How To Save For A Down Payment: A Complete Guide

How Much Should You Save Before Buying A House?

The amount you’ll need to save upfront when buying a house depends on several factors. First, each mortgage program has its own down payment requirements. And lenders look at other factors in your personal finances, including your credit score, to determine the minimum down payment that might be to your best advantage – perhaps it could allow you to qualify with a lower rate.

Here’s a breakdown of how much you’ll need to save for each of the most popular loan types:

• Conventional loans: A conventional loan is the most common loan type. It’s any type of loan that isn’t a part of a government program. Most conventional loans are conforming loans, meaning they can be purchased by Fannie Mae and Freddie Mac. Conventional loans require a down payment of at least 3%.
• FHA loans: An FHA loan is one that’s backed by the Federal Housing Administration. These loans help borrowers with lower incomes and low credit scores achieve homeownership with competitive interest rates. FHA loans require down payments of at least 3.5% for borrowers with credit scores of 580 or higher and 10% for borrowers with credit scores between 500 and 580.
• VA loans: A VA loan is backed by the U.S. Department of Veterans Affairs. This loan program is designed to help military service members and veterans buy, build, or renovate homes at competitive interest rates. VA loans don’t require down payments.
• USDA loans: A USDA loan is backed by the U.S. Department of Agriculture. This loan program helps low- and moderate-income borrowers buy, build, or renovate homes in rural areas. USDA loans don’t require down payments.
• Jumbo loan: A jumbo loan is a non-conforming conventional loan that’s too large to be purchased by Fannie Mae or Freddie Mac. Lenders can set their own requirements. Though there’s no standard minimum down payment amount, many lenders require 10% to 30%.

Keep in mind that the minimum down payment for your mortgage program isn’t necessarily the amount you should save. First, conventional loans require private mortgage insurance (PMI) with a down payment of less than 20%. If you want to avoid PMI, you’ll need to save more.

Additionally, remember that your down payment isn’t the only upfront cost to consider. You’ll also have closing costs and other expenses related to closing on your home. Not to mention, homeownership can bring about all sorts of unexpected costs. It’s important to have an emergency fund in place before buying a home so you’re prepared to tackle those expenses.

How To Save For A Down Payment On A House

The down payment is the biggest upfront cost required to buy a home. According to the Federal Reserve Bank of St. Louis, the median home sale price at the end of 2023 was $417,700. That means that even someone making the minimum down payment on a conventional loan would have to save more than $12,000 to buy a home at that price.

If the idea of saving that much seems overwhelming, start small. We’ve broken down the process of saving for a down payment into simple steps you can follow to help you achieve your dream of homeownership.

1. Determine How Much You Can Afford

One of the most important first steps of planning for a home is determining how much house you can afford. If you aren’t sure how much you can afford, look at your current income and spending to determine what size payment you can reasonably afford. Once you’ve done that, consider using an online housing cost calculator to figure out how much you can spend.

Remember that when you’re calculating how much you can afford, you can’t only consider the principal and interest payments on your mortgage. Your monthly payment will also include homeowners insurance, property taxes and possibly PMI.

2. Open A Dedicated Savings Account

When you’re saving for a down payment, it can be confusing to have that money in the same checking account as the rest of your money. In fact, you may even find that you inadvertently spend the money on something else, making it difficult to make real progress.

Consider keeping your down payment savings in a separate high-yield savings account (HYSA). First, your savings will be separated from the rest of your money, so you won’t accidentally spend it on something else. Additionally, because it’s in a separate account, if you feel compelled to make an impulse purchase, you’ll have to wait a few days for the transfer to go through, which is likely just enough time to talk yourself out of the unnecessary purchase.

As a bonus, HYSAs allow you to earn interest on your savings. In early 2024, it’s not difficult to find accounts with interest rates of 4% or more. That extra income can help you make a bit more progress toward reaching your down payment goal.

3. Create A Monthly Budget

Creating a budget is one of the most important first steps to reaching any financial goal. First, creating a monthly budget can help you make room in your finances to save. For example, let’s say you earn $3,000 per month, and your goal is to save $12,000 within the next 2 years to buy a home. If you run the numbers, you need to save $500 per month. A budget can help you figure out where your money is going now so you can find room for that $500 per month.

Creating a budget now can also help you once you move into your new home. Homeownership is expensive. In addition to the upfront costs, you must account for your monthly mortgage payment — which usually includes property taxes and interest — and unplanned maintenance costs.

By getting on a budget, you can prepare to continue saving money after buying a home, so you’re prepared to tackle any minor or major emergencies that arise.

4. Cut Unnecessary Expenses

Saving for a large financial goal like the down payment on a home often requires cutting something from your budget, even if it’s only temporary.

