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When applying for a Rural Development home loan, the applicant must be aware of several make-or-break qualifications. Credit, property location, and USDA income guidelines are critical when a lender is trying to determine if someone qualifies for a loan. For this article we are going to focus on the income standard.
Income guidelines on USDA loans can be confusing because there are actually two different sets of rules regarding income. The lender is required to calculate the maximum household income as well as income in relation to the debt-to-income ratio. Both are extremely important but are completely different.
The maximum household income rule is enforced by USDA and it varies from area to area based on the household size. USDA recognizes two classes of family size: 4 or less and 5 or more. For example, if the maximum household income for a family of 4 in a particular county is $74,500 then all working household members' incomes will be added together and the resulting figure cannot exceed this amount. This includes all people in the home regardless if they are on the loan documents or not.
When it comes to income as it relates to debt-to-income ratios, lenders usually want that number at or below 41%. This means when all borrowers on the loan have their cumulative monthly debts added up and divided into their total gross monthly income, the resulting number needs to be at or below 41%. A key point here is the word gross income meaning income before taxes. Another key point is monthly debts. These are not things such as cell phones, car insurance, or gym memberships. The debts used in this calculation are things that are reported to the credit bureaus such as car payments, credit cards, student loans, and mortgages. In addition to the monthly income versus total monthly debt, which is called the back end ratio, lenders look at the front end ratio which is the monthly gross income divided only by the proposed house payment.
USDA income guidelines can be very confusing to people if not explained correctly. Lenders must analyze the monthly income versus existing debt along with the maximum household income. They are completely different calculations but are equally important in determining whether someone qualifies for a USDA Loan.
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