For an applicant to qualify under USDA eligibility guidelines, the following conditions must be met. The applicant must be able to occupy the property to be purchased using the USDA guaranteed rural development loan. The applicant must be a citizen of the United States or should be a permanent resident (Green Card holder). Applicants who do not intend to reside at the dwelling are not allowed to be co-borrowers on the mortgage loan. If the borrower currently owns a property, then he/she may be expected to sell the existing home before being allowed to be considered for a USDA loan.
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Income Requirements for a USDA Mortgage
The income requirements that must be satisfied to qualify for a USDA loan are flexible and easy to meet. A borrower or borrowers on the application must be able to demonstrate income history for at least 24 months (past 2 years). Additionally, it must also be shown that income can be dependable and adequate going forward.
To determine your eligibility for a USDA home loan, make sure you understand the manner in which the income is calculated for qualification purposes. USDA Rural Development allows for two ways in which income is computed. They are:
All the income from all sources for all the applicants (borrower and co-borrowers) is factored into this. Income from employment such as salary, bonuses, overtime, tips, child support, alimony, disability payments, part-time salary is included. The total amount or gross income will be used as the denominator in the debt-to-income ratios under USDA loan income guidelines.
Adjustable income is determined after calculating the eligibility income of the entire household. From this gross figure USDA allows for certain deductions to be made to arrive at the Adjustable Income. In order to qualify,the Adjustable income should not exceed 115% of the median household income for the area in which the property is located.
For each minor child under 18 years of age, a deduction of $480 is allowed. The same amount is allowed for each member of the household that is disabled or handicapped. This deduction doesn’t apply for the applicants on the loan. If the household has a full time student above 18 years, $480 can be deducted. For Elderly people (>62 years) in the household, $400 can be deducted.
Special provisions are also made for families that have medical and child care expenses. For kids under 12 years or under, the entire cost pertaining to child care expenses can be deducted, provided the supporting documentation is presented. If the total expense related to medical care for an elderly family member exceeds 3% of the gross annual income, then it is allowed for a deduction to arrive at the adjustable income.
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If the qualifying debt-to-income (DTI) ratios are within the acceptable range, then the borrower should not have any issues. The housing cost (PITI) must not exceed 29% of the gross monthly income and should also not exceed 41% when combined with other monthly debt repayment amounts.
Student loan payments must also be included in calculating the debt ratios even if the payments are currently in deferment. An increase in borrower’s income can only be considered if it is expected to occur within two months from the due date of 1st monthly mortgage payment. Debts with more than six outstanding payments must also be added in income eligibility determination.
Higher ratios are approved on a case-by-case basis depending on any other compensating factors unique to the borrowing individual. An excellent history with a credit score that is higher than 660 or a long and stable employment history or higher assets/savings can be used by a USDA lender to justify approving a loan with higher ratios.
Income Verification / Documentation
For full-time employees, the income verification for a USDA mortgage can be done in a number of ways. Recent pay stubs that cover a period of at least one month along with a written VOE (Verification of Employment) or W-2s from the last two years can be used to document income.
Self employed borrowers can document USDA income requirements by submitting their full tax returns (1040s) for the preceding two years. Borrowers who receive social security or disability benefits can use it towards income requirement. In order to document it, they need to present the award letter (3 years continuance) or show bank statements that reflect the benefit payments. The deposited amount is grossed to 125% to account for taxes.
If an applicant receives child support income or alimony payments, a 12 month history along with a continuity for 3 years is necessary. If a part-time employment income is going to be used for income qualification, it is required to show for a minimum duration of 12-months.
To qualify for a USDA loan, the total income of both the borrower and their non-purchasing spouse must stay within stipulated limits for the given area in which the property is located. Check the USDA income limits prior to approaching a lender for pre-approval.