For all those living in the property over the age of 18 their income is counted when determining effective income meets the 115% median income limit for a USDA mortgage. Once the USDA lender determines the income qualifies for a USDA mortgage, the borrowers then document their income and provide that documentation to their loan officer.
USDA loans ask there be at least a two year history of employment as well as a likelihood the income will continue in the future. This verification is accomplished by providing the two years most recent W2 forms from all borrowers as well as most recent pay checks covering a 30 day period. These pay check stubs will show a gross amount, the net amount as well as year-to-date earnings. The lender will then compare the year-to-date earnings with gross monthly pay to see if there are any discrepancies. For instance, there may have been a period where the borrower had to miss work for an extended period of time. The lender will then determine if the missed income was for a legitimate reason and the issue resolved.
Sometimes the income is greater than gross pay appearing for that month. When this happens, it’s usually because of part time, overtime and bonus or commission income. Here’s how USDA guidelines treat such income and define when it can be used as qualifying income if needed.
USDA Loans and Part-Time Income
Part-time income is generally defined as working less than 30 hours per week and is used with the total calculation for annual income with the USDA loan.
With part-time income, a USDA lender must make certain determinations; one is to verify a two year history of receiving part time income and from that determine if the income is likely to continue into the future. If the lender doesn’t think the income will continue into the future, it won’t be counted for qualifying purposes, but may count towards the 115% income limit.
Lenders will verify the two-year requirement by reviewing W2s from the previous two years. Not only the previous two years but the part-time income should be consistent from year to year as well as match up with current year to date part time earnings. If there is no two year history or if the income is spotty, the USDA likely can’t count the income, regardless if the lender thinks the income will continue.
Season income and employment from a second job is also counted similar to part-time income and will be verified as such. If there’s any question, your loan officer can help.
USDA Loans and Overtime Income
Overtime income can be used for those who get paid on an hourly basis. Again, employers can assign an overtime formula as there is no national standard but wage laws do say that anyone who gets paid by the hour and works more than forty hours per week should be paid additional wages above the forty hours already worked. Time and a half for example or double overtime pay.
Overtime can be used first of all as long as there is at least a two year history. When reviewing a pay check stub, there will be the number of regular hours worked as well as overtime pay. The lender wants to make sure the overtime pay wasn’t an isolated event and is fairly regular. For example, a builder needed to get a project done before a certain date and the employee was asked to work overtime until the job was completed. Without additional such work, the income will be difficult to verify as a two year history as well as the likelihood it will continue.
USDA Loans and Bonus & Commission Income
This type of income can also be used under the same guidelines, a two year history and a likelihood of continuance. The lender will verify the frequency and types of such income. For instance, is the commission paid each month? Does the bonus come quarterly? Regular commission and bonus income can be used to help qualify. However, isolated bonuses may not and it’s up to the discretion of the USDA lender. A one-time “Employee of the Month” bonus might not be counted as realistically who will be the employee of the month each and every month, right?
In general, if any income other than from full time employment can be verified as legitimate work with a two year, documented history and the lender can make a reasonable determination that income will continue to be there to help pay the bills, it will be counted. If you’re not sure, your loan officer can help explain how such income can be used with a USDA loan.