Answer:
To gross up net or non-taxable income, the Service must multiply the amount of the net or non-taxable income by 1.25; if the actual amount of federal or State taxes that would be paid is more than 25% of the Borrower's net or non-taxable income, the Service may use the actual percentage.
Step-by-step explanation:
The debt ratios set by all entities that loan money (mainly Fannie/Freddie in our case) base their ratios on taxable income. Because the average American family pays 25% of their income between federal and state taxes conventional guidelines allow 25% “gross up” of the non taxable income