How to compute income for Rural Development housing loan?

[Anonymous]

Hi.  I am trying to figure out how much of a mortgage I qualify for under the 502 Rural Development loan (non-subsidized).  I *NEED* $75,000 but would prefer to borrow $85,000 as the home requires significant repairs and the larger amount would enable me to do ALL of them.  I am self-employed as a childcare provider (since 2006).  I understand that the underwriter can use my SE income from Schedule C of the USITR, plus any Earned Income Credit.  In 2009, I also earned $5,892.56 in non-taxable income from the USDA.  Iearned approximately $3,000 from the USDA in 2010 but do not have that exact amount on hand at this moment.  We also receive $722/month in food stamps which I understand can be calculated as repayment income.  I have two student loans totalling $125/month and no other debt.  Based on 2010 income, I have sufficient TDI but the broker said he needs to use the past 14 months of SE income.  My credit scores are sufficient ... right now the TDI ratio seems to be my only obstacle.

in 2009 (per USITR)

$9,696 on Schedule C (net)

$5,657 EIC

$15,353 total ($1,279.42/month)

in 2010 (per pending USITR)

$14,485 on Schedule C (net)

$4,304 EIC

$18,789 total

By my calculations, I need $633.06/month to pay PITI on $75,000 plus my student loans ...or $680.80 on $85,000 (using $125/mo student loans and $150/mo insurance&taxes, and calculating mortgage on 4% for 30 years).  

*   Average of past 14 months WITHOUT adding in the USDA income but INCLUDING food stamp income = $1,279.42 (11/2009) + 1,279.42 (12/2009) + $18,789   

     (2010) = $21,347.84, divided by 14 months = $1,524.85/month + $722/month FS = $2,246.85 ... of which 41% = $921.21/month = ENOUGH income!

*   Average of past 14 months WITH documented USDA income and including food stamp income = $21,347.84 above + $976.65 USDA income in 11/2009 and

     12/2009 (have checks) = $22,324.49, divided by 14 months = $1,594.61/month + $722/month FS = $2,316.61 ... of which 41% = $949.81/month = ENOUGH income!

Am I calculating this right?  Can they use the food stamps as repayment income?  Any other suggestions?  My 2010 income was also adversely affected because I was not able to transfer my license when I moved to my dad's farm since it has a pond and other hazards, which means I had to drop some daycare children to comply with the law as well as lost that ongoing USDA income ... but I can regain both with days of moving into the new home because it will easily pass inspection to transfer that license.

Finally, is there a cap on how MUCH in repair escrow can be made on a RD loan?  Someone said $10,000 or 10%, whichever is lesser.

Thanks in advance!

---Chris

[Anonymous]

Correction --- lender says he would average last 24 months.  My mistake.  That reduces my monthly income to about $1,422/month plus food stamps and non-taxable income.  Help, please?

[ShanetheMortgageMan]

Calculating income off of a tax return needs the actual tax return, but from the numbers you've provided it appears that at best case your self-employment income will be ($9,696 + $14,485 / 24 months) $1,007.  The EIC amount would be $3,000/year, or $250/mo... and the food stamps would be $722/mo... however I don't believe the EIC & food stamps can be used in qualifying income, they can be used as compensating factors if your file was borderline though.   At $1,007/mo in qualifying income it wouldn't be enough to qualify for a $633/mo housing payment.

Pretty sure the repair escrow is only permitted for items that are required to bring the property to HUD's minimum property requirements and can't be completed due to the weather.  The work needed can't affect the livability of the dwelling and has to be exterior.  Each lender will have their own guidelines, and lenders hate to do repair escrows so they will probably try to avoid doing it unless absolutely necessary.

Sounds like 2010 was artificially low due to the limitations of where you moved your work to, once you have filed 2011's tax returns then that will be averaged in with 2010's, and will give you more qualifying income.

[Anonymous]

What a fantastically FAST response --- thank you!!!  BTW, $125 of the $633 debt amount is for student loans (that are deferred because I'm still in school and will be for the next 12 months of classes and then the 6-month grace period thereafter) ... which leaves me with housing of $508/month PITI.  My current rent is $500/month and we used to pay $750/month.  Why would the EIC be only $3,000 per year when we had $5,657 and $4,304 in 2009 and 2010 respectively?  I'm not sure I included the fact that in 2009 I had $5,892 in checks from the USDA for non-taxable food reimbursements for feeding low-income children in my daycare.  I have those checks and they can be verified with the USDA sub-contractor who issued them to me.  (I had another $3,000+ in 2010 but do not have the exact amount handy --- again it can be verified.)  That income is documentable but was not included on my USITR.  Can they ADD that non-taxable income to average out my income?  In other words $9,696 + $14,485 + $5,892 + $3,000 = $33,073, or $1,378.04/month average???  That would bring me up to $565.99/month at 41% TDI without considering the EIC income or food stamp compensating factor.

[Anonymous]

Again, Shane, THANKS for the rapid response.  After your reply I went and found this on the bottom of page 11 at http://www.rurdev.usda.gov/ga/GRH%20LENDER%20HANDBOOK%204-20-09.pdf:    "Earned Income Credit may be added to repayment income"

So dare I hope that I can add the $5,657 and $4,304 in EIC earned in 2009/2010 to the Schedule C amounts to get a more healthy average of $34,412, divided by 24 months = $1,422/month (but still not enough) unless I can add in that USDA non-taxable income addressed in my prior post.

[ShanetheMortgageMan]

I gotcha on the student loans, but even though they are deferred they are still counted in the debt ratio for USDA.  They didn't used to be but a couple years ago they changed it so they are always included.

So revisiting the income: $1,009 for self-employment, $415 for the EIC (I see the correct figures now, I got the USDA figures confused with the EIC), and if you can use the USDA income then that would add the $250/mo I was using before as the EIC amount.  If you can use all of that it would put your debt to income ratio at 37% (housing ratio would be 30% but since you are making a similar payment it probably won't be an issue).  However I checked 3 different lenders USDA guidelines and none say that EIC can be used as qualifying income.  I feel it's going to come down to you and the loan officer documenting your income and having the loan officer take it to their underwriting department to have it looked over.  I also think before you do that, it would be a good idea if you and your loan officer conference call the USDA office in your state and go over the income as well.

Since your income is on the low side, and if it doesn't work out with this loan officer, you may want to consider applying directly with USDA.  The process takes a little bit longer, there isn't a lot of hand holding, but their guidelines are easier to meet than lenders Guaranteed USDA loan program guidelines.  The catch is your income must be in the low bracket for your county.  You seem resourceful so you probably already found it, but if not the website is http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do where you can see if you would be eligible for both the Direct version and Guaranteed.