The USDA loan provides you with flexible financing for homes in a rural area. The USDA determines the areas that are rural. If you qualify for a loan, you receive 100% financing and very liberal underwriting guidelines. The USDA does have strict requirements regarding who is eligible for the program, however, they do not have specific USDA Guaranteed loan limits.
Eligibility for the USDA Loan
The USDA does not set specific loan limits for their program. Instead, they limit who can qualify for the program. This is different than qualifying for a loan. Everyone that is eligible must still qualify. However, in order to be eligible, you must meet the following requirements:
- Purchase a home in a rural area according to the USDA map
- Your household income cannot exceed the limit for your area
The USDA looks at your entire household’s income – not just the applicant and co-applicant’s income. This means if you have children, parents, or other relatives living with you, their income counts too. When you total up the income of the household, you can take off for certain scenarios. They are as follows:
- $480 for each child under the age of 18
- $480 for each child over the age of 18 who is a full-time student
- $480 for each disabled person living with you
- $400 for each elderly person living with you
Once you calculate your total household income including the allowances, you can compare it to the USDA’s chart. They break down the maximum allowed income by area. They base it on the average median income for the area. The USDA loan is for low and very low-income families, which is why the income matters so much.
Figuring Out What you can Afford
Once you know you are eligible for the program, you must figure out your maximum loan amount. This works the same as any other loan program. You must focus on your debt ratio. Start by figuring out the qualifying income you can use for the loan. This differs from your eligibility income. You only add the applicant and co-applicant’s income. Keep in mind, you use your gross monthly income. This is income before taxes.
Here are a few tips to help you calculate your income:
- If you work on salary, divide your annual salary by 12 to get your gross monthly income.
- If you work hourly, multiply your hourly wage by 40 (if you work full-time) and multiply that number by 52. You then divide the number by 12 to arrive at your gross monthly income figure.
- If you work hourly, but do not work 40 hours, use the same calculation as above, except multiply by your average number of hours. You can figure the average hours by looking at your paystubs from the last 2 months and adding up the hours. Take the total hours and divide them by 8 weeks to see your average weekly hours.
- If you work on commission, you will need your tax returns for the last two years. Take your adjusted gross income for each year, add them together, and divide by 2. This is your annual income. You then divide this number by 12 to arrive at your gross monthly income.
This income is what you use to calculate your debt ratio. Next, you must figure out your total debts. These are debts that report on your credit report. Think of things like credit cards, student loans, and car payments. Bills like utilities, groceries, phone bills, and tuition do not report on your credit report so you do not have to include them.
Once you have your total monthly obligations, divide that number by your gross monthly income. This equals your debt ratio. When you add your potential mortgage payment into the debt, your total debt ratio should not exceed 41%, but there are some exceptions. However, this total should help guide you to the USDA Guaranteed loan limit for your situation.
Modest Housing is a Part of the USDA Guaranteed Loan Limits
No matter how low your debt ratio is, though, the USDA does limit your home purchase to a modest home. The home should be modest in value and design. This means a home you can comfortably live in for your family size without too many luxurious accommodations. This is because the USDA guarantees these loans in order to help people with low income obtain safe and sanitary housing.
The USDA Guaranteed loan limits for your situation will differ from the next person’s. Figure out your own loan limits by using our calculations above. Pay close attention to your income and debt ratio, but only commit to a mortgage you know you can afford, no matter how high the USDA allows your debt ratio to be for loan approval.