The USDA income requirements are easy to meet, especially if you are a low to moderate income family. The USDA program works a little differently than other programs in the sense that the less you make, the more eligible you become for their financing. The key is making within 115 percent of the average income for your area while being able to keep your debt ratios no higher than 29 percent on the front-end and 41 percent on the back-end.
Calculating your Income
The USDA program requires lenders to calculate your full-time income on a yearly basis and then divide it equally amongst 12 months to figure your gross monthly income. If you have a part-time job, and have held that position for at least 12 months, you can use the money you make there to help lower your debt ratio. In order to prove and calculate the amount of money you make per year/month, you will need to provide proper documentation.
- If you are salaried, you can provide W-2s for the last two years as well as your most recent paystubs that equal out to one month worth of wages. Some lenders will also require a proper Verification of Employment, which is a form your employer completes that verifies your start date, that you are currently employed, and your current salary. If you are expected to receive a raise and need the higher earnings to qualify, the raise must occur in the next 2 months and your employer must document it in writing for you to be able to use it.
- If you are self-employed, you will need to provide your tax returns for the last 2 years. This includes all schedules, not just the 1040. The lender will need all schedules in order to include all business expenses you write off as they come off of the top of your income and are not able to be used for qualifying purposes.
- If you receive any other type of income, such as social security, disability, alimony, or child support, you will need to provide proof of the compensation with the award letter along with proof of receipt of the money with your bank statements. Most banks require you to provide 12 months’ worth of bank statements to document it. In addition, you will need to provide proof that you will continue to receive this income for the next 3 years. This can be with a letter or court order.
After the lender calculates the gross amount of money you make per month, they will take off any allowances you qualify to receive. These allowances lower your pay, making it easier to meet the need to make no higher than 115 percent of the median income for your area. The deductions allowed are as follows:
- Every child under the age of 18 that lives with you provides you with a $480 deduction
- Every child over the age of 18 that is a full-time student and that lives with you provides you with a $480 deduction
- Every disabled family member residing with you provides you with a $480 deduction
- Every elderly family member residing with you provides you with a $400 deduction
Once you deduct the allowances from your gross monthly income, you have your qualifying income for USDA loans. As you can see, the calculations work a little differently than other loans, but the concept is the same – you need to be able to prove that you can afford the loan and any subsequent debts you already have while still living comfortably.