Sarah's USDA Income Number Isn't What She Thought It Was
Sarah found out something about the income number on her USDA loan application, and it changes what that number even is. Most people in Mullins, SC never hear it until the file is already built. Here is what she learned, and the question I want you to ask before your own file is built.
Meet Sarah, a Fictional Example Near Mullins
Sarah is a fictional, illustrative example. She is not a real client. But her situation comes up often: a household with a child in child care and real out-of-pocket costs. Like many people, Sarah assumed that gross annual income was the figure that counts on a USDA loan.
That is a natural assumption. Gross income is the number on your pay stub and your tax return. It is the number most of us carry in our heads. But on a USDA loan, gross income is where the math starts, not where it ends.
What the USDA Guideline Actually Says
Paragraph 4.4.B of the USDA guideline lays out how the income number is built. Here is the exact language:
Adjusted income is calculated by subtracting from annual income any of 5 deductions: Dependent Deduction ($480 per dependent); Child Care Expenses (reasonable unreimbursed costs for children age 12 and under); Elderly Household Deduction ($525 single deduction for households where a party to the note is 62+ or disabled); Medical Expenses (for elderly households only, unreimbursed expenses in excess of 3% of annual income); and Disability Assistance Expenses (unreimbursed costs for attendant care and auxiliary apparatus in excess of 3% of annual income).
So the number is adjusted income, not gross income. That one word changes the conversation.
The Five Deductions, One at a Time
Here is how I read each one in plain language.
Dependent Deduction: $480 for each dependent in the household.
Child Care Expenses: reasonable costs for children age 12 and under, but only the unreimbursed portion. If someone else pays for it, it does not count here.
Elderly Household Deduction: a single $525 deduction for households where a party to the note is 62 or older, or disabled.
Medical Expenses: this one is for elderly households only. It covers unreimbursed expenses in excess of 3% of annual income.
Disability Assistance Expenses: unreimbursed costs for attendant care and auxiliary apparatus, again in excess of 3% of annual income.
Notice the word unreimbursed in four of the five. Records matter. If you paid it out of pocket, you want to be able to show it.
What This Means for Sarah
Sarah has a child in child care and out-of-pocket costs. That puts a dependent and child care expenses on the table. If someone in her household were 62 or older, or disabled, the elderly household deduction would come into play, and the medical and disability assistance categories would be worth a look too.
The point is not that every household uses every deduction. The point is that all five exist, and Sarah should know which ones were considered before her file is built, not after.
The Question to Ask and What to Bring
Here is the one thing you can do today. Ask your lender:
"Can you walk me through how you calculated my adjusted income, and which of the five deductions in Paragraph 4.4.B did you look at?"
Then do two more things. First, request the adjusted income calculation in writing, so you can see the steps. Second, gather records of unreimbursed child care, medical, and disability assistance costs. Having those records in hand makes the conversation specific instead of a guess.
Who This Is Most Useful For
If you are a prospective USDA applicant with dependents, child care costs, an elderly or disabled household member, or unreimbursed medical or disability assistance expenses, this paragraph deserves a close read. It is short, but it changes what your income number even is.
Let's Talk It Through
I am Jason Sharon, a licensed mortgage broker with Home Loans Inc. If you want help understanding how this applies to your household, call me at 843-LOW-RATE. I find the path.
Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.
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