How to Save for a Down Payment in 5 Years or Less

How to Save for a Down Payment in 5 Years or Less

First, Determine How Much To Save For Your Down Payment

Some potential homebuyers believe they’ll never be able to buy a home because they can’t afford a 20% down payment. The truth is that many lenders no longer require 20% down. So how much do you need for a down payment?

3% Or Less

Depending on your credit score and income, you may be able to get a conventional loan with as little as 3% down. If you qualify for a USDA or VA loan, you can even buy a home with no down payment at all. At this time, Rocket Mortgage® doesn’t offer USDA loans.

The 20% Myth

Why do so many people believe that they need 20% down to buy a home? The 20% down myth comes from the private mortgage insurance (PMI) rule that most lenders and mortgage investors have.

If you have less than 20% down at closing, you may need to pay for private mortgage insurance. This protects the lender and mortgage investor if you default on your loan. Though having a 20% down payment will save you money over time, it’s not a requirement to buy a home.

Home Affordability

If you’re just beginning your homebuying journey, a great place to start is figuring out how much home you can afford. Once you take this into consideration, you’ll be able to get a realistic expectation of what your down payment could be.

High-Yield Savings Account

If you want to earn more interest without sacrificing the safety of FDIC or NCUA protection, opt for a high-yield savings account. Again, the simplest course would be to use your current bank. In fact, some financial institutions restrict these accounts to existing clients.

As their name suggests, high-yield savings accounts pay far higher interest than regular savings accounts, sometimes 10 to 20 times as much. However, the highest rates on these accounts are offered by online-only banks. If you can live with the absence of brick-and-mortar locations, one of these virtual institutions may be the best savings option of all.

That said, if you're not already an online banking customer you'll likely need to wait a little longer for transfers from your checking account than if you held the savings account at your own bank. And even the interest rates of online savings accounts are nothing to brag about compared with the potential earnings from other investment options.


9 Tips for Saving a Down Payment

Here are nine things you can do to save for a down payment so you get a home of your own more quickly than you might have thought.

1. Create a Budget

When you’re trying to save enough money for a down payment, it’s important to know where your money is going. Once you get a look at how much you’ve been spending on extras like clothing, shopping and entertainment, you may find it easier to cut back and start saving more. Creating—and sticking to—a budget is the first step. There are many budgeting methods to choose from, and the one that works best for you will be the one you’re best able to stick to.

2. Decide How Much You Can Afford to Spend on a House

A common recommendation for the amount of your income you should devote to housing is 30%. This does not mean taking on a mortgage equal to a third of your income, however. That 30% should include all housing expenses, such as taxes, utilities and insurance.

Figure out how much house you can afford and commit to saving up a reasonable down payment.

3. Automate Your Savings

It can be painful to move money into your savings account when it would be more fun to spend it. That’s why it’s a good idea to automate your savings.

When you set up an auto-deposit into your down payment fund on a set date every month, your savings will grow without you having to think about it. You could even take it a step further and auto-deposit your money into a savings account at a separate institution from your checking account, such as an online high-yield savings account. Savings accounts limit the number of withdrawals you can make each month, so it won’t be as easy to tap your savings when you’re feeling spendy.

4. Cut Costs

At some point in the down payment savings process, you’ll have to take a hard look at your expenses and decide to cut costs if you want to save faster.

Start with nonessential expenses, such as streaming services, restaurant meals or even your gym membership. Exercise is essential, but do you need to pay $50 a month to do it? Free alternatives include jogging outside or exercising along with instructional YouTube videos.

Think about how you can cut costs on essential items too. You may already have an affordable phone bill, but can you go lower by swapping to a prepaid or pay-as-you-go plan? When big savings are on the line, think outside the box to cut costs.

5. Get a Side Gig

Increasing your income is always an ideal move when it comes to making financial progress. If you don’t expect a raise or promotion at your full-time job anytime soon, you can try making money on the side in the gig economy.

But don’t go into a side hustle blindly. Selling handmade keychains on Etsy may not get quite the return you’re hoping for. Look for gig work that has low overhead and a good opportunity for profit, like tutoring, freelancing or consulting. Or consider putting in a few hours a week doing food delivery or driving for ride-hailing services.

6. Buy Used and Save the Difference

You may be surprised by how much you can save when you buy clothes, shoes, furniture, appliances, vehicles and other goods used instead of new. It’s important to be strategic with your buying practices, though. You don’t want to spend money on items that will need to be fixed or replaced quickly.

When saving for a down payment, buying second hand is an effective strategy for both wants and needs. It can satisfy cravings for new things like outfits, which can be found for pennies on the dollar. And it can also save you money on needs, such as a replacement phone in the form of a less expensive certified refurbished model.

