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USDALoan.org

USDA Loan Rates, Lenders, Guidelines and Information

Do USDA Loans Require Tax Returns?

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The USDA loan is one of the few loan options that offer 100% financing. You have to be a low to moderate-income family and you must buy a home in a USDA designated rural area in order to qualify. Finding a home in a rural area is pretty easy to figure out, but it’s the USDA income requirements that may make you stumble.

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The USDA income guidelines take into account the income of everyone over the age of 18 in your household. Even if the household members aren’t on the loan, they have to disclose their income. In the past few years, the USDA has gotten a little stricter with this requirement by requiring borrowers to supply their tax returns. It’s not the way you might think, though.

Keep reading to find out how it works.

The IRS Tax Transcript Requirements

You may not have to provide your copy of your tax returns to prove your household income, but the lender does have to request your IRS transcript. This means you and every household member will have to complete IRS Form 4506 T. This form gives the lender permission to access your IRS tax transcript.

The tax return transcript shows the basic information about your tax return so that the lender can verify what you supplied is the truth. It is a summary of what you filed, but it also shows your adjusted gross income. The lender then uses this to verify that you provided the same information.

If the information matches what you told the lender, the lender can then move forward processing your loan. Their first order of business is to make sure that you meet the income guidelines for your area. You cannot make more than the allotted amount for your family size and your area. In general, you can’t make more than 115% of the average income for the area.

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Qualifying Your Income

Once you know that you are eligible for the loan, you then have to prove that you qualify for it. Will you need your tax returns for this step too? It depends on the type of income you earn. Typically, if you are a salaried employee or you work full-time on an hourly salary, you won’t need to provide your tax returns for qualifying purposes.

On the other hand, if you work on commission (more than 25% of your income is commission) or you own your own company, you will need to provide your tax returns. In this case, you’ll likely need to provide the tax returns for the last 2 years. This gives the lender the opportunity to average your income over that time.

Why would a lender need two years of income? It’s because of the volatile nature of both commission income and self-employed income. When you don’t receive a salary, your income likely has ‘ups and downs.’ If the lender were to qualify you on your income when your income was ‘up,’ you might qualify for more mortgage than you can afford year-round. If the lender qualified you for a loan when your income was ‘down,’ they may short change you. Taking that 2-year average helps the lender know that you can afford the payment year round.

Other USDA Loan Requirements

Aside from proving that you can afford the loan, you’ll need to show the lender other factors to ensure that you qualify for the USDA loan program:

  • 640 minimum credit score
  • 29% total housing ratio (your housing payment shouldn’t exceed 29% of your gross monthly income)
  • 41% total debt ratio (your total debts shouldn’t exceed 41% of your gross monthly income)
  • Proof that you will live in the home as your primary residence
  • Proof that you can’t qualify for any other loan program

The USDA loan provides 100% financing, as we discussed above. This means you don’t have to put any money down on the home, but you do have to cover the closing costs. The only way that you can roll the closing costs into your loan is if the house appraises for more than the amount you agreed to pay. If this is the case, you may be able to increase your loan amount to cover the closing costs.

Keep in mind, that you’ll also pay mortgage insurance on the USDA loan. You will pay 1% of your loan amount at the closing (or rolled into your loan) and 0.35% of the outstanding balance each year, paid on a monthly basis. In other words, the lender takes the annual premium and divides it equally amongst your 12 monthly payments. You pay the insurance along with your mortgage payment. This insurance lasts for the life of the loan.

In short, USDA loans do require tax returns, but typically not for qualifying for the loan. It’s more to prove your household’s eligibility for the 100% USDA loan program. The IRS transcripts are typically easy to obtain as long as you provide the proper form. If there is an issue and the lender cannot obtain them, you can request them yourself and provide them to the lender, if they request this of you.

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USDA Loans: The Hardest Requirements You’ll Face

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If you want to buy a rural home and you don’t have a down payment, you may want to explore your option for a USDA loan. Who can go wrong with 100% financing and low closing costs, right?

