USDA Income Calculations - Income Eligibility Vs. Qualifying Income
Date: December 15, 2011USDA Loans require that borrower(s) income meet both Income Eligibility and Income Qualifying requirements. Income Eligibility is the income used to determine whether the household income exceeds the allowable limit, specific to the particular county and state in which the property is located and the size of the household. Income Qualifying is the income used to determine whether the income is large enough to support the loan request. However the calculation used to determine both criteria differ.
A common list of areas that should be reviewed by the Loan Officer with the borrower is as follows:
Income Type | Income Eligibility | Income Qualifying |
Household Income | Income of all adult members of the household are considered for qualifying purposes even if they are not on the loan application | Use only income from borrower(s) on the loan application |
W-2 annual income | Use Box 3 – Social Security Income | Use Box 1 – Wages, tips, other comp |
Court ordered child support and alimony | Use court ordered amount even if not receiving income. This is for all members of the household | Must document on-time receipt over the previous 12 months |
Part-time, overtime and bonus income | Any income earned is extrapolated over a 12 month period of time | Need a two year documentable history with the same employer to consider |
Business Income/Loss | Business income or loss from a previously filed tax return will be used in determine income | Need a two year documentable history provided by tax return information obtained directly from the IRS |
Unemployment Income | Benefit received from current year (and possibly previous year even if non-reoccurring) will be added to income eligibility | Only unemployment income derived from seasonal planned layoffs will be considered as for qualifying income. All other unemployment income will be disregarded |
Unreimbursed business expenses | Reduce Income Eligibility income | Reduce Income Qualifying income |
Loan officers inexperienced with USDA Loans often will not correctly calculate income eligibility, which may lead to subsequent loan denial. Furthermore, the actual borrower should review this information as well. Borrowers need to realize there are variables identified through the loan approval process that the Loan Officer has no way of knowing when providing an initial pre-qualification letter. For instance only when tax returns are obtained from the IRS will the underwriter know if there is unreimbursed business expense.
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