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USDA loans are available for certain properties with no down payment required and possibly a lower interest rate than conventional loans. However, eligibility for USDA loans largely depends on borrower income and home location.

While those four letters, namely USDA, may conjure up images of prime beef or grain crops, this particular usage refers to a program that can encourage homeownership for those with lower incomes in rural and some suburban areas. These mortgages may also help people buy and repair homes in need of updating.

Here, you’ll learn more about what these loans offer, how they work, and who qualifies for them.

What Is a USDA Loan?

USDA loans offer a loan option with no down payment for certain qualifying buyers who plan to purchase property in rural or some suburban areas. These mortgages are guaranteed by a division of the USDA known as the USDA Rural Development Guaranteed Housing Loan Program.

While partner lenders typically issue the loans themselves, the fact that the government is taking on some of the risk of lending funds has a big benefit. It allows these loans to often offer a considerably lower rate than you’d find at a commercial lender.

To qualify for a USDA loan, you may have to earn below a specific income limit and buy in certain areas. You may also purchase a property in need of repair.

If you are eligible, another perk of these mortgages is that private mortgage insurance (PMI) is not required, which is another way they present an affordable option for some buyers.

How USDA Loan Programs Work

USDA Rural Development’s housing programs give individuals and families the opportunity to buy or build a rural single-family home with no money down, repair their existing home, or refinance their mortgage under certain circumstances.

The USDA promotes homeownership for low-income households and economic development in rural areas.

USDA loans are available to eligible first-time homebuyers and repeat buyers for primary residences.

USDA Loan Requirements

Here are more details on who qualifies for a USDA loan.

Single Family Housing Guaranteed Loan Program

This program is the one that most people think of when they hear about USDA loans.

The USDA guarantees 30-year fixed-rate loans originated by approved lenders so that people in households with low to moderate incomes can buy homes in eligible rural areas. (You’ll need to search with an exact address.)

The income threshold is defined as no more than 115% of area median household income. In other words, your household income can’t exceed the area median income by more than 15%.

Buyers can finance 100% of a home purchase, get access to better-than-average mortgage rates, and pay a lower mortgage insurance rate.

That means no down payment, but borrowers still might want to look into down-payment assistance programs that also may help with closing costs.

A USDA loan can be used to purchase, renovate, or build a primary single-family home (no duplexes).

Single Family Housing Direct Home Loans

These subsidized loans, issued directly by the USDA, are available for homes in certain rural areas and for applicants with low and very low incomes.

The amount of the subsidy depends on the adjusted income of the family, and it reduces the family’s mortgage payment for a certain amount of time.

Adjusted income must be at or below what’s required for the geographical area where the house is located, and applicants must currently be without housing that’s considered safe, sanitary, and decent.

In addition, they must be unable to qualify for loans elsewhere; meet citizenship requirements (or eligible noncitizen ones); legally be allowed to take on a loan; and not be suspended from participating in federal programs.

The home itself must meet certain requirements for USDA loan eligibility. It must:

•   Typically have no more than 2,000 square feet

•   Not have an in-ground swimming pool

•   Not have a market value that exceeds the loan limit for the area

•   Not be used to earn income from the home.

Typically no down payment is required, although borrowers who have more assets than are allowed may need to use part of them toward the purchase. The rate is fixed and, when taking payment assistance into account, could be as low as 1%. The repayment term can be up to 33 years, or 38 years for applicants with very low income.

Funds can be used to purchase, build, repair, or renovate a single-family home. Once the title is out of the borrowers’ names or they no longer live in the house, they must repay part or all of the subsidies received.

Apply directly with your state Rural Development office .

This online eligibility tool can help potential borrowers see if they might qualify.

Single Family Housing Repair Loans and Grants

This program, also called the Section 504 Home Repair Program, is for homeowners with very low incomes who need a loan to improve, repair, or modernize their homes.

The program also offers grants if the applicants are 62 or older with very low incomes, and the money will be used to remove hazards to health and safety. The borrower must own the home and live in it. Prospective homeowners must not be able to find affordable credit through other venues.

Current limits on both the loans and the grants are as follows:

•   Maximum loan amount: $40,000

•   Maximum grant amount: $10,000

•   Maximum per person: $50,000, if they qualify for both the loan and grant.

Loan terms can be up to 20 years, with a fixed 1% interest rate.

For details about how to apply, applicants may contact their state Rural Development office.

Homeowners of higher income levels who need to finance home repairs may want to look into home improvement loans.

Note: SoFi does not offer USDA loans at this time. However, SoFi does offer FHA, VA, and conventional loan options.

What Is the Minimum Credit Score for a USDA Loan?

The USDA does not set a firm credit score requirement. However, you are most likely to be approved if your score is in the 640 and higher range.

Even with a lower score, however, you may qualify for a loan.