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It’s important to know that the USDA loans aren’t for everyone. First, you have to prove eligibility and then you have to prove that you qualify. While it sounds like a lot, there are only a few requirements that are hard and they pertain to the eligibility for the program.

What’s a USDA Loan?

You should understand that the USDA loan is only for borrowers that have low to moderate household income. In other words, if you or someone in your household makes a lot more than the average income for the area, the USDA loan isn’t for you. It’s reserved for borrowers that would be unable to secure any other type of financing.

That being said, the toughest USDA loan requirements are the property location and the total household income. You can use the USDA’s charts to determine where you fall within their requirements.

The Property Requirements

In order to use USDA financing, you have to buy a home within the rural limits that the USDA set. Now what they consider rural and what most people consider rural are usually two different things. The USDA uses the most recent census tract to determine which areas are rural.

While it doesn’t mean you will live in the middle of cornfields with no neighbors for miles, it does mean you’ll live outside of the city limits. If that’s not something you want to consider, the USDA loan wouldn’t be the right choice for you.

The Income Requirements

As we discussed above, you need to be within the average income for your area in order to be eligible for the USDA program. This includes all incomes made from everyone in your household. If you have aunts, uncles, grandparents, or friends living with you – each adult income counts.

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The USDA doesn’t provide loans for borrowers that have a household income that exceeds 115% of the income for the area. But, they do allow what they call allowances to make it easier to qualify:

  • If you have children that live with you, they will likely be worth a $480 deduction each. The USDA allows this deduction for each child under the age of 18 as well as each child over the age of 18, but that is a full-time student.
  • If you have disabled relatives living with you, the USDA provides a $480 deduction for each disabled person living in your residence.
  • If you have elderly parents or other relatives with you, the USDA allows a $400 deduction for each elderly person in your residence.

The USDA will look at your monthly income based on the above figures to determine your eligibility income. If you don’t pass this step, you won’t move forward with the USDA loan.

The Qualifying Requirements

Once you get past the eligibility requirements for the USDA loan, the actual qualifying requirements are fairly relaxed:

  • 640 credit score
  • 29% housing ratio
  • 41% total debt ratio
  • Stable income/employment
  • Proof that you will live in the home as your primary residence
  • Proof that you cannot secure any other type of financing

Keep in mind that you can’t apply for the loan with your entire household as co-borrowers. Typically, it’s just you and one other person, such as a spouse, on the loan. The other incomes in the house can help you pay the bills, but they don’t help with qualifying for the loan.

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Does an IRS Payment Plan Affect Your Ability to Buy a Home?

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Do you have a payment plan with the IRS because you couldn’t pay your taxes? You might think that it makes you ineligible to get a mortgage, but that may not be the case. Keep reading to learn how a payment plan may affect your ability to get a loan.

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Fannie Mae Loans Aren’t an Option

We’ll get the bad news out of the way first – you can’t use a Fannie Mae loan if you have an IRS payment plan. They simply don’t allow it. But, if you have good enough credit to get a conventional loan, Freddie Mac loans do allow it, so it’s not a bid deal.

Just because Fannie Mae doesn’t allow it, though, there are many other loan programs including all of the government-backed programs, such as FHA, VA, and USDA loans.

The Important Detail

The most important detail you should focus on is making your payments on time. The loan programs and lenders don’t focus on the fact that you have a payment arrangement. What they focus on is your payment history with the payment arrangement, just as they do for your other bills, such as house payments, credit cards, and personal loans.

What most lenders want to see is on-time payments for the last 12 months. In other words, you have to wait to apply for the mortgage until you’ve made 12 payments and each of those payments must have been made on time. If you have a late payment within that timeframe, you’ll have to start all over again until you have 12 months in a row that you don’t have any late payments.