Chances are that if you track your spending, you’ll find plenty of things in your budget that don’t really need to get there. Consider what expenses you could cut back on or even eliminate while you’re saving for your house. Expenses to consider cutting back on could be:

• Travel
• Eating out
• New clothing
• Streaming services
• Entertainment

Budgeting is all about priorities. During this season of life, it’s okay to make saving for your down payment your top priority. Once you’ve reached your savings goal and have a bit more breathing room in your budget, you can add in some of these other priorities or splurge on something you’ve avoided spending on while saving.

5. Don’t Take On Additional Debt

Debt can make buying a house more challenging for several reasons. First, debt usually requires a monthly payment that takes up room in your budget. If you take on additional debt while you’re saving for a home, you take away money you could have put toward your goal.

Taking on additional debt can also affect your credit score. When you open a new debt account, you’ll usually have a hard inquiry and a new credit account on your credit report, both of which can temporarily reduce your credit score. Additionally, the new debt could increase your credit utilization, which can also harm your credit score.

If you find yourself considering any new debt while you’re saving for your home, look at your alternative options. Could you postpone that purchase until after you buy your home? Could you save up to buy the item in cash? There are usually options that don’t require going into debt.

6. Reduce Outstanding Debt

In addition to avoiding taking on new debt, it’s also important to reduce your current outstanding debt. Paying down some of your debt can help improve your credit score, especially when it’s revolving debt like a credit card. And a higher credit score will make it easier to get approved for a mortgage, as well as help you get a lower interest rate.

Paying off debt can also improve your debt-to-income ratio (DTI). A good DTI can help you get approved for a larger mortgage, get approved for a lower interest rate or get approved with a lower down payment.

Finally, reducing your outstanding debt can clear up room in your budget for other priorities, including saving for your down payment and, eventually, your new mortgage payment.

7. Find Extra Income

The more you can save each month, the faster you’ll be able to reach your down payment goal and buy your dream home. However, there’s only so much you can cut from your budget. The good news is you can create more room in your budget by bringing in some additional income.

These days, there’s no shortage of options to help you earn more money. First, consider how you could earn more at your current job, whether that’s asking for a raise or picking up some overtime hours. Next, explore your options to earn additional income outside of your normal job. Popular options include freelancing, being a delivery or rideshare driver, babysitting and more.

8. Ask For Financial Assistance

If you’re having trouble saving for your down payment, there’s no shame in asking for help. In fact, a 2023 LendingTree study found that 39% of home buyers—including 78% of Gen Z buyers, 54% of millennial buyers, and 33% of Gen X buyers—received help with their down payment, usually from their parents.

If you’re lucky enough to have parents or other loved ones who can help you with your down payment, it could be an excellent option to help you buy a home more quickly. Just remember that they’ll have to write a gift letter to verify they don’t expect you to repay that money.

9. Consider Downsizing

If you’re currently a renter, chances are that your rent payments are your biggest monthly expense. One way to help you save your down payment more quickly is to downsize to a more affordable home while you’re saving.

Let’s say you currently rent an apartment that costs $1,500 per month, leaving only $250 per month available to save for your down payment. Could you downsize to an apartment that only costs $1,000 per month? You would immediately triple the amount you’re able to save each month, meaning you’ll be able to save for your home three times as fast.

10. Stay On Track

It’s easy to lose motivation when you’re saving for a large financial goal, especially if it’ll take several years to achieve. While you’re on your saving journey, find ways to stay on track and help yourself stay motivated.

First, ask yourself how you can keep your goal top of mind. Maybe that means hanging a savings tracker on your refrigerator or having other reminders of your big goal around your home.

Another way to stay motivated is to make room in your budget for smaller splurges. If it’s going to take you 3 years to save for a home, it’s not realistic to cut out all unnecessary purchases that entire time. Rather than setting yourself up for failure by planning for no unnecessary spending, consider how you can make room in your budget for some fun, whether it’s eating out, making small updates to your wardrobe, or taking the occasional weekend getaway.

Alternatives To Saving For A Down Payment

Saving up to pay your down payment in cash isn’t necessarily your only option. There are some alternatives to consider using, either instead or alongside saving.

• Down payment assistance programs: A down payment assistance program can provide a loan or grant to help pay for your down payment and/or closing costs. These programs are often offered by state and local governments or organizations. There may be some eligibility requirements, including income limits. Your lender can help you find out which programs you might be eligible for.
• First-time home buyer programs: There are plenty of first-time home buyer programs designed to make homeownership more attainable. These programs may help with down payment assistance and other needs. Some of these programs are local, while others are available at the national level.
• Zero-down payment mortgage: There are loan programs that allow you to buy a home without a down payment. The two most prevalent no-down-payment loans are VA loans and USDA loans, both of which have some strict eligibility requirements.

The Bottom Line: There Are Multiple Ways To Save For A Down Payment

For most people, the down payment is the biggest hurdle to buying a home. Yes, it can be challenging to save thousands of dollars for the down payment. However, there are plenty of strategies you can use to help you save money and buy your dream home sooner.