USDA loans are known for their extreme flexibility in underwriting, but one area they do not offer flexibility is their income guidelines. USDA income eligibility is straightforward and unyielding, meaning that you have to fit within the guidelines in order to qualify, no questions asked. So how do you figure out if you are eligible? Here’s a quick rundown.
USDA Income Eligibility Calculations
The USDA provides an income chart for every county within the United States so that you can effectively determine your eligibility based on your household income. However, it is not enough to visit the chart and calculate your gross household income. In order to make things fair, the USDA allows certain allowances in order to make it easier to meet the requirement of 115% of the median income for the area.
Calculating USDA income starts like this:
- Determine the annual income of your household. This means all income that comes into the house from the applicant, co-applicant, and all other household members that are not on the loan. The exception to the rule is any aides that reside in the home or foster children or foster adults; their income does not need to be included.
- Income that does not need to be included is as follows: payment received for any type of foster care; any minor’s income; fringe benefits from an employer; vouchers from Section 8 housing; financial aid for student education; gifts; insurance payments.
- From your annual income, you can then deduct the allowances as follows:
- $480 for any child under the age of 18 or any disabled individual living with you that is not on the loan
- $480 for any child over the age of 18 that is a full-time student
- $400 for any elderly person residing with you
The final number you come up with is your eligibility income and can be compared to the income eligibility map, which can be found here.
Income Stability
Just like any other loan program, the USDA requires that your income is expected to be stable and steady. They do not have a particular amount of time that you must have been at a specific position or making your current income. However, the underwriter should be able to determine that your income is stable and is likely to continue for at least the next two years.
If any income is considered to be unstable or not eligible to continue for the next two years, which could be the case for contract income or child support, the income cannot be used for qualifying purposes in terms of repaying the loan. However, the income still must be calculated to determine if you meet the income requirements for the area. If your income is more than 115% higher than the income for the area, you will not be eligible for a USDA loan.
The Difference Between Qualifying Income and Eligibility Income
There is a large difference between qualifying income and eligibility income that you should be aware of when you apply for a USDA loan. Eligibility income is the first type of income you should be concerned with as it determines whether or not it makes sense to apply for a USDA loan. This is the income that is the total of everyone’s income in the household, regardless if they are on the loan or not. This is the income where you deduct the above allowances and determine if you fall within range.
Qualifying income, on the other hand, is the income that you use to meet the required ratios for the loan. This can only be the income of the people that are on the mortgage note – namely the borrower and co-borrower. So for example, if grandma lives with you and she works part-time to keep herself busy, her income must be included when determining if you make too much money to qualify for a USDA loan. But if grandma is not a borrower on the application, her income cannot be used to lower your debt ratio.
The USDA Income Eligibility guidelines are different from any other loan program, but if you fall within the guidelines you will find their underwriting restrictions to be one of the most flexible. If you find a home within the rural boundaries that the USDA determined, it is to your benefit to use this 100% financing program.
