USDA and Total Household Income

Rural Development offers one of the most competitive loan products available to American mortgage consumers on the market, but it does come with some unique guidelines that other loan programs don’t have to come up against.  A common question that we hear here at the Heights is why do they need this information about people who aren’t going to be living in the home?

USDA loan, like some other lending programs, is a government entitlement program.  What this means is that the purpose of the program is not to make profit, but instead is a program funded by tax dollars that has a singular purpose: “to improve the economy and quality of life in rural America.”  The program was created in 1990 as a part of the 1990 Farm Bill, and from the onset of the program, the mission of the charter has been at the forefront of the thinking when guidelines are updated.

Ok – so what does that mean?

In 1994, the entire Department of Agriculture was reorganized as a part of the Department of Agriculture Reorganization Act of 1994.  One of the things that changed during this reorganization was that there was a slight tweak to the agency’s charter: “to improve the economy and quality of life in undeserved rural areas.”   This change seemed minor at the time, but was the foundation for the changes that we see now.

The trick here is that “undeserved” in the charter.  USDA has spent each year since this point refining the rules in a search for an objective measure that would work to gauge that term. The theory behind this has manifested three ways:

• The home itself needs to be in an undeserved area.
  This is easy to check for yourself, as USDA has created a search tool so that you can see if a house is in a qualifying area here  https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=sfp.
  
  The rule is not completely as cut and dry as this, but generally speaking, if the community has fewer than 20,000 residents, there is a strong chance that it will be in an eligible area.
  
  
• The total liquid assets of everyone living in the home must be below 20% of the purchase price of the property.
  This is also a loose rule, but it’s the first indication of how USDA has chosen to implement a rule-set to observe if a family itself is also undeserved.  The general idea is that if you are going to be living in a household that has access to enough funds to be able to reasonably attain financing through other means, USDA wants you to use those other means so that the program funds can be preserved for those more in need.
  
  
• The total income of everyone who will be living in the home must be at or below 125% of the median income of the county that the home is located in.
  The idea here is that if you and all the people that you will be living with are making enough money annually, you should reasonably have the means to obtain different financing.  There are a lot of exceptions to this cap for things like child care expenses and for money spent on schooling, but the purpose is the same as the other two main rules.  USDA is committed to honoring their charter, and due to the fact that Rural Development funds are limited each year by congressional budget hearings, it is important that they make sure that the limited USDA funds that are available are being directed to those most in need.

The important takeaway is not that this is a big bureaucratic nightmare.  In fact, it is quite the opposite.  While USDA has these unique loan program guidelines, they are also known for having the most consistent underwriting standards as well.  There are different hoops to jump through, but the hoops themselves are more black and white, and easier to jump through than with FHA loan or Conventional loans, and the result is that you end up with a 30 year fixed rate mortgage with rates typically at or below the rates of the competitive loan programs, all with no down payment required. Get started today and see what your next steps are for buying your dream home with no money out of pocket!