The USDA loan provides low-income families with the ability to purchase a home. The USDA’s goal is to provide all families with safe and sanitary housing without requiring families to rent. Because the program began to help families and the USDA insures the loans for approved lenders, there are specific guidelines including USDA household income limits. If your household income exceeds these limits, you are not eligible for USDA financing and must secure financing from another entity.
How the USDA Household Income Limits Work
Every area has maximum income requirements. If your household income exceeds those limits, you are automatically ineligible for the program. This works the opposite of most other programs where the more money you make the better. This does not mean USDA loans do not have specific debt ratio guidelines, but they are more flexible with those guidelines than with income requirements.
The USDA determines the median income for every eligible area of the United States. Any household eligible for USDA financing cannot make more than 115% of the amount for their area. The good news is the USDA has categories for each household size. For example, a family of 4 will have a lower maximum than a family of 8, simply because it is more expensive to feed and care for a family of 8 than it is for a family of 4.
When you calculate your household income, you must include money which any household member over the age of 18 brings into the home. This includes extended family who may live with you, such as parents or other relatives. The household income amount is not used for qualifying purpose, such as to calculate your debt ratio, though. It is simply used to determine if you meet USDA guidelines.
There are allowances you can deduct from your total household income based on the people who live in your home aside from the borrower or co-borrower. These additional household members can help decrease the amount of income the USDA counts to include you in the USDA program.
Kids provide you with the largest deduction on your USDA income. For every child under the age of 18 living with you, deduct $480. This means if you have 3 children, you can deduct $1,440 from your income! For many people, this deduction helps make them eligible for USDA financing.
Even if you have children over the age of 18 living with you, they may provide you with an allowance. If any of these children attend school full-time, you may deduct $480 for them as well. This is in addition to the $480 for any child under the age of 18.
Disabled and Elderly Household Residents
Even if you do not have children living with you or they do not provide you with enough of an allowance for your income to qualify, there is still hope. If you have any elderly or disabled residents in your home, you receive additional allowances. Disabled household residents receive a $480 allowance and elderly household residents receive a $400 allowance.
The amount of the allowance comes right off of the top of your gross annual income. For example, if you have 2 children under the age of 18, 1 child over the age of 18 who is a full-time student and 2 elderly parents living with you, your total allowance equals $2,240. If your gross annual income equals $78,000 and you live in the Chicago Metro Area, you would not qualify based on your annual gross income. The maximum amount for a family of 7 in this area equals $76,250 according to the USDA map. However, with the allowances, your gross income equals $75,760, which qualifies you for the program.
The $75,760 and the $78,000 do not equal the income the lender will use to qualify you for the loan, though. They will only use the income from the borrower and co-borrower to qualify for the loan. The lender may consider the additional income a compensating factor; however, if your debt ratios are close to the maximums allowed.
Proving your Income
Proving your income for a USDA loan works the same as any other loan program. You need to fully verify your income with paystubs, W-2s or tax returns. If your income originates from the government, such as social security or disability, you will need to provide your award letter and proof of receipt of the income with your bank statements. Similarly, if you receive child support or alimony, you need to provide the court order as well as the proof of receipt as you would for government income.
The USDA program provides you with a simple program with no down payment requirements and simple to follow USDA household income limits. If you are a low-income family or a family with multiple people living with you, this program could help you afford a home in a rural area. The rural boundaries are much broader than most people realize, giving many people the opportunity to own safe and sanitary housing in areas which are not quite as “country” as they anticipated.