Are you thinking about applying for a USDA loan but not sure about the income requirements?
Well…the bad news is that it can get pretty confusing. Due to the popularity of USDA loans, so many people apply, but not many understand the ins and outs of how the income is calculated in order to qualify.
The good news is that we’re here to give you the shortcut you need so that you don’t go spinning in circles.
What is the Minimum Income for a USDA Loan?
The USDA makes it easier for those with low incomes to buy or construct their own homes. Interested applicants will be happy to know that there are no minimum income limits.
However, it would help to show lenders that you can make payments throughout the loan period.
In general, your income should be at least 50% to 80% of the median income in your target area. This is to qualify either as a low-income or moderate-income earner.
Income Guidelines for USDA Loans
You can get 100% financing on your home loan with the USDA. However, it’s still the private lenders that fund your loan. The USDA just guarantees your mortgage against losses.
That’s why applicants still need to meet specific loan requirements. This includes limitations regarding the property’s location, size, and use.
There are also certain guidelines when it comes to income. You will need to show the following:
- Credit Score – The USDA does not require a minimum credit score. However, private lenders may require a credit score of 620. This is so they can use the USDA’s Guaranteed Underwriting System.
- Consistent Income – You must show stable employment for at least 2 years prior to the loan application.
- Debt-to-Income Ratio – Lenders will look at how much of your monthly income goes into debt payments. To qualify, debt payments must not exceed 41% of your monthly income.
- Income Limit – Your household income must not be more than 115% of the median income in your area.
How to Qualify with Little to No Credit History
Given how USDA loans work, the department is flexible when it comes to its requirements. So even if your credit falls below 640, you still have a chance to qualify for a USDA loan.
Lenders will ask you to establish an alternative credit history or non-traditional tradelines. This is to prove that you can meet your payment obligations.
You can submit statements that show you have been paying on time for the last 12 months. This includes:
- Rent
- Utilities
- Cable and internet
- Phone bills
- Health insurance premiums
- Childcare or tuition expenses
- Auto insurance
You can also prove creditworthiness by having sizable savings and minimal debt. They will also look if you have a history of defaulting on loans or filing for bankruptcy in the last 3 years.
What Is the Maximum Income for USDA Loan
Compared to FHA loans, USDA does not have maximum loan limits. The size of your home loan will depend on your household income and your area’s median income.
The maximum income limit for USDA home loans is 115% of the area median income.
This means that your household income should only be up to 15% higher than the median income of your area.
For example, if the area median income is $45,000, your household income must not exceed more than $51,750.
Maximum income limits will increase if your household has more than 4 members. You can add 8% to the income limit for every additional member.
If your household has more than 8 members, you also get an 8% increase to your total household income limit.
Meeting maximum income limits is important when applying for a USDA loan. It is also vital when or if you choose to refinance your loan later on.
How Does USDA Define Household?
The USDA will count all sources of income from all members of your household.
This includes income from:
- Wages
- Interest income from properties
- Child support and alimony
- Social security income and benefits
- Military or armed forces pay for the applicant or spouse
- Periodic payments including annuities, retirement funds, disability/death payments
- Recurring monetary gifts
- Unemployment benefits
You can exclude income from the following sources:
- Foster children or adults
- Live-in aids
- Income earned by minor dependents
- Income of more than $480 from dependents who are part-time students
What Is an Adjusted Income Limit?
You may still qualify using adjusted income if you exceed the allowed income limit.
The USDA allows for certain deductions to your annual income. This includes:
- Dependents – You can deduct $480 per dependent (minors, with a disability, full-time students)
- Childcare expenses – You can deduct childcare expenses for children under 12.
- Elderly household – You can deduct a total of $400 if you have one or more household members over the age of 62.
- Unreimbursed disability assistance payments – Includes home care services, housekeeping, and vehicle adaptations.
- Unreimbursed medical expenses (elderly households) – For expenses more than 3% of household income.
- These deductions have specific eligibility requirements. Contact us to learn more
What Is the Income Limit for Rural Development Loans?
The 115% income limit applies to all USDA rural development loans.
The average income from households with 1 to 4 members must not exceed $103,500. Meanwhile, the average income from households with 5 to 8 members must not exceed $136,000.
This number may go up or down depending on where your rural property is located.
For exact income limits, get in touch with us today for an up-to-date quote.
USDA Loan Salary Requirements
When applying for a USDA loan, you will need to show proof of stable employment.
The USDA requires applicants to have at least 1 year of stable and continuous income. They also encourage lenders to look at your employment potential for the next 2 years.
You may need to submit the following salary requirements to prove repayment income:
- Pay stubs or payroll earning statements
- Employment contract or agreement with payment terms and duration
- Form W-2 Wage and Tax Statement for the last 2 years
Lenders will also conduct an oral verification with your employer to confirm your position and potential for continued employment.
Self-employed applicants must submit federal income tax returns, applicable W-2 forms, and a statement of income and expenses.
Does Your Income Qualify for a USDA Home Loan?
All hope for owning your own home is not lost!
USDA home loans offer 100% financing with lower monthly mortgage costs. To qualify, you will need to meet their income requirements. This includes minimum credit scores, debt-to-income ratios, and maximum income limits.
The other fantastic thing about USDA home loans is that they can be flexible on income requirements. For instance, you can highlight certain areas of your finances to compensate for lower credit scores.
If you want to know how to strengthen your loan application, do not hesitate to get in touch with us today!
Frequently Asked Questions
What are the benefits of a USDA loan?
USDA loans offer 100% financing for your rural property. Apart from no down payment, you can also enjoy lower mortgage costs and interest rates. Since USDA guarantees your loan, it helps lower the risk for private lenders.
Are USDA loans based on gross or net income?
Lenders will look at your income to check if you can make loan payments. However, monthly payments will be based on the property’s purchase price, your USDA guarantee fee, interest rate, and loan period.
Are USDA loan payments based on income?
Lenders will look at your income to check if you can make loan payments. However, monthly payments will be based on the purchase price of the property, your USDA guarantee fee, interest rate, and loan period.
How do you figure debt to income ratio?
Add up all the debt that you incur each month. This includes payment for credit cards, auto loans, and child support. The total amount must not exceed 41% of your monthly income.
