The USDA loan program was designed to help homebuyers in rural areas purchase a home with no money down. Along with restrictions on property locations, there are income restrictions for USDA loans.
Lenders can help prospective buyers better understand their income eligibility, in part because the USDA loan program considers income in several different but important ways.
There are 3 income calculations considered in determining a borrower's USDA income eligibility:
- USDA Annual Household Income - the total projected household income. When calculating annual income, every adult earner in the household will be considered.
- Adjusted Annual Income - is calculated by subtracting qualified deductions from the annual household income. USDA qualifying income is determined by compared adjusted annual income to the regional median income. This is critical because of the USDA's income restrictions.
- 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 affordability picture.
USDA Annual Household Income -
Many USDA homebuyers wonder why there are income restrictions for USDA loans.
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.
Though income restrictions for USDA loans can vary by region, the loan program sets basic guidelines.
In general, USDA income limits are defined as:
- Less than $103,500 for a household of 1 – 4 people
- Less than $136,600 for a household of 5 – 8 people
USDA annual income limits are higher in areas where cost of living exceeds the national average.
USDA annual income is a projection of the total income earned by every adult member of a given household.
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 of the common exceptions are:
- 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 the final one when it comes to determining whether a borrower meets USDA income guidelines. In addition, some income streams can present challenges or otherwise 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:
As a general rule, the farm's net operating income will be added to the USDA annual income calculation.
A net loss counts for $0, and can't be used to offset other income types. However, deductions will be factored into the adjusted annual income figure. Farmers can deduct property depreciation that occurs as a result of normal wear and tear.
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 income that fluctuates 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 earning for the upcoming year.
Income-generating assets held by any adult occupant can be evaluated for the purpose of assessing USDA qualifying income. Some common income-generating assets include:
- Investment accounts or properties
- Trust funds
- Proceeds from the sale of real estate
Cash on hand 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.
Questions about whether you qualify?Find a USDA lender who can work with you every step of the way. →
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: Deduct $480 from annual income for every dependent who will use the new home as their primary residence.
- Child care expenses: Deduct unreimbursed child care expenses for children under 12. Child care expenses qualify only when the care enables a family member to work outside the home.
- Elderly household deduction: Deduct $400 from the annual income if the head of household, spouse, or another mortgage co-borrower is at least 62 or is a person with a disability.
- Deduction for the care of household members with disabilities: Deduct unreimbursed expenses for the care of a disabled person which exceed 3% of the annual household income.
- Deduction for medical expenses: Elderly households deduct unreimbursed medical expenses that exceed 3% of the annual household income.
In order for your income to qualify for the USDA requirements, your adjusted annual income can't exceed 115% of the median income in your region.
Keep in mind that USDA income limits vary depending on the size of your family and location. They're also subject to change every year.
Repayment Income -
There's a big difference between USDA annual income and repayment income. Annual income is used to determine USDA eligibility, while repayment income helps 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:
|Income from Regular Employment|
|Hourly||1. Multiply hourly rate by average weekly hours||2. Multiply by 52 weeks||3. Divide by 12 months|
|Weekly||1. Multiply weekly income by 52 weeks||2. Divide by 12 months|
|Biweekly||1. Multiply the two weeks income by 26 pay periods||2. Divide by 12 months|
|Twice Monthly||1. Multiply the semi-monthly income by 24 pay periods||2. Divide by 12 months|
|Monthly||1. Use the monthly income from your pay stub||2. Multiply 12 months|
|Less than 12 months/year||Divide annual salary amount by 12|
Other Income Sources
|Overtime/Bonuses||Minimum 2-year consecutive history. Take 24-month average based on net overtime/bonus income.|
|Commission||Minimum 2-year consecutive history. Take 24-month average based on net commissions.|
|Seasonal/Part-Time||Minimum 2-year history with verified continuance. Take 2-year average based on tax returns.|
|Tax Exempt||Since DTI calculations use taxed income, you can count 125% of any tax-exempt income. Multiply monthly amount by 1.25.|
|Military Pay/VA Benefits||Verified monthly base, housing, clothing, fight/hazard, reserve and disability pay is considered. Tax-exempt pay will be considered at 125% of the monthly amount.|
|Retirement/Social Security||Use an award letter to verify. Must continue for at least 3 years following the loan closing to be counted as repayment income.|
|Child Support/Alimony||Must continue for at least 3 years following the loan closing to be counted as repayment income. You must also verify the payments have been on-time for the previous 12 months.|
|Interest and Dividends||Minimum 2-year consecutive history. Take 24-month average based on net income from interest and dividends.|
|Rental Income||Net rental income, received for 24 months or more, can be considered for calculation of repayment income.|
Being educated about the types of acceptable USDA repayment income will help you maximize your USDA homebuying budget.
USDA Loans & Income
USDA borrowers have more income considerations than other potential homebuyers. That's why it's key to talk with lenders that truly understand this program.
USDA's income restrictions can be confusing, in part because evaluating eligibility isn't a one-step process. 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.