Recommended: Learn the Cost of Living by State

Pros and Cons of USDA Loans

This section will focus on the USDA guaranteed loan program.

USDA Loans Pros

•   Typically no down payment is required.

•   Lower rates than FHA and conventional loans on average.

•   There isn’t a minimum FICO® score to qualify, so a less-than-ideal credit history may not prevent the loan from going through, though lenders like to see a credit score of at least 640.

•   Lenders may also require a debt-to-income ratio (DTI) of 41% or under. Depending on other factors, a slightly higher DTI might be possible.

•   No private mortgage insurance (PMI).

USDA Loans Cons

•   Homes must be in eligible rural areas.

•   Applicants must meet income limits.

•   Only certain lenders offer the program.

•   USDA loans require a 1% upfront guarantee fee and a 0.35% annual guarantee fee, based on the remaining principal balance each year.

Other Types of Mortgage Loans

In general, if your household income is more than 115% of the area median income, you can’t qualify for a USDA loan. The income of the entire household is considered, even if someone isn’t going to be on the mortgage note. That’s just one reason you might need to seek another type of mortgage.

Three broad types are:

Conventional loans: These are provided by banks and other private lenders and are not government-backed loans. This is the most common type of mortgage today. Borrowers typically need to have a down payment of 3% to 20%, and the lender will look at the debt-to-income ratio and credit scores when deciding whether to grant the mortgage loan.

FHA loans: Lenders that issue these loans are insured by the Federal Housing Administration, and it can be easier to qualify for this type of loan than a conventional mortgage. Lending standards can be more flexible and, with a credit score of 580 or higher, the borrower might qualify for a down payment of 3.5%. Note that mortgage insurance for an FHA loan can be high.

VA loans: Veterans, active military members, and some surviving spouses may receive VA loans provided by banks and other lenders but guaranteed by the VA. Eligible borrowers can benefit from a loan with no down payment and no monthly mortgage insurance. Most borrowers will pay a one-time funding fee, though.

Different types of mortgage loans have benefits and disadvantages. As a homebuyer, it is beneficial to understand what is applicable to your situation.

First-Time Homebuyer Programs

Borrowers who qualify as first-time homebuyers can receive benefits. Loan programs include:

•   Freddie Mac’s Home Possible® program and Fannie Mae’s 97% LTV. The programs offer down payments as low as 3% for buyers who have low to moderate incomes.

•   The Fannie Mae HomeReady® mortgage program. Borrowers who undergo educational counseling can get help with closing costs.

•   Mortgages for qualifying first-time buyers, who can put as little as 3% down.

It can make sense for low- and moderate-income borrowers to contact their state housing agency to see what programs are available for first-time homebuyers.

Recommended: Find First Time Home Buyer Programs in Your State

The Takeaway

USDA loans support rural homebuyers and homeowners who meet income limits and whose properties qualify. Others shopping for a mortgage will need to research home loans and find a choice that suits them.

FAQ

What are the basics of how a USDA loan works?

USDA loans are available with no down payment and potentially a lower interest rate to borrowers who are buying certain properties in qualifying rural areas and who meet income limits.

What’s the difference between an FHA loan and a USDA loan?

These loans address different types of properties and have different qualifying requirements. With a USDA loan, there is no down payment requirement, there is no PMI, but borrowers must meet income guidelines and be purchasing properties in a rural or suburban area. With an FHA loan, there is a 3.5% down payment and a DTI requirement, but there is not the regional guideline for the property. However, PMI is assessed.

Is FHA better than USDA?

When comparing FHA vs. USDA loans, it’s not really a matter of one being better than another but of which one suits your needs and which one you qualify for. An example: If you are buying in a rural area, you might get a USDA loan requiring no down payment. If you are buying in a metropolitan area, you might instead qualify for an FHA loan with 3.5% down.

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

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Fractional reserve banking is an economic system that goes on behind the scenes at the institutions where you keep your money. It allows the bank to keep only a fraction of the money on deposit as cash for withdrawal.

The rest of the funds kept with the bank may be loaned out for other purposes. This allows the bank to make money and stay in business, and it can also help keep the economy humming along.

Learn more about fractional reserve banking, its history, and its pros and cons here.

What Is Fractional Reserve Banking?

The system of banking used most widely around the world today is called Fractional Reserve Banking (FRB). In this system, only some of the money that exists in bank accounts is backed by physical cash that people can withdraw. Banks can then take the extra money and lend it out, which theoretically helps to expand the economy.

This is a debt and interest creation system which is essentially the entire backbone of the modern-day economy.

In simpler terms, if someone goes to the bank and deposits cash, the bank only holds on to a certain amount of that cash, and they lend the rest of that out to individuals and businesses. Most checking accounts don’t pay any interest, so the bank gets to lend out the money for no cost.

