You have decided to apply for a USDA Home Loan. You’ve found the home of your dreams, and it resides within the eligibility criteria set forth by the USDA. What should you expect to have to make the approval process as easy and seamless as possible? Are you worried about the documents you’ll need to submit or how many pay stubs do you need for a mortgage?
USDA Loan Income Requirement Explained
The main question we get asked here at Society Mortgage about rural development loans is “Why do I need to provide income documents for all the members of my household?”
Unlike conventional purchase loans, USDA rural development loans are income-based loans that take into consideration personal and household finance. To be approved for this mortgage loan program, the Rural Development underwriter must verify the total household income and the ability of the borrower(s) to repay the loan. The USDA loan income verification includes co-borrowers, non-purchasing spouses, adults over the age of 18, and/or individuals collecting retirement or SSI benefits.
Here are some helpful definitions to better understand household income and repayment income.
Household income
Household income is the combined adjusted gross income of all people living in the home, regardless if they are applying for or will be on the mortgage. This amount can’t be higher than the county limits.
Repayment income
Repayment income is income from the actual loan applicants and determines the DTI (debt-to-income) ratio. There are deductions for each child under the age of 18 and/or any full-time student over 18.
The underwriter’s first step is to determine the total gross for all household income(s) which should be stable and dependable and meet rural development income limits. Each state has its maximum income allowance for a household, which can change from year to year.
In this program, financial institutions must verify all income by accurate verification of employment, payroll stubs, and W2s for two years. This includes income such as overtime, bonus, commissions, and self-employment must also be consistent and have a history of at least two years.
It is important to disclose all household income. If you don’t, you can be committing mortgage fraud. Not only will you get denied, but you can also be fined.
Asset Documentation for Your USDA Loan
To submit your file to the underwriting financial institution, you will need to provide the following USDA Home Loan Asset Documents.
Bank statements
Applicants need to provide recent bank statements, typically the last two months for all checking and savings accounts. Verified accounts help lenders assess the applicant’s savings and ability to pay insurance and closing costs or a down payment if required. The underwriter requires the most recent 2 months or 60 days of bank statements to get an idea of money-spending practices and to identify any additional sources of income.
Investment accounts
Statements for any investment accounts, including IRAs, 401(k)s, stocks, and bonds, should be submitted if they are being considered as part of the applicant’s asset total.
For 401K and IRA Statements, these are typically only needed to show total assets and the possibility of reserves.
If you’re submitting these documents, the underwriter will also require you to provide all pages of your terms and conditions of withdrawal. This information is usually found in the Plan Summary sent to you by your 401K or IRA account provider. According to the USDA underwriting guidelines, you will need all pages of this document.
While 401K or IRA accounts are optional, most borrowers will provide these accounts to show they can withdraw money during hardships to have reserves or to show a down payment for the home.
Gift letters
If any portion of the down payment or closing costs will be covered by gifts, you will need a gift letter that states that the money is a gift and not a loan. This brief letter should clarify the relationship between the donor and the recipient, as well as the amount of the gift.
USDA large deposits
Specifically for USDA, if there are any large deposits or several miscellaneous deposits, these will need to be sourced and explained with a large deposit letter of explanation and a copy of the source of the deposits.
While for FHA Mortgages deposits that exceed 1% of the sales price are considered large, USDA loans have no specific rule for large deposits’ threshold. The definition of “large” is subjective and up to the underwriter.
An example of a source for a USDA large deposit can be a check copy, an invoice for work done, or a pay stub from work.
The large deposit letter of explanation will need to explain exactly where the deposit came from and the date it was deposited. It must also clearly indicate whether or not it’s a source of income or a one-time deposit. This letter will need to be signed and dated in pen by you.
Income documentation for your USDA loan
To assess your mortgage application, banks require that you disclose the source of your income. The primary way of showing the source of income is through pay stubs for your monthly income from salary, invoices, W-2 forms, and 1099 forms.
Employment verification
Lenders will verify employment history for at least the last two years. This is to ensure stability and consistency in income. A lender wants to know that the borrower will be able to repay the mortgage within reasonable and acceptable income levels. A borrower’s employer may be contacted to confirm employment status and income.
Proof of income: pay stubs
The underwriter requires at least 30 days of pay stubs for multiple reasons. They want to confirm your income level as well as deductions.
Deductions from your pay stubs
If you provide pay stubs that show a deduction for child support, for example, the underwriter will need you to provide full documentation to support this. This includes divorce decrees that outline the terms of child support.
If you are receiving child support, the underwriter will need the above plus a year’s proof that you’re receiving child support to count it as income. You can typically request your divorce decree from your attorney, and the proof of income can come from the specific website of your state that shows child support payments.
While there are some other one-off situations where sourcing may be impossible, these can usually be overlooked with a proper letter of explanation. An example of this can be deposits from tips from working in a restaurant-type setting.
1099s
If you have your own business, the underwriter will cross-reference your 2 most recent tax returns, profit and loss statements, balance sheets, and 1099s.
Additional income sources
If applicable, you must provide documentation for additional income such as alimony, child support, Social Security benefits, or disability payments. This should include official records or court documents.
Society Mortgage Can Help with Your USDA Loan Documentation
If you have decided to buy a home in a USDA area but feel unsure about the process, connect with us. Our licensed mortgage loan officers at Society Mortgage are experts in USDA loans and requirements and can guide you in preparing the full documentation that may seem daunting to you.
It helps if you have gathered all the necessary documentation and are prepared to explain the source of your income, so your USDA loan application goes smoothly and is quickly processed. The sooner you get approved, the quicker you will receive the amount you need to move into your new home.
Talk to a mortgage loan officer today, let them explain the process and necessary documentation for a USDA loan, and take the first step toward owning your dream home!