The Debt Ratio

Aside from the timely payments, you must prove that the debt fits into your debt ratio. Lenders need to make sure that you don’t exceed the debt ratios already set for each program. For example, if you want a conventional loan, you’ll need a debt ratio no higher than 36%. If you apply for an FHA loan, you can have a debt ratio as high as 41% and a VA loan allows a DTI as high as 43% in some cases.

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The lender needs to make sure that you can comfortably afford all of your debts including the new mortgage and the IRS payment arrangement. The debt ratio ensures that you have enough disposable income each month in order to cover the cost of living without having to sacrifice.

Increasing Your Chances of Approval

If you are worried about your chances of approval because of your IRS payment arrangement or your debt ratio, consider coming up with compensating factors. These are factors that offset your risk of default. Some of the most common factors include:

  • A high down payment – The more money you invest in the home, the lower your chances of default become because you don’t want to lose your own investment.
  • A high credit score – If you have a high credit score, it can offset the risk that your tax liability causes. A high credit score shows lenders that you are financially responsible and a low risk of default.
  • A low debt ratio – Just because loan programs have maximum debt ratios, it doesn’t mean that you should max out your debts. The lower your debt ratio is, the lower your risk of default becomes, which makes it easier for you to qualify for the loan.

The IRS payment plan can affect your ability to get a loan only if you don’t pay it on time or if it makes your debt ratio too high. Evaluate your income and debts to see if you can fit a mortgage payment into it while meeting the debt ratios discussed above.

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When Can you Eliminate Mortgage Insurance?

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Mortgage insurance is a fee you must pay if you have a government-backed loan (except the VA loan) or if you put less than 20% down on your conventional loan purchase. In some cases, mortgage insurance can add as much as a couple hundred dollars to your mortgage payment.

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Mortgage insurance is strictly coverage for the lender. If you were to default on your loan, the lender would have insurance coverage to get some of the money back that they lost on your defaulted loan.

In some cases, you don’t have to pay mortgage insurance forever. Keep reading to see how you may be able to eliminate it.

Conventional Loans and Mortgage Insurance

If you put less than 20% down and you used conventional financing, you must pay Private MortgageInsurance. The amount you’ll pay depends on your LTV and credit score. You pay this insurance until you owe less than 80% of the home’s value. This can happen in a couple of ways:

  • You pay the principal down according to your amortization schedule and hit 80%
  • Your home appreciates enough that you owe less than 80%

If you want to eliminate the PMI on your loan, you must request it in writing. You must also provide proof of the reason. For example, if your home appreciated, you can supply evidence of the comparable sales in your area.

If you don’t request the elimination of the PMI, by law, your lender must eliminate your Private Mortgage Insurance when you owe 78% or less of the home’s value.

FHA and USDA Loans With Mortgage Insurance

FHA and USDA loans are both government-backed loans. In order to provide the guaranty that they provide, you must pay mortgage insurance. Unlike conventional loans, you cannot cancel the mortgage insurance on the FHA or USDA loan. You will pay the insurance for the life of the loan.

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Also unlike conventional loans, each borrower pays the same amount of mortgage insurance. On FHA loans, borrowers pay 0.85% of their average principal balance each year. The lender then breaks that premium up over 12 months, charging you 1/12th each month. On USDA loans, borrowers pay 0.35% of the average principal balance each year. Like FHA loans, you pay 1/12th of that amount each month.

In addition to the annual mortgage insurance charged, both FHA and USDA loans also charge an upfront mortgage insurance fee. The FHA charges 1.75% as an upfront mortgage insurance fee and the USDA charges 1.0%. Each of these is a percentage of the loan amount and the fee is collected at the closing.

Like we stated above, you pay the insurance for the life of the loan. This means even when you owe less than 80% of the home’s value, you still pay mortgage insurance.

