USDA Rural Loan - Determine Maximum Monthly Mortgage Payment
Date: February 21, 2013One of the most frequent questions that come from perspective homebuyers is "How Much House Can I Afford?" Determining this number is based on calculating what are known as the borrower’s Debt-To-Income (DTI) ratios. The established maximum DTI ratio used for a USDA Loan is based on a the monthly mortgage payment not exceeding 29% of the gross monthly income and total debt, including the new monthly mortgage payment, not exceeding 41% of the gross monthly income.
Monthly mortgage payment includes the principal and interest payment on the mortgage note; in addition to the monthly pro-rated portion of the annual property tax and homeowner insurance bill. Specific to the USDA Rural Loan program is the pro-rate portion of the USDA Annual Fee, which is often referred to as a monthly mortgage insurance payment. If there are any condominium or Homeowner Association (HOA) dues, they must be included in the monthly mortgage payment as well.
Total debts include the anticipated monthly mortgage payment and all monthly re-occurring credit obligations. Examples of reoccurring credit obligations include monthly car payments, minimum payment on a credit card, and student loan payments. If the borrower is obligated to make any alimony or child support payments, the payment(s) will be included within the total debt calculations.
If the total debts exceed 41%, than the maximum monthly mortgage payment must be reduced, in order to bring total DTI back down to 41%. For example assume a monthly income of $5,000. Based on the 29%/41% ratio requirements the maximum housing expense will be $1,450 and total debts will be $2,050. If the non-housing expense exceeds $600 ($2,050 - $1,450), than the housing expense will need to be reduced an equal amount to keep the total ratio at 41%.
While the 29%/41% ratio is considered to be the Underwriting standard guideline, the USDA Loan Program will allow for DTI ratios as high as 35%/48%. What determines the ability to qualify at a higher ratio is a combination of factors, such as an approval through Guaranteed Underwriting System, which is USDA’s automated approval, and other compensating factors such as:
 | 680 or higher credit score |
| No or low "payment shock" - less than a 100% increase in proposed mortgage payment Vs. current rental housing expenses |
| Fiscally sound use of credit |
| Ability to accumulate savings |
| Stable employment history with 2 or more years in current position or continuous employment history with no job gaps |
| Cash reserves available for use after settlement |
| Career advancement as indicated by job training or additional education in the applicants profession |
| Trailing spouse income - as a result of a job transfer, in which the house is being purchased, prior to the secondary wage-earner obtaining employment. This assumes that the secondary wage-earner has an established history of employment and has a reasonable chance to obtain new employment in the area upon relocating to the area |
| Low total debt load |
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