How Much Should You Put Down on a Mortgage

Homeownership By Noah - January 21, 2022

You may already be familiar with two important truths about down payments: 20% has long been the recommended target, and many homebuyers finance and close on homes without meeting the mark. So what should you pay attention to? Is the 20% down payment dead, or does all financial advice boil down to something as simple (and frustrating) as “figure out what you can afford and do that”?

Figuring out how much you should put down on a mortgage can be a deceptively tricky challenge in part because there are multiple types of mortgage loan that have their own requirements, advantages, and disadvantages. Not to mention other factors like your personal financial circumstances and the conditions of the housing market in your area right now. Building your best down payment strategy starts with considering how these factors intersect, balancing external influences against your family’s purchasing power.

Conventional Mortgage vs. Jumbo Loan

One factor that can make a big difference in your down payment options is whether you’re seeking a traditional or conventional mortgage, or if you need a jumbo mortgage to purchase your home.

As the name implies, a jumbo loan is larger than a traditional mortgage. The Federal Housing Finance Agency (FHFA), not individual lenders, sets the limit for when a loan crosses into jumbo territory. For 2021, the FHFA raised the conforming loan limit (CLL) to $548,250 (from $510,400 in 2020) for most mortgages on single-unit properties. If you’re house hunting in a high-cost area, the limit may be higher based on a multiple of median home value in that area, but the FHFA set a ceiling of 150% of the CLL, or $822,375.

So if you’re in a specific hot market where median home prices are much higher than is typical, such as Seattle ($896,500) or the Bay Area in California ($1.3 million), you’re much more likely to need a jumbo mortgage than if you are house hunting in Ohio, where a typical home sale price is around $250,000. 

Jumbo mortgages tend to come with stricter requirements than conventional mortgages. If you need to borrow $2.5 million to purchase your home, you’re a riskier applicant than someone seeking $250,000. Lenders want to make sure they’re working only with the strongest, best qualified candidates for these mega-loans, so they may want to see a lower DTI ratio or a minimum credit score of 700 rather than 640. To secure a jumbo mortgage, you may also need to be prepared to put down at least 20%, and some lenders may even require 30%.

Early in your house-hunting search, it can be wise to check the CLL threshold in your area so you don’t make a budget based on a fairly typical 6-12% down payment, only to find out that you may be in jumbo mortgage territory and need to commit to at least 20%.

FHA and VA Loan Down Payment Requirements

In some cases, a 20% down payment simply isn’t possible. That doesn’t mean becoming a homeowner is out of reach, even if your credit is far from stellar. The Federal Housing Administration (FHA) offers government-backed mortgage loans with a minimum down payment of only 3.5% if your credit score is at least 580 and you meet other qualifications. Borrowers with a credit score in the 500-579 range need to be able to meet at least a 10% down payment.

A VA loan is also an option for some qualified borrowers to get a mortgage loan without any down payment requirement. Having no down payment and no mortgage insurance requirement is a great set of advantages. One notable disadvantage is that some sellers may be less interested in working with buyers who have VA loans, since the VA requirements may force sellers into making expensive repairs. In a highly competitive real estate market, a seller may have the option to pick another buyer who’s easier to work with.

How Are Mortgage Reserves Different From Down Payment?

Putting down a large down payment on a house has its advantages, especially in today’s fierce market. Avoiding paying PMI can save you considerable money over time. A higher down payment means lower monthly payments and more equity in your home from the beginning. And a strong down payment may even be a factor in making your offer more attractive than other buyers bidding on the same house. But down payment isn’t the only important chunk of cash when it’s time to apply for a mortgage.

Lenders want to discuss your mortgage reserves as well as your expected down payment. Mortgage reserves are easy-to-access funds, such as bank savings, CDs, investment funds like stocks or mutual funds, or vested funds in retirement accounts. Lenders want to assess how you’d keep up with mortgage payments if you lost your income or needed help. They often measure mortgage reserves in months, so if your monthly mortgage payment will be $2,000, then $12,000 would be 6 months’ reserves. Lenders set their own requirements for how many months of reserves they need to see, depending on the type of property and size of the loan.

Keeping funds on hand to demonstrate mortgage reserves, pay your share of closing costs, and meet other important financial goals (e.g., maintaining a healthy emergency fund, saving for college or retirement) can matter as much or more than how much to put down on a house.

Is it Better to Put Down a Large or Small Down Payment?

When a couple gets married, it’s wise to devote thought, planning and budget to the marriage, not just an extravagant wedding day. Similarly, it’s important to start your homeownership journey thinking about the years to come, instead of focusing entirely on closing the sale.

Going with a traditional loan, or even an option like an FHA loan that lets you start with a low down payment, can make more financial sense if you need to work to maximize mortgage reserves. Making sure you’re prepared to meet your payments faithfully will make you feel more secure about your new home. A lower down payment can be a smart move for some homebuyers who need to make sure there’s enough liquid funds left for other major commitments.

That said, it doesn’t always make sense to aim for less than a 20% down payment. For example, FHA loans set a mortgage limit of $356,362 in low-cost counties and $822,375 in high-cost counties. If the median sales price on homes is high where you live, you may need to put down a large down payment even with an FHA loan to cover the difference. And if you need a jumbo loan, you may need to make a plan to save even more than 20% to make your dream home a reality.

Homeowners also need to consider whether paying PMI and larger monthly payments is worth the up-front advantage of a smaller down payment. In some cases, saving longer or getting creative with financing (such as exploring Noah’s Down Payment Assistance program can put you in a stronger position to start with a larger down payment and more equity, while still saving cash for important expenses in your life.

How much for a down payment on a house is in some ways an individual question of your finances and the home you’re hoping to buy. But you can also get a good sense of whether a small or large down payment is right for you by considering your local market and lender requirements on your best type of mortgage loan. Starting with a clear view of options in your area and then adding your own finances to the picture can point you toward the down payment target that gives you the best start to homeownership.