USDA Loan Income Limits and Requirements – Calculating Eligibility

If your family is shopping for a new home loan, there are several federal loan programs that you may want to look into. One loan program that has become increasingly popular over the years is the Single Family Housing Guaranteed Loan Program, more commonly known as the USDA loan. 

The USDA loan program was established to encourage homebuyers to purchase properties in more rural areas. It is issued by private lenders but backed by the USDA (U.S. Department of Agriculture). The biggest advantage of a USDA loan is that no money down is required, the low interest rates, the low mortgage interest, and the flexible credit requirements. 

Requirements for a USDA Loan – Breaking Down Eligibility Criteria

In order to qualify for a USDA loan, you will not only need to meet the credit and income criteria established by the USDA, but also that of the lender issuing the loan. The minimum requirements as set forth by the USDA include the following:

Borrowers must be able to prove that they are U.S. citizens or legal permanent residents.

If you were born in the U.S., providing a birth certificate will do. If you were naturalized as a U.S. citizen, you will need to provide a naturalization certificate. If you’re not a citizen but you are a legal permanent resident, you’ll still be able to take out a loan, but you will need to provide your permanent resident card, more commonly known as a green card. You will also need to show a Social Security card. 

Borrowers must prove that they have had dependable income for two consecutive years.

A dependable income refers to a steady income. If you have held different jobs every month, this won’t be considered steady income, even if you were making roughly the same amount at every job. Lenders want to see stability, which means working at least two years at the same place of employment. Borrowers who have a dependable income are less of a risk when it comes to missing payments since they are less likely to suddenly lose their income.

There are several ways to prove that you have a dependable income, including bank statements, pay stubs, W-2s, and your tax returns.

Borrowers must be able to prove financial responsibility by having no late payments or collections on their record for at least 12 months prior to applying for the loan.

Lenders want to be paid back what they’re owed every month. Not only do they want to avoid borrowers who won’t make their payments, they don’t want to deal with the hassle of chasing down late payments, missing payments, or having to foreclose. They will determine your financial responsibility by checking your credit history. They will not approve a USDA loan for any borrower unless they do not have any late payments or collections on their record for at least 12 months prior to applying for the loan.

Borrowers must have an acceptable debt ratio (the minimum debt ratio varies from lender to lender).

Even if you can demonstrate that you pay your bills on time and that you have a dependable income, lenders will look at your debt-to-income ratio to determine whether you are capable of taking on more debt. If you already have too much debt, they may decide that taking on a mortgage will be financially impossible with the income you have. Although the minimum debt ratio varies from lender to lender, generally speaking, your monthly debt can’t exceed 41 percent and your housing costs can’t exceed more than 29 percent of your monthly gross income.

The property the loan will be used for must be in a rural area qualified by the USDA.

The entire point of the USDA loan is to encourage homebuyers to buy property in more rural areas, thereby strengthening rural communities. You can look up the address of a property you’re interested in at the USDA’s website to determine whether it’s eligible under the USDA loan guidelines. 

The adjusted annual income of the borrower cannot exceed 115 percent of the area median income (this depends on the size of the borrower’s family as well). 

The USDA loan is meant to assist households who do not have enough money or may have had some financial problems in the past so that they can purchase a home. Generally speaking, your household income can’t exceed 115 percent of the median income in the area that you’re looking to purchase a property; however, there are some exceptions based on the size of your family. 

Borrowers will need to have an acceptable credit score

A borrower’s credit score provides lenders with an idea of how financially responsible and how financially secure they are. Even though there is no credit score minimum set by the USDA, the majority of USDA lenders will require that borrowers have a score of at least 640. Borrowers with lower credit scores can, however, still qualify, but their files will require manual underwriting.

Income Calculations for a USDA Loan

Although the majority of the USDA loan requirements are relatively straightforward, there’s one requirement that can be a bit tricky to figure out: the USDA income limit. In general, your household income can’t exceed 115 percent of the median income of the local area. Families with moderate household incomes will typically meet this requirement, especially since the USDA income limits were increased for all U.S. counties in June of 2018.  

Requirements Are Different State By State

As part of their income limit restructuring, the USDA divided income limits into groups. There are two groups, the first covering households with one to four persons, the other covering households with five or more persons. For most U.S. counties, the income limit for groups of one to four persons is $82,700. The income limit for groups of five or more persons is $109,150. However, these requirements may vary a bit from state to state.  

California Specific Income Limits for USDA

The reason that income limits vary from one county to the next is that the cost of living can vary greatly depending on where you are buying property, which means that property values will also vary. For example, the income limits in many of the counties in California are the same as those established by the USDA. However, some counties have higher income limits. Take for example Santa Rosa, where the income limit for the first group is $135,000, while the income limit for the second group is $163,000. The USDA has a breakdown of income limits in various counties available on their site.

Exceptions – What Isn’t Included in USDA Income Calculations

There are a few exceptions that aren’t counted towards your household income. These include the following:

• Any household income that was earned by a minor (a person under the age of 18).
• Any income earned by live-in aides, such as live-in nurses.
• Any household income in excess of $480 that was earned by a full-time adult student.
• Any income tax credits that you earned.
• Any lump sum additions that you obtained to your assets, such as capital gains, inheritances, or life insurance policies.
• Any housing assistance payments that you may be collecting.

Maximum Income Limits

The maximum income limit is based on the gross income for W2 earners. It can be a bit more complicated if you are self-employed or if you are a 1099 earner. Gross income includes salary, overtime, bonuses, commission, tips, and any other types of compensation for services. The USDA will also include the cost of living allowances and housing allowances you are collecting as part of your income. 

In addition to the county you’re buying property in, the maximum income limit will also depend on the number of people in your household. The more persons there are in your household, the higher the maximum income limit will be. It’s also worth noting that only your current household income is taken into account–you will not have to worry about future income or earning potential affecting your eligibility. 

A Final Note on USDA Income Limits

Numerous factors help to determine whether you will be eligible for a USDA loan. Your household income is the trickiest factor to figure out. You’ll need to factor in the income limits in the area where you’re looking to buy as well as their median household income. The number of people in your household will affect what your household income is and how high the income limit will be. A reputable lender can help you figure out whether you will qualify or not based on these numbers. 

© 2018 American Pacific Mortgage Corporation. All information contained herein is for informational purposes only and, while every effort has been made to ensure accuracy, no guarantee is expressed or implied. Any programs shown do not demonstrate all options or pricing structures. Rates, terms, programs and underwriting policies subject to change without notice. This is not an offer to extend credit or a commitment to lend. All loans subject to underwriting approval. Some products may not be available in all states and restrictions apply. Equal Housing Opportunity.