Getting Rid of Mortgage Insurance on FHA or USDA Loans

The only way to eliminate mortgage insurance on FHA or USDA loans is to refinance the loan. You’d have to refinance into a conventional loan with an LTV of 80% or less in order to avoid PMI. Because conventional loans have stricter requirements than FHA or USDA loans, you’ll need to make sure you qualify.

Conventional loans require:

  • 680 credit score
  • 28% housing ratio
  • 36% total debt ratio
  • Stable income/employment
  • No recent bankruptcies or foreclosures

If you took the FHA or USDA loan because you didn’t meet one of these requirements, you’ll have to work to improve your situation so that you do qualify. Once you pay off your USDA or FHA loan, you’ll eliminate the mortgage insurance once and for all.

Paying mortgage insurance doesn’t have to be a bad thing as it does help you get the loan that you need. But after a while, you’ll want to eliminate it from your payment. If you can request elimination with a conventional loan, that is the easiest route, otherwise, you may have to refinance and pay closing costs to get a new loan.

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Can You Buy a Fixer-Upper With a USDA Loan?

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You found the perfect fixer-upper, but you need USDA financing because of your low income and no money for a down payment. The USDA usually requires homes to pass their appraisal, which includes their minimum property requirements.

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Can you buy a fixer-upper with your USDA loan? You might be able to, but you must meet certain requirements.

The Home Must be Livable

One of the USDA’s largest rules is that you must be able to live in the home while it’s being renovated. If the home is beyond inhabitable, you won’t be able to use USDA financing on it. While you live in the home, the work must be completed within six months. If the work will take more than six months, you can’t use USDA financing.

What constitutes a livable home will vary by lender. Obviously, you need to be able to live in the home without fear of any dangers or obstacles making your daily life difficult. There cannot be the presence of things like lead paint or asbestos, as they don’t make for a livable home.

The Home can Only Need Minor Renovations

If the home needs a major overhaul, you can count USDA financing out of the running. The home can only need minor renovations that cost no more than 10% of the loan amount. On a 150,000 loan, the renovations cannot cost more than $15,000.

While this does limit the work you can do on a home, it still leaves you plenty of room for renovation. While knocking down walls or adding rooms might not be feasible, you may be able to do things like replace a deck, paint the exterior of the house, or put on a new roof, just as a few examples.

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You Don’t Handle the Payments

Your lender will handle the payments to the licensed contractors working on your home. The contractors will have a contract that the lender will approve that will include a distribution of funds schedule. The contractor must then meet the dates on the contract in order to receive the funds.

The lender will do a final inspection to ensure that the contractor did everything according to the agreement before they will release the final payment. You must also sign off on the work saying that it is satisfactory according to the agreement as well.

You May Need a Contingency Fund

Some lenders require you to have a contingency fund to make sure you have money should an emergency arise. It’s impossible for contractors to figure out everything that could go on when they renovate your home. If something comes up that will cost a lot of money to fix, you’ll need the contingency fund to rely on if you don’t have enough in the money borrowed for the home.

Contractors Do the Work Most of the Time

A majority of the time, contractors are necessary to do the work on your home. If you are capable, though, you may be able to do the work yourself, but your lender must approve you to do so. In order to qualify, you must be able to prove not only that you have the knowledge to do the work, but also that you have the time to get it done within six months. The work that you do also cannot exceed 10% of the loan amount, just as is the case if a contractor does the work.

The bottom line is that you can buy a fixer-upper with USDA financing, but it must be a minor fixer-upper. You can’t buy a home that is completely unlivable that needs thousands upon thousands of dollars of work. If you find a home that’s doable, but needs a facelift, though, it could be a good candidate for USDA financing.

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What FICO Score Do I Need for a USDA loan?

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USDA loans work well for people that don’t mind living in a rural area. The USDA designates certain areas of the US that are outside of the city lines as rural. If you can find a home in that area, you can secure 100% financing for your home. That means no down payment. You can even have the seller pay your closing costs, meaning you can come to closing with very little of your own money.

