USDA mortgage program puts rural home buying within reach for some

Kjell Thompson has long dreamed of owning her own home, but until recently she thought it out of her reach.

Her life changed about a year and-a-half ago, when she bought a four-bedroom rambler, financed with a U.S. Department of Agriculture Direct Home loan that gave her a 30-year mortgage at 1 percent interest. The loan covered all of her costs, with no down payment required.

Thompson, 38, qualified because of her low income and her need for safe housing. A single mother, she works three jobs and earns about $25,000 a year. Her last rental home was an old, mold-speckled trailer. It wasn't the place she wanted to raise her three children.

"We've always rented, from place to place," she said. "Renting, yucky place to yucky place, decrepit place, cold place. You know?"

A growing number of would-be home buyers in rural communities are turning to federally backed mortgage products administered by the U.S. Department of Agriculture. The government has pumped millions into the USDA's loan programs to help stimulate the housing market in rural America. The low-interest loans are making home ownership possible for people who never imagined they could afford to buy.

There are almost 24,000 active USDA mortgages in Minnesota. That's up 52 percent since 2009.

The popularity of USDA home loans has exploded in just the past three years, doubling to nearly 1 million. The catch: The mortgage products are only for people living in rural communities with populations of less than 20,000.

To qualify for her loan, Thompson was required to work with local USDA staff. She also had to take a first-time home buyers class, and her new home had to meet the agency's quality standards.

She received the loan even though she has bad credit from a slew of outstanding family medical bills and now has a mortgage payment of about $675 a month. That's slightly more than she paid in rent, but she's happy she is now building equity.

Thompson said the day she and her children moved into their new home, she saw it as a big step out of poverty.

"I just believed that we would wake up that next morning in our own home, and they would have a different perspective on life, and they did, and they do, and they're proud of me," she said. "And every day we pull in this driveway it's a dream come true, and every night I climb in my bed and know this is mine... And I am so thankful."

USDA Direct Home Loans are for people with very low incomes, or less than 50 percent of the area median income and those with low incomes of between 50 to 80 percent of the median income.

The agency also offers USDA Guaranteed Loans for people with low- to- moderate incomes of up to 115 percent of the area median income. Guaranteed loans are backed by the federal government but are available directly from banks.

The guaranteed loan program has received big funding boosts from Congress. Funding this year in Minnesota is projected to be about $470 million. That's 30 percent more than last year, and it's more than triple what it was a decade ago.

Stephanie Vergin, housing program director for the U.S. Agriculture Department in Minnesota, said the agency's loans are nothing like the risky subprime mortgages that got many people into trouble a few years ago. Vergin said federally backed loans are playing a greater role in the housing market since it crashed in 2009.

"These loans have to be underwritten well and we need to make good decisions about who can afford a home," she said. "There are folks out here still looking for opportunities. And that's what's going to drive the recovery in these next couple years."

Because lenders require borrowers to have a better credit score than in previous years, it's not easy for many to obtain an affordable mortgage, said Warren Hanson, president of the Greater Minnesota Housing Fund, a non-profit agency that promotes affordable housing.

He said the USDA loans have led to home sales that otherwise might not have happened.

"The economy is still a little bit fragile," Hanson said. "Credit is still tight, and these mortgage products are limited, so I think that to the degree they're available and they're being used more, that's a really good sign."

That's because the housing market recovery has been slower in rural Minnesota than in the Twin Cities metropolitan area. Foreclosures have dropped about 7 percent in rural areas, compared to a 10 percent drop in the Twin Cities region.

But housing experts say government-backed USDA loans are helping to stabilize housing markets in small communities.

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