The USDA loan offers you the opportunity to purchase a home with no down payment. It is a great program with many flexible options. However, there is a catch. You cannot make more than the amount set by the USDA for your area. You can find the limits for your area here. The good news is there are ways to get around the USDA household income limits.
Qualifying for a USDA Loan
Qualifying for a USDA loan works a little differently than any other loan type. With this loan, you cannot exceed a certain amount of income. However, you still have to meet required debt ratios as well as credit score, appraisal, and asset guidelines. This means you have to have income and debts which fall in line with the USDA guidelines. Because the program began to help very low income families get into a home, they do not provide the zero down payment program to those who could qualify for a different program.
Calculating Household Income
One major difference with the USDA loan is how they look at your income. They realize many families that have small incomes have other family members live with them. Because of this, the USDA allows household income for eligibility purposes. This differs from qualifying income, however. Eligibility income is the income your entire household makes. This is regardless of age. If you have teens in the home that work, their income counts towards your eligibility income. The same is true if you have older parents living with you or any other relatives. All household income counts towards your eligibility.
The Allowances for USDA Household Income Limits
Adding up every household member’s income might sound like it would put you right over the edge for qualifying for a USDA loan, right? Luckily, there are allowances the USDA allows. These allowances come off the top of your eligibility income. This means even if your household makes more than the limit for the area, they may still be eligible.
How Age Matters for USDA Allowances
The USDA cares about the age of the people in your household for eligibility purposes. For example, if there are 4 people in your home, 2 adults, and 2 children under the age of 18, you likely only have 2 incomes. However, you can reduce this income with the child deduction you can take. For every child under the age of 18, you can deduct $480 off your income. This reduces your total income and can help you become eligible for a USDA loan.
Let’s look at another example. This time there are 6 family members – 4 adults and 2 kids under the age of 18. The two extra adults are your parents. They are each 70-years old and do not have an income. In this case, the USDA would use the income of yourself and your spouse. From that income, they would subtract $480 for each child and $400 for each of your parents. This gives you a total of $1760.
One last way age matters for your USDA allowances is with children over the age of 18. If your children still live with you beyond 18 years old, you can use them as a deduction if they attend school full-time. This works whether or not your child contributes to the household income. In order to use this deduction, however, you must have official proof from the school that your child is enrolled full-time.
Using Childcare to Reduce Income
If you and your spouse work full-time and you pay for childcare, you may be able to deduct your childcare expenses from your income. This works as long as you have official proof of the payments. Most lenders require you to provide your tax returns. This means you must claim childcare on your taxes in order to use the deduction. If you don’t claim it on your taxes, you may be able to provide receipts or canceled checks for the payment.
Using Disability Income
The last way to reduce your household income is if someone in your household has a disability. If this is the case, you must prove the disability and the expenses. You can start with USDA Form RD 1944-4. This helps to verify your disability. In addition to this form, you will need to provide proof of your expenses. If you can fully verify the disability, you may be eligible to receive a $400 deduction on your eligibility income.
The income you use to qualify for the loan differs from your eligibility income. The only income the lender needs to verify for loan processing is the borrower and co-borrower’s income. Your children’s income or income of any other family members will not count. The USDA calculates the eligibility income because they know low income families tend to live with multiple people in the home and everyone contributes to the housing expenses. This helps lower income families gain eligibility for the USDA program, which does not require a down payment.
The USDA household income limits are in place in order to avoid anyone from taking advantage of the program. Because it does not require a down payment, many people would prefer to use it; however, it is only for low income families. The USDA makes it possible for families even with higher incomes to qualify, though, as long as they meet one of the above requirements. The premise behind the program is to help build up rural areas which would otherwise go untouched for long periods, allowing the areas to depreciate.