. A broker can compare conventional, FHA, VA, and jumbo options against your file.
For borrowers whose income is fixed and they have no job, Lendmire’s piece Best Cash-Out Refinance Program on a Fixed Pension or Disability Income With No Job covers that angle in more depth.
Key Terms Defined
Gross-up: An underwriting step that raises verified nontaxable income to a before-tax equivalent so it compares fairly with taxable income.
DTI (debt-to-income ratio): Your monthly debt payments divided by your gross monthly income.
LTV (loan-to-value): The loan balance as a percentage of the home’s appraised value.
Seasoning: The waiting period a lender requires on a loan or on your ownership before you can refinance or take cash out.
Continuance: The lender’s test of whether your income is likely to keep arriving.
Limited cash-out refinance: A refinance that pays off your existing mortgage and costs with only incidental cash back.
Frequently Asked Questions
Can I do a cash-out refinance on pension income alone?
Yes, if the pension is documented, likely to continue, and the numbers fit the guidelines. Retirement status is not a barrier. The lender looks at your income, credit, equity, and reserves together. Approval is subject to lender guidelines and full file review.
Is every pension nontaxable?
No. Most private-employer pensions are taxable, so there is nothing to gross up. Only income verified as nontaxable qualifies. A tax professional can tell you how yours is treated, and the lender will want proof.
Do all programs gross up the same way?
No. Fannie Mae’s guide describes a 25% addition for verified nontaxable income. Freddie Mac has a comparable provision. Lender overlays can also be stricter than the agency rule.
Does grossing up raise the amount of cash I can take?
Not directly. Cash-out amount is capped by equity and leverage limits, such as 80% LTV on a one-unit primary residence. Gross-up helps by lowering your DTI, which can make a larger loan approvable. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
What documents should I bring?
Bring an award letter or benefit statement, recent account statements showing receipt, and tax returns or other records that prove nontaxable status. If your pension starts near closing, expect to supply extra documentation.
Next Step
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s refinance programs page.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. Fannie Mae Selling Guide B3-3.1-01, General Income Information
5. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions
7. Fannie Mae Eligibility Matrix
This article is part of Lendmire’s cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Best Cash-Out Refinance Program to Fund a Home Remodel · Best Cash-Out Refinance Program for the Down Payment on a Construction Loan · Best Cash-Out Refinance Program for W-2 Employees
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Compliance and disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage broker and is not a direct lender, depository institution, financial advisor, or tax professional. Content in this article is general market analysis and educational information — not financial, legal, or tax advice for any specific situation. Lendmire does not guarantee loan approval; every transaction is subject to underwriting by the funding lender. Mortgage pricing and loan program guidelines are subject to change at any time without notice and vary by borrower characteristics, property type, and state regulations. Lendmire complies with Equal Housing Opportunity. Licensure verification: NMLS Consumer Access.