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It all sounds too good to be true, so what’s the catch? You must need a high credit score to get the loan, right?

Wrong! You don’t need a high credit score – all you need is a 640 FICO score according to the USDA. If you compare that to the 680 credit score you need along with a 5% down payment for a conventional loan, you are getting a good deal.

What if You Don’t Have a 640 Credit Score?

The USDA loan is for low to middle-income borrowers, some of which don’t have a 640 credit score. Does this mean they have to go without USDA financing?

Luckily, the answer is no, but only if you don’t have traditional credit. If you don’t have enough trade lines to make up a credit score, USDA lenders are allowed to use ‘alternative credit.’ They can use trade lines that don’t normally report to the credit bureau. For example, if you pay car insurance, rent, or utilities, you have bills you must pay each month. If you can provide proof that you’ve paid three to four alternative trade lines on time for the last year, you may be able to secure USDA financing.

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A 660 Credit Score can Get You Better Treatment

If you have a 660 credit score or higher, you may be able to streamline the USDA loan approval process with your lender. Borrowers that have a credit score of at least 660 may not have to provide as many documents to get through the approval process.

Having a higher credit score may also help to offset a high debt ratio. Normally, USDA lenders have to decline borrowers that have a 640 credit score and debt ratios that exceed 29/41. Even though many loan programs allow a total debt ratio of up to 43%, the USDA sticks to their 41% guideline unless you have that higher credit score.

Are you Eligible for a USDA Loan?

Before you even start worrying about whether a USDA lender will approve you for a loan, you should determine if you are eligible for the program itself. The USDA program is only for low to middle-income borrowers. You can determine if you qualify by using the income chart here.

When you use this chart, make sure to take into consideration your household income, not just the income of you and your co-borrower. The USDA wants to know the total household income to see if you qualify for their guaranteed loan program or if you may qualify for an FHA or conventional loan, both of which you may need to put money down on the home to get.

The USDA program is great for borrowers with at least a 640 credit score and debt ratios in line with the program’s guidelines. It offers 100% financing and low closing costs to help stimulate the rural areas of the country that otherwise might sit vacant.

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Tips to Purchase a House with Little Money Down and a Low Credit Score

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You want to buy a home, but you know you have a low credit score and little money to put down on it. This sounds like a recipe for disaster. What lender will give you a loan, right?

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Luckily, there are several loan programs you can turn to, all of which are government-backed loans. These loans carry a guaranty from the government. This means the government entity will pay the lender back a portion of the proceeds they lose if the borrower defaults. Because of this guaranty, lenders are able to write and fund loans for borrowers that would otherwise be ineligible for one.

Below are the most common loans that allow low down payments and low credit scores.

FHA Loans

FHA loans have a reputation of being a first-time homebuyer’s loan. While it certainly can be used for that purpose, it’s open to anyone that meets the FHA criteria.

One of the most notable facts about the FHA loan is the low down payment requirements. You only need to put down 3.5% on the home to secure FHA financing. On a $200,000 home, that’s $7,000. That may still seem like a lot, but there’s another catch. You don’t have to put any of your own money down on the home; 100% of the funds can come from an acceptable gift source. This may include relatives, your employer, or a charitable organization.

FHA loans also have the reputation of allowing low credit scores. Today, you only need a 580 credit score to secure FHA financing. That’s 100 points less than conventional loans require. With at least a 580 score, you can get away with putting down just 3.5% on the home.

The FHA also allows an exception when it comes to credit scores. They allow lenders to fund loans for borrowers with a credit score as low as 500. In exchange for the lower credit score, though, the down payment requirements increase. You would need 10% down on the home in this case. You can still accept gift funds to help with the down payment, but 3.5% of the down payment must come from your own funds.

USDA Loans

USDA loans are another government-backed loan with a guarantee. The credit score requirements for this program are slightly higher, but still lower than conventional loans. Today, you need at least a 640 credit score to qualify.

