Qualifying Income for USDA Loans

What You'll Learn in This Article

• USDA Annual Household Income
• Adjusted Annual Income
• Repayment Income
• USDA Loans & Income

The USDA loan program was designed to help homebuyers in rural areas purchase a home with no money down. Homebuyers pursuing USDA loans must choose certain property locations and fulfill certain income requirements.

Lenders can help prospective buyers better understand their income eligibility, in part because the USDA loan requirements considers income in several different but important ways.

A borrower’s USDA income eligibility depends on three income calculations:

1. USDA annual household income: Annual household income refers to your total projected household income. When calculating annual income, your lender considers the income of every adult earner (18 and older) in the household, whether they are co-borrowers or not.
2. Adjusted annual income: Your lender calculates adjusted annual income by subtracting qualified deductions from annual household income. USDA qualifying income compares adjusted annual income to the regional median income to ensure you’re within the USDA's income restrictions.
3. Repayment income: Repayment income includes any verifiable monthly income provided in the loan application for loan qualification purposes. This is the income lenders use to evaluate your debt-to-income ratio and whether you can afford your loan over the long term.

USDA Annual Household Income

The USDA loan program was created to provide a path to homeownership for low- to moderate-income Americans living in non-urban areas. USDA income requirements help keep USDA loans accessible to those who need them most. Read on for more information about USDA loan income limits.

Income Limits

Though income restrictions for USDA loans can vary by region, the loan program sets basic guidelines. USDA income limits 2025 are:

• Less than $112,450 for a household of 1 – 4 people
• Less than $148,450 for a household of 5 – 8 people

USDA annual income limits are higher in areas where the cost of living exceeds the national average.

Remember, each adult occupant's income will be considered when determining USDA income eligibility. That being said, certain types of income are always excluded from this calculation. Some common exceptions include:

• Section 8 or payments from other housing assistance programs
• Income earned by a full-time adult student that exceeds $480
• Income earned by a minor occupant
• One-time inheritance, capital gains, or insurance payouts
• Income earned by live-in aides

Determining the annual household income is an important step, but it isn't final when determining whether a borrower meets USDA income guidelines. Some income streams can require a more detailed look.

Unique Income Situations

It can be relatively simple to document earnings from Social Security or a salaried position, but some cases aren't so straightforward. Here's how the USDA handles a few common situations:

Farm Income

As a general rule, a farm's net operating income will be added to the USDA annual income calculation. Farm expenditures cannot be used as a deduction in determining income. A net loss counts for $0 and can't be used to offset other income types. However, deductions will factor into the adjusted annual income figure. Farmers can deduct property depreciation that occurs as a result of normal wear and tear.

Business Income

Net operating income will be considered when making a USDA income eligibility determination. A net loss counts for $0, but deductions for verifiable unreimbursed business expenses will be taken into account for the purpose of determining adjusted annual income.

Income-Producing Properties

Qualifying income from an income-producing property will be calculated based on historical tax filing data. Plan to account for net operating income and remember that certain deductions may factor into the adjusted annual income.

Overtime and Seasonal Employment

Individuals with fluctuating income on a seasonal or year-over-year basis should use historical data to calculate their USDA qualifying income.

For example, a seasonal worker that earned $5,000 each fall for the last two years might project an additional $5,000 in seasonal earnings for the upcoming year.

Assets

Income-generating assets held by any adult occupant can be evaluated to assess USDA qualifying income. Some common income-generating assets include:

• Investment accounts or properties
• Trust funds
• Proceeds from the sale of real estate

Cash and bank account balances may also be considered. Large deposits or account holdings that seem unusual compared to a borrower's monthly earnings could signal income that is otherwise unaccounted for and may require additional verification.

Cash value for retirement accounts, life insurance policies, and personal property generally won't be considered when calculating USDA qualifying income.

Adjusted Annual Income

You'll use your adjusted annual income to find out if you meet the income restrictions for USDA loans. Adjusted annual income is calculated by subtracting any applicable deductions from your annual income.

There are five qualified deductions that can be used to reduce annual income:

• Dependent deduction: You can deduct $480 from annual income for every dependent who will use the new home as their primary residence.
• Child care expenses: You can deduct unreimbursed child care expenses for children 12 and under. Child care expenses qualify only when the care enables a family member to work outside the home.
• Elderly household deduction: You can deduct $400 from the annual income if a party to the note is at least 62 or is a person with a disability.
• Deduction for the care of household members with disabilities: You can deduct unreimbursed expenses for the care of a disabled person that exceeds 3% of the annual household income.
• Deduction for medical expenses: Elderly households can deduct unreimbursed medical expenses that exceed 3% of the annual household income when combined with any disability assistance expenses.

Your adjusted annual income can't exceed 115% of the median income in your region. USDA income limits vary depending on the size of your family and location and are subject to change every year.

Repayment Income

Repayment income helps USDA lenders assess the creditworthiness of potential homebuyers.

From a lender's perspective, it's crucial to verify that a borrower has enough stable income to make on-time mortgage payments every month.

Lenders decide how much money an individual can borrow by comparing their repayment income to their monthly expenditures. This basic calculation is called a debt-to-income ratio, or DTI.

The agency publishes a standard 41% DTI guideline for USDA loans. That means they recommend borrowers spend no more than 41% of their monthly income on debts, including the proposed monthly mortgage payment, but there is some built-in flexibility.

When it comes to USDA loans and repayment income, lenders have the ultimate say in what it takes to qualify for financing. It is possible to get a USDA home loan with a DTI higher than 41%, assuming a borrower has qualifying credit and assets.

Calculating Repayment Income

Repayment income includes stable, dependable income that is verifiable by a third party. Let's take a look at how to calculate monthly income for some common repayment sources:

USDA Loans & Income

USDA income limits can be confusing, in part because evaluating eligibility isn't a one-step process. It’s wise to talk with lenders that truly understand this program. A trusted USDA lender can walk you through the process and help you evaluate all of your mortgage options, including this powerful $0 down loan.

Talk with a trusted USDA lender today.