Most banks have been required to keep a certain amount of the money that gets deposited available as cash, generally 10%, but this can vary based on the value of deposits held by the bank. This cash is called reserves or the reserve requirement.

Banks also earn interest from the Federal Reserve on the reserves that they hold, which is called the “interest rate on reserves” (IOR). If the Federal Reserve increases the amount of reserves that banks must hold, this takes money out of the circulating economy, and vice versa.

Fractional reserve banking is one of the main ways that banks make money, as they earn on the difference between any interest they pay to customers and the interest they charge borrowers for taking out loans.

The History of Fractional Reserve Banking

The origins of fractional reserve banking aren’t entirely clear, but the system is generally believed to have been created during the Middle Ages. At that time, more and more people began storing their money in banks, and the banks wanted to be able to transfer coins between customer accounts, rather than storing the exact coins that were deposited until the future time when the customer wanted to withdraw them. This evolved into deposits being treated as a sort of IOU, and the system continued to develop from there.

Requirements of Fractional Reserve Banking

In addition to the percentage of money that banks are required to keep on hand, there are other requirements set by the Federal Reserve for the fractional reserve banking system. Banks must send reports detailing the deposits, reserve cash, and other information about transactions to the Federal Reserve on a regular basis.

Typically, large banks (whether traditional vs. online) with more than $124.2 million in assets were required to keep 10% in reserves, but smaller banks had different requirements. Banks with assets between $16.3 million and $124.2 million were required to hold 3% in reserves, and banks with under $16.3 million in assets were not required to hold any reserves.

However, in March 2020, the Federal Reserve Board lowered the reserve requirement to 0% across the board.

The Fractional Reserve Multiplier Equation

Although it can’t be calculated precisely, the impacts of fractional reserve banking on the economy can be estimated using what is called the multiplier equation. This equation helps figure out how much money can potentially be created from bank lending.

The equation is:

Initial Deposit x 1/Reserve Requirement

For example, if a bank has $500 million in total assets and it was required to hold 10% in reserves, that would be $50 million. Using the multiplier equation, the calculation would be:

$500 million x 1/10% = $5 billion

This means that $5 billion can potentially be created in the economy through the system of fractional reserve banking. This is different from printing new money and is simply an estimate of the impacts of FRB.

Recommended: Federal Reserve Interest Rates, Explained

Pros of Fractional Reserve Banking

There are both upsides and downsides to the fractional reserve banking system. Some of the pros are:

•   Banks can use most of the money that gets deposited to grant loans and earn interest on those loans.

•   Banks also earn interest on the reserves they hold.

•   The system helps grow the economy.

Most of the time the system works well. Banks make money on interest, money gets released into the economy, and much of the time that money helps borrowers to earn money as well. The idea is that borrowers invest money into their home, business, or other activities, which in turn helps them grow their wealth. They then pay the bank back for the loan and the cycle continues.

Recommended: The Difference Between a Checking and Savings Account

Cons of Fractional Reserve Banking

However, some of the cons of fractional reserve banking are:

•   Banks don’t have a lot of physical cash on hand, which can be a problem if there is a bank run. During the Great Depression, most banks had to close because too many people were trying to take cash out and the banks didn’t have enough.

•   During an economic downturn (or what is known as a recession), the FRB system largely stops working, since the economy is no longer expanding. The problem with the system is that there is a constant need for economic growth in order to pay back the constantly increasing amounts of debt created through lending. In order to keep growing, more investment is needed, which creates even more debt. When the economy stops growing, there isn’t enough money to pay back all the debt.

•   If there is too much inflation, this lowers the value of money.

•   If people default on loans, this lowers the price of assets, lowering the value of things like real estate that people hold.

•   Sometimes central banks and governments attempt to help the economy or make political moves by making adjustments to the FRB system, such as changing interest rates. Although these changes can sometimes help in the short term, they usually result in long-term negative effects, such as inflation.

•   As occurred in the 2009 financial crisis, not all debt is “good” debt, meaning not all of it results in productive economic activity. When it becomes too easy to obtain a loan, inexperienced business owners and real estate investors can get a cheap loan when they can’t necessarily afford it. In the years before 2009, a lot of people took out cheap loans in the peak of the housing market, thinking that housing prices would continue to rise.

The Fed had lowered interest rates so much that practically anyone could take out a loan. When the market crashed, these people weren’t able to pay back loans, and the value of the real estate also crashed.

The economic cycle of upturns and downturns is an inevitable part of the fractional reserve banking system.

The Takeaway

The fractional reserve banking system is an economic system that typically requires banks to keep a certain amount of cash on hand for withdrawals. The rest of the money may be loaned out and used for other purposes, which helps the bank earn money and the economy grow.

This is going on behind the scenes when you bank. Many people are interested in finding a bank that suits their financial and personal needs, however, with features such as a competitive interest rate and rewards.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
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