Your Lender Does Not Use One Income Number for a USDA Loan
Everyone says a lender just looks at your income and gives you one number. For a USDA loan, the guideline says that is wrong. USDA uses three different income definitions, and each one answers a different question. If your household has more than one earner, knowing the difference can save you a lot of confusion.
Kenneth's confusing numbers
Meet Kenneth. He is an illustrative buyer, not a real client, house-hunting near Brunswick, GA. His household has more than one earner. A situation that comes up often is exactly his: he hears one income figure when someone talks about eligibility, and a different figure when the conversation turns to his payment. He assumes someone made a mistake.
Nobody made a mistake. Kenneth was looking at two different definitions of income without knowing it.
What the USDA guideline says
The USDA guideline, Paragraph 4.2.A.1, lays out three definitions. It says USDA uses three income definitions, and it also states that this three-tier system is unique to USDA. That last point matters. If you have read about other loan programs, you may expect one income figure to do every job. With USDA, it does not.
The sentence that matters most for Kenneth's confusion is this one: "Repayment Income includes only income of parties to the note and is used to determine ability to make monthly payments."
Annual Income: the eligibility question
Annual Income includes all amounts received by all household members, and it is used to determine eligibility. Notice the phrase all household members. This is the widest of the three definitions. It looks at the household as a whole, not only at the people who will sign the loan.
Adjusted Income: the payment assistance question
Adjusted Income starts from annual income and subtracts allowable deductions. It is used to determine eligibility for payment assistance. So this is a second eligibility question, but about a different benefit. It is a different number from Annual Income because deductions have been taken out.
Repayment Income: the ability to pay question
Repayment Income is the narrowest. It includes only the income of parties to the note, and it is used to determine ability to make monthly payments. A person who lives in the household but is not a party to the note may count in Annual Income, but would not count here.
Why multi-earner households feel this most
When only one person earns money and that person is on the loan, the three definitions can look similar and nobody notices the distinction. Add a second earner and the groups of people diverge. One number includes everybody in the home. Another includes only the people on the note. That is why Kenneth saw two figures that did not match. They were not supposed to match, because they were built to answer different questions.
The question to ask your lender
Here is what you can do today. When a lender gives you an income figure, ask: "Which of the three USDA income definitions is this number: Annual Income, Adjusted Income, or Repayment Income? And whose income is included in it?"
Then ask for each figure to be labeled by its definition. A labeled number tells you which question it answers and which people are inside it. An unlabeled number leaves you guessing, and guessing is how a household ends up thinking the process is broken.
Putting it to work
Once Kenneth knows which definition each number represents, the picture makes sense. One figure shows whether the household fits the eligibility test. Another speaks to payment assistance. A third speaks to whether the people on the note can make the monthly payments. Three questions, three numbers, and no contradiction.
If you are considering a USDA loan and your household has more than one earner, I would be glad to walk through it with you. I am Jason Sharon with Home Loans Inc, and my approach is simple: I find the path. You can reach me at 843-LOW-RATE.
Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.
Learn more about this loan program: Your Lender Does Not Use One Income Number for a USDA Loan
