USDA Rural Development Loan Income Limits: How They Are Calculated and Why They Trip Files

USDA Rural Development guaranteed loans use a household income test, not a borrower income test. That distinction trips more files than any other aspect of the program. The income limit applies to the total income of everyone in the household, whether or not those people are on the loan.

Household vs. Qualifying Income

USDA calculates two separate income figures for guaranteed loans. Household income determines eligibility against the area income limits -- this includes ALL adults in the household. Annual qualifying income is used to calculate the debt ratio for approval -- this covers only borrowers on the note. A working adult child living in the home may be excluded from qualifying income but their earnings almost always count toward household income.

What Counts in Household Income

• ✦All earned income from adults in the home, including overtime, part-time, and seasonal work
• ✦Child support and alimony received (regardless of whether it is used for qualifying)
• ✦Investment income and interest
• ✦Social Security and disability income for all household members, including children in some cases
• ✦Business income from self-employment, net of business expenses

Allowable Deductions from Household Income

USDA allows certain deductions that can bring a household under the income limit. The most common are the childcare deduction ($480 per minor child under 12), a $400 annual deduction for each disabled adult household member, and medical expenses exceeding 3% of gross income for elderly households. These deductions are applied to the household income calculation, not to qualifying income.

Where MLOs Make the Mistake

The most common error is running USDA through an AUS without first manually calculating household income. DU and LP do not run the USDA household income test -- that is a manual underwriting step. Submitting a file where a working college student in the home pushes household income over the limit after closing is a curable situation if caught early and a compliance problem if caught after funding.