There is hope for those who cannot get a conventional loan and have low to moderate income. The USDA offers a no-down payment, 100 percent financing through a guaranteed loan for these families who are buying a home in rural and suburban areas.
Nearly 140,000 of these loans were given out in 2014, which was down from 160,000 the year before, says Joaquin Tremols, director of the USDA Rural Housing Service’s Single Family Housing Guaranteed Program in Washington, D.C.
The guaranteed loan is just one of the two types of loans offered through the USDA. The other one is a direct loan for very low income households. They are made directly from the government and can be subsidized to as low as 1 percent interest rate.
However, the guaranteed loan is not subsidized and does not require a Congressional appropriation every year, Tremols says. And recipients can still get a good interest rate.
“You have to apply with an approved lender. They take our training before we cut them loose,” he says. Eligible applicants can use the guaranteed loans to build, rehabilitate, improve or relocate a dwelling, too, besides just buying a home in an eligible rural area. Rural doesn’t necessarily mean out in the boondocks, though. There are areas designated close to big cities, too.
According to the USDA Single Family Home Loan handbook, applicants may be eligible to receive a guaranteed loan if they
- Meet income eligibility
- Agree to personally occupy the dwelling as their primary residence
- Are U.S. citizens, U.S. non-citizen nationals, or qualified aliens
- Have the legal capacity to incur the loan obligation
- Have not been suspended or debarred from participation in Federal programs
- Are purchasing a property that meets all program criteria.
USDA Income Geographic Differences
Being approved as income-eligible can be tricky because so many things are included in the figure. Plus, the income limits are different depending on where you live. Let’s start with two examples of the difference in income limits from opposite sides of the country.
If you were looking to buy a house in the rural areas of Buffalo, N.Y., with a USDA moderate guaranteed loan and a four-person household, you could have an income of $77,850. For families of five or more, that figures goes up to $102,750.
If you travel across the U.S. to an expensive area of San Jose, Calif., the four-person household income limit is $122,050 and jumps to $161,100 for five or more people.
Moderate income typically means you make 115 percent or less of the median income for your geographic region. As a basic example, if families average $50,000 per year in your area, your family can make up to $57,500 per year and still be eligible.
Income limits vary widely and tend to rise significantly around major metro areas.
Those interested in the USDA loan can easily check their income eligibility here.
The USDA website also details property eligibility in areas all across the country.
“You can punch in an actual property address – in case you were looking at a certain home – and submit the information. It will tell you if it’s in the USDA loan rural area. It’s pretty nifty,” Tremols says.
What Counts as Income According to USDA?
As for income eligibility though, the government counts income from all adults in the household (those 18 and over) — not just parties who are signing the loan — must be included in the annual income for eligibility purposes, according to the USDA guaranteed loan handbook.
For instance, the Social Security checks received by your mother-in-law who lives with you will also go towards that income. You also will have to count up to the first $480 of earnings for your son or daughter (who is 18 or older) and is a full-time college student even though they live away from home temporarily during the year.
Other income that is counted can include
- Employee housing or automobile expense allowances
- Military and self-employed income
- Alimony/child support
- Pension/retirement income
- Rental income
- Disability/social security checks
- Unemployment compensation
Income that Doesn’t Count toward Your Eligibility Income
There are some income types that will never be counted, according to the handbook.
Income that is not considered toward your household total, for eligibility purposes, includes
- Payments received for the care of foster children or foster adults in the home
- Earned income of a minor
- Employer-provided fringe benefit packages, even if displayed on the applicants’ pay statements
- Section 8 housing vouchers
- Any student financial aid
- Money gifts of money or lump sum inheritances, capital gains or insurance payments under health, accident or worker’s compensation policies
Lenders can help potential buyers find deductions for their annual income to meet the eligibility requirements, Tromels says.
“Some people do benefit from these deductions,” he says. “The handbook shows many various examples in the handbook.”
USDA Income Eligibility Deductions
According to the USDA’s underwriting guidelines, the allowable deductions to determine an adjusted income can include
- $480 for each minor child under 18
- $480 for each disabled or handicapped individual who is not the applicant or co-applicant on the loan
- $480 for each full-time student 18 years or older
- $400 for each elderly (62 years of age or older) or disabled applicant
- Total amount of medical expenses for any elderly family member that exceeds 3 percent of gross annual income
- Actual cost of child care for children 12 years and younger with full documentation of cost
“People like this loan because there is no down payment, and there is 100 percent financing,” Tremols says. “They are all simple 30-year fixed loans with no balloons, no interest-only or adjusted interest rate.”
Qualification and Income Eligibility are Different
Remember that your total household income for eligibility purposes could be different than your qualification income. For instance, a an elderly parent who will live in the home might have a job and earn income. For eligibility purposes her income counts, but you can’t count that income toward the income on your loan to help you qualify, unless the elderly parent is on the loan.
Check Your USDA Income Eligibility
USDA income eligibility is lenient considering deems eligible families making up to 115% of the typical income for the area. Prospective home buyers should check all the USDA requirements with an approved lender to see if they qualify.