With that 640 credit score, you can obtain 100% financing for a home. This means you don’t have to put any money down on the home. The only money you would have to bring to the closing is the money for closing costs and the upfront mortgage insurance the USDA charges. The upfront mortgage insurance is equal to 1% of your loan amount. On a $150,000 loan, you would owe $1,500 for upfront mortgage insurance. You would also pay 0.35% of the loan amount per year on a monthly basis for additional mortgage insurance.

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In order to secure a USDA loan, though, you must buy a rural property. The USDA has loose guidelines when it comes to defining rural properties, though. Looking at their map, you may find areas that are just outside of the city lines that qualify, which you may not even think would be rural.

VA Loans

If you are a veteran that served our country for at least 90 days during wartime or 181 days during peacetime, you may be eligible for a VA loan. You may also be eligible if you served in the National Guard or Reserves for at least 6 years.

The VA loan provides 100% financing for eligible veterans. This means you don’t need your own down payment. You would only be responsible for the closing costs on the loan and the VA funding fee. The VA funding fee is equal to 2.15% of your loan amount if you served in the regular military and 2.4% of your loan amount if you served in the National Guard or Reserves.

The VA doesn’t have a minimum credit score that they require, like the FHA and USDA do. Because the VA doesn’t underwrite or fund the loans, though, many lenders set a minimum credit score. On average, you will find that you need a 620 to secure VA financing, however, this could vary by lender. If you have a credit score lower than 620, you may have to shop around a bit to find a willing lender.

Each of these government-backed programs gives you the opportunity to secure financing with a low down payment and/or a low credit score. We recommend that you apply with at least three lenders to find the loan program that suits you the best as well as the best interest rate/closing costs to make your loan as affordable as possible.

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2 Types of USDA Home Loans: Which One Is Right for You?

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Rural homebuyers with low to moderate income may qualify for a USDA home loan. That’s great news because this program offers 100% financing and has flexible guidelines. As you get started, though, you’ll notice that the USDA offers 2 programs – the Guaranteed and Direct loan programs.

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Which one is right for you?

The USDA Guaranteed Loan

The most common USDA program is the Guaranteed loan. It works like the FHA loan in the fact that the USDA ‘guarantees’ the loan for lenders. In other words, the USDA promises to pay the lender back a portion of the funds they lose should you default on the home. This allows USDA approved lenders to provide loans to applicants with less than perfect credit or low income.

The funds from this loan come from the lender, not the USDA. The USDA does play a role in the loan process, though. They have the final say in your approval. Once the lender final approves your loan, they must send a complete underwriting package to the USDA for their stamp of approval before they can allow you to close.

In order to be eligible (not qualify) for this loan, your total household income cannot exceed 115% of the average income for the area. The USDA looks at all income-producing adults in your home too, even if they aren’t on the loan. The USDA recognizes that multiple generations live together today and often help one another with the cost of living.

If you are eligible, you then apply for the loan with your co-borrower. Your total household income no longer plays a role. Now it’s up to you and your co-borrower to meet the following guidelines:

  • 620 minimum credit score
  • No poor economic events in the last few years including bankruptcies or foreclosures
  • Maximum housing ratio of 29%
  • Maximum total debt ratio of 41%
  • A maximum 30-year fixed rate term

You also must not be eligible for any other mortgage program. This includes FHA, conventional, or VA loans.

The USDA Direct Loan

Unlike the Guaranteed Loan, the USDA Direct Loan comes directly from the USDA. You don’t go through a lender, but rather work directly with the USDA to obtain the loan.

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Only borrowers that make between 50% and 80% of the area’s average income are eligible for this program. It’s the USDA’s attempt to help very low-income families afford suitable housing. The Direct loan is offered in 33-year and 38-year terms and the interest rate is based on the market, rather than at lender’s discretion.

In order to qualify, you must prove that you cannot qualify for financing from any other program. You must also prove that you don’t have suitable housing at the time of application. However, you must be able to prove that you can afford the mortgage payment you would owe with the Direct loan program.

