Homebuyers of moderate means in rural Inland Northwest communities are discovering U.S. Department of Agriculture-backed mortgages as one of the last zero-down alternatives available today.

Demand for loans guaranteed by the USDA's Office of Rural Development has grown substantially since conventional lenders began tightening their approval criteria, says Ed Reynolds, the Olympia-based Rural Development program specialist for Washington state.

In Spokane County, the Rural Development program guaranteed 62 home loans totaling $10.5 million in 2010, down from 75 loans totaling $12.8 million in 2009, but still several times higher than the totals for 2008 and 2007, when USDA guaranteed 11 loans for $2.1 million and two loans totaling $311,000, respectively.

Statewide, the Rural Development program guaranteed a record 2,473 home loans totaling $476 million in 2010, up from 2,152 loans totaling $404 million in 2009. In 2008, as the subprime mortgage crisis caused conventional lenders to tighten their own lending criteria, Rural Development guaranteed 491 loans totaling $89.6 million, up from 125 loans totaling $21 million in 2007.

"Only two zero-down programs are left—us and Veteran's Affairs," Reynolds says. "We don't make you do pushups first."

Spokane-based Sterling Savings Bank is one of the largest originators of Rural Development-backed loans in Washington state, he says.

Donn Costa, an executive vice president at Sterling, says most Rural Development-guaranteed loans are for nonfarm residential properties in designated rural areas that are just outside of metropolitan city limits.

In Spokane County, those areas include Medical Lake, Cheney, Deer Park, and most unincorporated areas, he says.

The Rural Development guarantee replaces mortgage insurance, while providing protection for USDA-approved mortgage brokers and lenders, through a 3.5 percent fee that's usually attached to the 30-year mortgage.

The program is aimed at moderate income earners, meaning borrowers can make up to 115 percent of the area median income. To qualify for a Rural Development-guaranteed mortgage in Spokane and Kootenai counties, the current annual household income maximum for a family of four is $74,050, USDA's website says.

Costa says he expects Rural Development-guaranteed loans to increase in volume.

"We're predicting new home sales to be better in 2011 than 2010, and we expect USDA-guaranteed loans to increase," he says.

Costa says, though, that such loans are a small fraction of Sterling's total loans.

"With income and area restrictions, I don't think it's going to be more than 1 percent of our overall loan volume," he says.

Katie Marcus, residential sales manager at Coeur d'Alene-based Mountain West Bank, says about 10 percent of that bank's home loans are Rural Development-guaranteed loans, even though homes within the city limits of Coeur d'Alene, Hayden, and Dalton Gardens are ineligible for such mortgages.

The Rural Development-guaranteed loan is supposed to be a loan of last resort, but most people wanting to or willing to live in designated rural areas fall within the income limits to qualify for them, Marcus says.

"If you have access to assets for a down payment, we're supposed to encourage Federal Housing Administration or conventional loans," she says. "In the current economy, though, it's hard to save money."

Conventional mortgage requirements include a down payment of at least 5 percent of the loan and mortgage insurance, Marcus says. Private mortgage insurance costs at least 0.9 percent of the amount of the loan annually, although mortgage insurance isn't required once the equity in the home reaches 20 percent to 22 percent of its value, she adds. That combination of those two requirements eliminates from the conventional-mortgage market those potential homebuyers who have little or no savings, she says.

While Rural Development-guaranteed mortgages don't require a down payment, Marcus says borrowers are subject to strict debt-to-income ratios meant to guard against them taking on too much debt.

For instance, Rural Development-guaranteed mortgage payments are limited to 29 percent of the borrower's gross monthly income, and the borrower's total debt payments must be less than 41 percent of gross monthly income, she says.

Jeffrey Beeman, Rural Development's Coeur d'Alene-based area director for the 10 northernmost Idaho counties, says 2010 was second only to 2009 in terms of guaranteed home loans there.

In 2009 and 2010, the Rural Development's North Idaho office guaranteed 442 and 382 home loans, respectively, up steeply from 2008 and 2007, in which the office guaranteed a two-year total of 197 mortgages.

Beeman says Rural Development backed the majority of its residential property loans in Post Falls in 2009 and 2010, but Post Falls won't be considered a rural community much longer.

"Next year, with release of new census figures, Post Falls will be an ineligible community," he says. "I think the market is going to move toward Rathdrum and Spirit Lake. It depends how far people are willing to commute."

The Rural Development home-loan guarantee program ran out of funds for a portion of 2010.

"We weren't able to close Rural Development-guaranteed loans for about 45 days," Sterling's Costa says.

Congress, however, restored Rural Development's authority to guarantee such loans by putting the program on a self-funding track. The legislation set the fee for the guarantee at its current rate of 3.5 percent, up from an earlier rate of 2 percent.

"The fees are how we pay loss claims," Reynolds says. "We're taking in more than we put out, actually."

Adds Beeman, "Now that it's budget neutral, I think there will be lots of money in that program."