USDA Rural Development Home Loans help buyers purchase a home with no down payment required.  In addition to no down payment, it has recently become even more affordable.  The recent reduction in the USDA funding fee and monthly payment is helping prospective home buyers tremendously.  In addition to normal underwriting conditions, there is a USDA household income requirement.  So we will discuss how this requirement works in this article and learn it is quite liberal.

USDA Household Income Requirement

In order for a buyer to use the advantages of USDA financing, there are some extra requirements.  First the property must meet USDA property eligibility requirements.  Other words, the property must be located in an eligible area.  Furthermore, the household income must be within the USDA county limits.  The income limits are based on the number of people that will live in the home.  This number includes adults and children.  Currently USDA breaks down the county limits as follows:  1 – 4 household members and 5 or more household members.  The more people in the household, the higher the income limit.

So the number of household members includes everyone, but the USDA household income limit does not.  USDA counts all income for the entire household 18 years old or more.  Verifying income for all adults in the household is nothing new to USDA loans.  But now there is a new wrinkle in the guidelines.

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 USDA Household Income – Tax Return Transcripts Requirement

HB-1-3555 Chapter 9, 9.3 E, requires lenders to obtain Income Tax Return Transcripts from the Internal Revenue Service (IRS).  This must be completed for all adult household members which will live in the household.  Normally lenders only request tax transcripts on borrowers, but this is different.  The tax return transcripts assist lenders in validating the income documentation submitted by household members.  Therefore this is a backup to verify all household income has been included.

Due to a recent IRS data breach, the IRS is rejecting some lender requests for tax return transcripts in order to deter fraud.  That means there could be a delay in retrieving some of the tax transcripts.

What Happens if the IRS Rejects the Transcripts Request?

When an IRS Form 4506-T request from a lender returns the following rejection message, there are steps to follow.

“Due to limitations, the IRS is unable to process this request.  The IRS will mail a notification to the borrower to explain this reason; please contact your borrower.”

Required Steps to Overcome the IRS Rejection:

1. The lender must retain the determination from the IRS that their request cannot be processed.
2. The applicant may request their tax return transcripts and deliver them to the lender. Information to request transcripts by mail is available online at: http://www.irs.gov/Individuals/Get-Transcript.
3. The applicant must request the previous two years of complete tax return transcripts. If the applicant has not filed their 2014 taxes, the lender must retain:
   1. Transcripts for tax years 2012 and 2013
   2. Evidence of the applicant’s request for an extension
   3. Verification of 2014 earnings and
   4. Current income verifications as required in 7 CFR Part 3555, Section 3555.152(b)(3) and HB-1-3555 Chapter 9, 9.3 E.

In order for lenders to close a USDA guaranteed loan, the USDA commitment must be received.  In order to obtain the commitment, the IRS tax transcripts are required.  The above guidelines are only valid for lender requests the IRS will not process due to the data breach or confirmed identity theft.  These guidelines do not apply to “rejected” requests from the IRS due to misspelled names or incorrect/transposed data.

We hope you find this article helpful and we encourage you to reach out to our dedicated team of loan officers.  Let us help you buy your next home!  Learn more about how a USDA loan can help you become a homeowner here.

Follow our writer, Russell Smith, on ActiveRain.  ActiveRain is a site that real estate professionals, buyers, and sellers may use to gain helpful knowledge.

This article is not providing tax advice.  So please involve a tax professional when considering gifting real estate or money.