Unlike the Guaranteed program, there aren’t specific credit score guidelines you must meet. As long as the USDA believes that you can’t qualify for other financing and the property is modest in size, safe, and will be owner-occupied, and you have low to very low income, you can apply for the loan.

The USDA does enforce a maximum 41% total debt ratio for this program, just like the Guaranteed program. This is to help keep your expenses in check, rather than putting you in over your head and making homeownership a burden rather than a benefit.

Typically, Direct loan borrowers don’t have to make a down payment or pay the closing costs. If the USDA can prove that you have enough assets, though, you may be responsible for a fraction of the closing costs. The average USDA Direct borrower pays around $1,000 in closing costs.

Finally, the USDA does require Direct loan borrowers to attend housing counseling. This is to make sure that you understand the debt you are incurring and how it will affect your finances moving forward. It’s the USDA’s effort to prevent a foreclosure.

The Property Requirements

Whether you qualify for the Direct or Guaranteed loan program, you must purchase a rural property. You can view the properties that the USDA considers rural on their map. The home must be modest in stature and size. It should be large enough to suit your family, but not so large that it can be considered a luxury.

If you are an average borrower with moderate income, you’ll likely qualify for the Guaranteed loan. if you have very low income and few assets, though, the Direct loan could be an option that could help you become a homeowner and hopefully better your financial position.

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Can you Get a USDA Loan if you Already Own a Home?

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The USDA loan is for low to moderate-income families that don’t have adequate housing and can’t secure any other type of financing. So what happens if you already own a home? Can you not use USDA financing?

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The answer isn’t as cut and dry as you might think. Technically, USDA loans are for owner-occupied properties only. If you have another home, you cannot use USDA financing to buy an investment home or second home. You also can’t use it to buy the home to live in and then rent out your other property. USDA financing is meant to help borrowers that wouldn’t have a place to live if they didn’t have the USDA loan.

But there are exceptions to the rule. Keep reading to see if any of the exceptions apply to you.

Your Current Home is a Mobile Home

The USDA doesn’t consider a mobile home adequate housing. In other words, you can buy a single-family home, townhome, or condominium with USDA financing. You don’t have to sell the mobile home either. But, what you do have to do is prove that you can afford the payments on both ‘homes.’ This includes the taxes and insurance as well.

Your Job Relocated You

If you own a home now, but your job relocates you more than 50 miles away from your current home, you may be able to keep the home and buy a new one with USDA financing. As long as you can prove that you will live in the new home as your primary residence and that it’s located closer to the job, you may get it approved. The scenario is up to underwriter approval, though, and each situation is on a case-by-case basis.

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Your Family Grew

It happens to the best of us – we buy a home that we think is perfect. Before long, though, you outgrow the house because your family size grew. The USDA may allow you to buy another bigger home with USDA financing and keep your current home.

Keep in mind that the USDA must approve whether you ‘outgrew’ the home. For example, let’s say you bought a 2-bedroom house and only had one child at the time. Fast forward a few years and you now have four children. That 2-bedroom home probably doesn’t suffice and the USDA will likely agree. The living space must be modest, but adequate for a family of your size.

When you Can’t Use USDA Financing Again

If the USDA doesn’t agree that any of the above exceptions apply to you, using USDA financing for another home purchase won’t work. You will need to sell the current home and then buy a new home. This doesn’t mean you can’t look for a new home while yours is on the market. But, you have to wait to close on the home until after you no longer own the first home.

If you do get approved for any of these exceptions, you must be able to prove that you can afford both mortgage payments. Again, this includes your real estate taxes and insurance on both properties. The USDA allows a maximum housing debt ratio of 29% and a maximum total debt ratio of 41%. You should keep those numbers in mind as you try to figure out if you can afford both loans.

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Can You Use PMI as a Tax Deduction?

