USDA loans provide 100% financing for low to moderate income families. It’s a program that is meant to be a ‘last resort.’ In other words, if you qualify for any other program, you cannot use USDA financing. If you do qualify, though, you probably want to know if there is a maximum loan amount.
Technically, the USDA does not maximize how much you can borrow. However, they do so in a roundabout way. They restrict who is eligible for the program based on their income. If you make more than 115% of the average income for your area, you don’t qualify. Restricting the amount of income a family can make essentially restricts the loan amount. Since the USDA allows housing debt ratios of 29%, your max loan is whatever payment doesn’t exceed 29% of your income.
The USDA Income Limits Determine your Loan Amount
The typical one to four-person household has income limits of $78,200. This will vary by county, but using this generic number, you can see that the typical family would qualify for a loan amount of $1,889. This includes principal, interest, taxes, and homeowner’s insurance and the USDA annual insurance.
This gives you an idea of how you can figure out what your maximum loan amount would be. Once you know your monthly gross income, multiply it by 29% to determine your maximum housing payment. Before you get too excited, though, you’ll have to figure in your other monthly debts too. The USDA allows a maximum debt ratio of 41%. This means the new mortgage payment plus your other monthly debts cannot exceed 41% of your gross monthly income.
Determining Your Eligible Income
The USDA looks at income eligibility a little different than they do for qualifying. Be prepared for them to ask for proof of income for everyone in your household. This includes those that are not going to be on the loan. Eligibility is based on the total household as the USDA recognizes that other household members may contribute to the household expenses.
For example, if you have four adults living in your home, all 4 incomes must be used to determine eligibility. The USDA does allow for certain allowances, though. If you have children, disabled relatives, or elderly relatives living with you, you can deduct $480 for children and the disabled and $400 for the elderly. This allows you to account for the costs associated with caring for them.
Qualifying for a USDA Loan
Aside from the income requirements, you’ll have other requirements you must adhere to in order to secure USDA financing.
First, you’ll need to buy or refinance a home in a rural area. You can view the USDA map to see which areas are considered rural. The USDA bases their decision on the latest census tract.
You’ll also need to prove that you can afford the loan by providing your last 2 paystubs and the last 2 years’ worth of W-2s or tax returns. The lender must determine that your income is not only steady, but likely to continue. They base this on your historical income patterns. If you did not have steady income over the last two years, you may not show the consistency the USDA needs.
Finally, you’ll need a minimum credit score of 640. This is a USDA rule, but some lenders may require a slightly higher score. Since 640 is considered a poor score, it’s safe to say that the USDA loan is rather forgiving. Lenders are able to give loans to ‘risky borrowers’ because of the USDA guarantee. The USDA will help the lender out if you default on the loan.
While there’s not an exact maximum loan amount for USDA loans, it is fairly restricted. The USDA only allows use of the program to purchase a ‘modest home.’ Anything considered luxurious or unnecessary will make a home ineligible for the program. So while they don’t have maximums, they have other restrictions in place that can help keep the loans to a minimum.