Banks assess down payments based on loan-to-value (LTV) ratio, borrower creditworthiness, and loan type. A larger down payment reduces LTV, lowering default risk and potentially qualifying the borrower for better terms. Lenders also evaluate income stability, debt-to-income (DTI) ratio, and credit history alongside the down payment size. For conforming loans (under $765,500 in 2023), a 20% down payment eliminates private mortgage insurance (PMI), while 5-10% down may require PMI. Jumbo loans (over $765,500) often demand 10-20% down.

Banks prioritize down payments to mitigate risk, as smaller down payments increase exposure to property value fluctuations. For example, a 20% down payment covers 80% of the home’s value, aligning with Fannie Mae’s conforming loan standards. Data from the Consumer Financial Protection Bureau (CFPB) shows that 63% of U.S. homebuyers in 2022 made a down payment of less than 20%, relying on loans with PMI or government programs like FHA loans (3.5% down). A 2023 Federal Housing Finance Agency report found that borrowers with 20% down payments had a 35% lower default rate than those with less than 10% down. Additionally, lenders use down payment size to tier interest rates; for instance, a 10% down payment might result in a 0.5% higher rate compared to 20% down. These practices reflect banks’ balance between risk management and market competitiveness.