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One of the largest advantages of owning a home is the deductions you can take on your tax returns. Oftentimes, homeowners can deduct thousands of dollars on their taxes. Understanding what is tax deductible and what isn’t can help you make the most of your situation. One thing many people overlook is the fact that PMI is a tax deduction.

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When Do You Pay PMI?

Any borrower pays PMI on loan amounts, which exceed 80% of the home’s value. If you took out only one loan for 95%, for example, you pay PMI. If, however, you took out two loans, a first for 80% and a second for 15%, you do not pay PMI. It is only on a first mortgage higher than 80% of the value of the home.

PMI is Like an Interest Tax Deduction

This year, you can deduct PMI as you would an interest tax deduction. In fact, you deduct the premiums as if they were interest. This helps to lessen your tax liability. It is not a direct credit, however. It is a deduction. This means the amount you can deduct comes directly off your income, reducing your adjusted gross income. This is the number the IRS uses to figure your tax liability.

The Maximum Income Allowed

There are certain restrictions when it comes to deducting PMI on your taxes, though. For instance, borrowers with an adjusted gross income higher than $100,000, cannot deduct the full amount of the PMI they paid. If your adjusted gross income is higher than $109,000, you cannot deduct PMI at all. The deduction is meant for the middle-of-the-road income earners.

If you make more than $100,000, whether you are single or married, the amount you can deduct decreases by 10% for every one thousand dollars. For example, if your adjusted gross income equals $105,000, you can only deduct 50% of the PMI you paid for the year.

Itemized Deductions

In order to take advantage of the PMI deduction, you must itemize your deductions on your taxes. This is the same as it is for the interest deduction. In fact, you deduct PMI in the same place on Schedule A. In the section where you deduct the interest, you will find a section titled “PMI Deduction.” This is where you enter the amount and your deduction is calculated.

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The Last Year

The PMI deduction began in 2007. This was when homeowners could deduct the premiums they paid. It was originally a part of the Tax Relief and Health Care Act of 2006. It was not meant to be a long-term deduction, but since the industry is still recovering, the deduction still exists. As of right now, though, 2016 will be the last year you can take advantage of it. If it is to continue, Congress must approve it.

The Additional Requirements

There are some additional requirements you must meet in order to take the tax deduction for PMI. The most important requirement is the date you took out the loan. The deduction is not applicable on any loans prior to January 1, 2007. In addition, if you refinanced during that time, the PMI you can deduct is only the loan amount for the initial outstanding principal. If you took any cash out of the equity of your home, you cannot deduct the PMI on that money.

If you have a second home, you may be able to deduct the PMI you pay on that home as well. This is true as long as you use the home for your own use. It could be a second home or a vacation home. If it is an investment home, however, it is not eligible for the deduction.

Canceling PMI

While it might be disappointing that the PMI tax deduction may go away after this year, remember you can cancel PMI. As soon as your loan is less than 80% of the value of the home, you no longer have to pay this insurance premium. It is up to you to determine when this happens, though. The lender is not required to automatically cancel your PMI until the LTV hits 78%. This could leave you paying unnecessary insurance premiums for a while.

There are several ways for you to cancel your PMI. You can pay for a new appraisal if you think the value of your house increase recently. This helps you to cancel PMI faster. While you won’t have the tax deduction any longer, you will save a lot more by not paying the premium any longer. If you want to take care of it faster, you can also refinance your loan. As long as you use a rate/term refinance, rather than taking cash out of the equity of your home, you may be able to cancel PMI faster.

Paying PMI might seem like a pain, but it has its advantages. First and foremost, it makes it possible for you to purchase a home. Without PMI, you might not be eligible for such a high LTV. Secondly, it gives you a break on your tax liability. In today’s day and age, tax deductions are hard to come by, making the PMI deduction worth quite a bit. Even if you only save a few hundred dollars on your taxes, every penny helps when you are trying to save money!

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