The USDA Rural Loan gives you access to flexible and affordable financing on a home within a rural area. The program is strictly used for primary residences, however, as one of the largest stipulations of the program is that you do not currently have decent, safe, and clean housing. Using the loan twice would not meet those requirements, which would make you ineligible or a second loan with this program. The idea behind the program is to help the economy and increase the quality of life in certain areas; it is not to help borrowers make a profit on investment homes or purchase a second home as a vacation home.
USDA loan eligibility depends on a variety of factors that are unique to this loan program. The standard requirements still preside, including the need for a particular credit score and debt ratio; however, the program also requires a particular geographical location for USDA financing as well as specific household sizes/incomes. Because it is a low-income program, income ceilings exist in order to prevent people from taking advantage of the low costs and interest rates of the loan. Every area of the United States has a different income ceiling as the USDA parameters state that the total household income cannot exceed 115 percent of the average income for the area. This amount would greatly differ from a county in California and a county in Missouri, for example.
Total Household Income Matters
Unlike other loans, the USDA qualification guidelines require that you include all household income to determine your eligibility for the program. This is different than the “qualifying” income which is used to determine your interest rate and whether or not you are a good risk for financing. Eligibility income is the total income of everyone in the home; this includes children that are of age and have a job as well as any other extended family members that reside with you. Their income must be figured into the eligibility income to determine if your total household income is within the 115 percent of the average income for the area. In this case, if your household income is too high, you would not qualify for the loan because the USDA assumes that you would have access to other loan programs with a higher income bracket and USDA loans are reserved for low to moderate income families.
The USDA breaks down the income limits into 3 categories: very low income; low income; and moderate income. It is the families in the moderate income bracket that qualify for a guaranteed loan, which is a loan similar to the FHA loan. The USDA guarantees the loan for the lender, which means they will pay the lender if you were to default on the loan in the future. This allows the lender to take a few more risks than they would likely take if they were on the hook for the mortgage on their own as it would be too risky to lend to a large number of borrowers with a risky loan profile.
The borrowers within the very low and low-income brackets might be eligible for a different type of USDA loan, called a Direct loan. In this program, the borrowers are eligible to receive a subsidy of sorts to help lower their mortgage payment temporarily so that they can secure decent housing without making it very difficult to afford.
In addition to the different income brackets, the USDA breaks income down by family size. The amount of income your household is eligible to have and still qualify for a USDA loan goes up for every household member that you have. The USDA guidelines go up to an 8-person household, but if you were to have more than 8 people in the house, you would adjust the income upwards 8% of the 4-person household for your area for each person you have over the 8-person limit.
Just as there is a ceiling for USDA loan income eligibility, there are income allowances that you can take in order to decrease your gross monthly income, helping you to qualify for a home in your area. The allowances are as follows:
- If you have children living with you that are under the age of 18, decrease your income $480 for every child
- If you have children living with you that are over the age of 18, but are full-time students, decrease your income $480 for every child
- If you have family members living with you that are disabled, decrease your income by $480 for every disabled person
- If you have family members living with you that are considered “elderly”, decrease your income by $400
These deductions allow you to lower your eligibility income, enabling you to meet the income ceilings a little easier.
Because the USDA loan program is for people that cannot afford any other type of financing and live within a rural area, it makes sense that the program has income limits. Unlike other programs where the more you make, the better off you are, this program restricts your income. This prevents the program from being abused by those that could afford any other type of financing, though, since the USDA guarantees the loans and funds the program in order to better certain areas of the country. If you are within the income limits of the USDA loan requirements and have found a home that is considered rural, it is well worth it to look into the benefits of a USDA loan!