If Your USDA Ratio Is Over the Line, Read Paragraph 4.24.A
If your debt-to-income ratio landed a little over the line on a USDA loan, this post is for you. A situation that comes up often looks like this one.
Harper hears the word threshold
Harper is a fictional buyer near Mount Pleasant, SC. She is an illustration, not a real client. She has steady income, and her bills are paid on time. She applies for a USDA loan and hears that her ratios are over the threshold.
Most people in her spot assume that is the end. They stop shopping, or they quietly lower their goals. What Harper does not know is that the USDA guideline lists compensating factors, and that a file over the threshold can still have things worth documenting.
What the guideline actually says
The passage is in USDA Paragraph 4.24.A. Here it is word for word:
Compensating factors include: payment history showing the applicant historically paid a greater share of income for housing with the same income and debt level; accumulated savings and a savings history showing capacity to set aside a larger-than-average portion of income; job prospects with anticipated significant pay increases or available overtime; and homes constructed under specific energy efficiency programs (Energy Star, Zero Energy Ready Home, LEED, etc.) which may allow ratios to exceed thresholds by up to two percentage points.
The four factors in plain words
Payment history: the applicant has historically paid a greater share of income for housing, with the same income and debt level. Think of a long record of on-time housing payments.
Savings: accumulated savings and a savings history that show capacity to set aside a larger-than-average portion of income.
Job prospects: anticipated significant pay increases or available overtime.
Energy efficient homes: homes built under specific energy efficiency programs such as Energy Star, Zero Energy Ready Home, or LEED. This is the factor the guideline ties to ratios that may exceed thresholds by up to two percentage points.
I am not going to promise how any one file turns out. Each loan is reviewed on its own facts. The point is that the list exists, and you should know it before anyone closes the door.
The question Harper asks
Here is what I would tell a buyer like Harper to say to her loan officer:
"My ratio is over the threshold. Which compensating factors from Paragraph 4.24.A can you document on my file: payment history, savings history, job prospects, or an energy efficient home?"
That question does two things. It shows you know the guideline has a section for this, and it moves the conversation from a yes or no into a documentation checklist.
What Harper brings
A good question needs paper behind it. Harper would bring:
- Housing payment records, to show her payment history
- Savings statements, to show her savings history
- Written proof of an expected pay increase or overtime, to support job prospects
- Energy efficiency program proof, if she is buying a new build
Notice that the job prospects factor is about anticipated pay increases or available overtime. A hope is not enough. Written proof is what makes it something a loan officer can put on the file.
Your next step today
Pull together the records above, even if you are not sure they will all apply. Then ask the question word for word. If the answer is vague, ask which of the four factors can be documented and what they would need from you.
I am Jason Sharon, a licensed mortgage broker. If your USDA ratios are over the line, call me at 843-LOW-RATE and I will find the path.
Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.
Learn more about this loan program: If Your USDA Ratio Is Over the Line, Read Paragraph 4.24.A
