USDA loans provide mortgage financing for borrowers in a designated rural area and that mean certain income limits. Rather than making sure you make ‘a lot’ of money, the USDA caters to borrowers that don’t exceed the limits they set.
The USDA program is only for those households considered ‘modest.’ In other words, they would not be able to afford a home with any other mortgage program. If a household’s income exceeds the designated limits, they will have to use other government-backed programs, such as the FHA loan.
The Income Limits
So what exactly are the USDA’s income limits? Generically speaking, your household income cannot exceed 115% of the median household income for the area. Before you determine where you fall, let’s define household income.
Normally, when you apply for a loan, the only income that counts is that of the borrower and co-borrower. For eligibility purposes on the USDA loan, though, your entire household’s income counts. This means anyone not on the loan, but that lives with you and makes an income also count.
The USDA income limits vary based on where you live and the size of your household. The more family members you have, the higher the income you can have and still be eligible for the loan.
If you want general numbers, the floor limits for varying family sizes are as follows:
1-4 family members – $78,200
5-8 family members – $103,200
For every family member over 8, you can add 8% of the 1-4 family limit to the amount. For example, a family of 10 would have a limit of $115,712.
The actual limits vary based on where you live. If you live in a high cost area, such as in California, your limits are higher. You can see the actual income limits here.
USDA Income Allowances
The good news is that even if you make more than the USDA income limits, you may still qualify. The USDA provides allowances, which you can deduct from your total household income. If you have any of the following, you may qualify for an allowance:
- Children under the age of 18 living with you
- Children over the age of 18 living with you but that are full-time students
- Disabled relatives living with you
- Elderly relatives living with you
Each of these situations qualifies you for an allowance. Children either under the age of 18 or over 18 and a full-time student provide you with a $480 allowance per child. Disabled relatives living with you also provide you with a $480 allowance. Elderly relatives give you a $400 allowance.
You can deduct the allowance from your gross annual income to come up with your USDA eligibility income.
Qualifying for a USDA Loan
Keep in mind, the income limits are strictly for USDA loan eligibility. It does not mean you qualify for the loan. That is a whole different piece of the puzzle. Once you know you are eligible, you must then qualify for the loan.
When it comes to qualifying, only the borrower and co-borrower’s income counts. You don’t get to use your total household income for this part of the loan. However, this could be a good thing since you’d also have to consider each household’ members debts as well.
The USDA does have relaxed guidelines, though. They require the following:
- Minimum 640 credit score
- Maximum 29% front-end ratio
- Maximum 41% back-end ratio
In other words, the USDA loan cannot take up more than 29% of your gross monthly income. This includes principal, interest, and mortgage insurance. It also includes 1/12th of your real estate tax bill and homeowner’s insurance bill.
Your total monthly debt ratio is your total monthly debts compared to your gross monthly income. This includes the proposed mortgage payment. The total debts cannot exceed 41% of your gross monthly income. This is why not including your household member’s income may be a blessing, as you don’t have to include their debts.
Because the USDA guarantees the loan for lenders, they can be a little more relaxed. Lenders can take on a riskier loan because they have the guarantee of repayment if they default. This doesn’t mean every lender will have relaxed guidelines, though. You may have to shop around as lenders can add their own requirements on top of what the USDA requires. Just like any other loan, though, you’ll want to shop around to find the best rate and term for your loan.