7. Cook More

It may seem cliche, but there’s a reason personal finance experts suggest you cook more at home when you’re trying to save money: It works.

In 2020, Americans spent about 8.6% of their disposable income on food on average. Of this, 3.6% percent was on food outside of the home while 5% was on home-cooked food. Restaurant dining tends to be much more expensive than home cooking, so shifting some of the meals eaten out to home-cooked could save you even more money for your down payment.

8. Become a Champion Reseller

When you’re trying to save up a down payment, some of the property you already have could help get you there. Look at the items you no longer use or need and consider reselling them on online marketplaces, at local pawn or consignment shops or through a yard sale.

Include things like furniture you would otherwise donate or clothes in good condition. Other savvy shoppers will be happy to take these items off your hands, putting money right back into your pocket.

9. Move Back Home

Once upon a time, kids could move out from their parents’ home after high school or college and never look back. Today, however, many young people are realizing that living at home for a while longer might be the only way they can afford to save up a down payment for a home of their own.

Even if you are contributing to the household through shared rent, utilities or groceries, you can still save on the costs associated with renting such as first, last and security deposits. Saving money by living with family can accelerate your down payment savings by years.

Other Costs to Consider When Saving for a Down Payment

Brace yourself. A down payment isn’t the only expense you need to save for before buying a house. But don’t worry, the other costs are smaller and won’t take much longer to save for:

  • Closing costs. On average, buyers pay 3–4% of a home’s purchase price for closing costs.2 When you close on a house—which is basically just signing all the paperwork that officially makes your new home yours—you have to pay for expenses like loan origination fees, credit reports, underwriting fees, appraisal fees and title fees.
  • Moving expenses. You can always save money on moving costs by asking friends for help. Otherwise, hiring movers can cost anywhere from $240 to $2,000 depending on how much stuff you’re moving and how far away you are from your new home. (If you're moving really far away, you could pay up to $8,000!)3 If you go that route, be sure to get quotes from local moving companies ahead of time to help with budgeting.

Keep in mind: The seller might actually cover your closing costs. But don’t bank on it. That usually only happens if the seller is in a hurry to move or if it’s an alternative to repairing something that comes up during the home inspection.

Temporarily Downsize Your Life

One of the biggest monthly expenses people face is rent. It can account for the lion’s share of your monthly expenses and make saving for a down payment far more difficult. But if you are serious about amassing money to purchase a home, temporarily downsizing your living arrangements is a sacrifice that can make sens.

These days, it’s common for adult children to move back in with their parents to save money. TD Ameritrade found in one of its recent Young Money Surveys that, upon college graduation, 48% of Millennials moved back into their parents’ home to save money.

If shacking up with your parents is out of the question, downsizing to a smaller apartment or taking on a roommate to share in the costs can reduce your monthly expenses. That, in turn, means more money for your down payment fund.

8. Sell items you don’t use

Whether you have kitchen gadgets, old toys, furniture, clothes, etc., it’s easy to sell items in good condition to make extra cash. Declutter your home, then head to a thrift shop, host a garage sale, or post your stuff on sites like eBay, Poshmark, or Facebook Marketplace.

7. Save some more

It’s important to note that your down payment isn’t the only money that you’ll have to bring to the table when purchasing a home. So while you’re saving for your down payment, be aware that you may also need to save for things like:

  • Closing costs
  • Inspections & appraisals
  • Moving costs
  • Furnishing, decor, and/or renovation costs
  • Homeowners’ Association fees

Though all of these may not apply to your situation, it’s good to have extra funds on hand for miscellaneous expenses that may come up. You may consider reducing the amount that you put toward your down payment so that you can use the rest of the money to cover these, and other, expenses.

Month 7: Keep Spending to a Minimum

Gowen was able to save more than $1,000 per month because she was committed to keeping her expenses low. For example, she bought used smartphones and kept her phone bill to $40 a month with a Straight Talk Wireless plan. But she didn’t eliminate all non-essential spending from her budget. “Even though I was trying to save half of my take-home pay each month, everyone needs a little spending money,” she said. She just made sure to create a discretionary spending category in her budget so she would have money to cover outings or the occasional trip to the thrift store to buy clothes without shortchanging her savings. Read: The Best Place to Buy a House in Every State 

Month 11: Research Low Down Payment Loans

If you’ve cut costs and boosted your income but still won’t be able to save enough for a 20% down payment, look into loans that require a smaller down payment. “I had saved a good portion of a down payment for my first home and started talking to mortgage lenders,” Gowen said. “I was grateful they told me not to wait until I had 20% down. Even though that means you’ll pay PMI until you’ve paid off 20% of the principle of your house, sometimes it’s worth it to just get in the market before prices go up.” The average down payment was 7.6% of the median home sales price in 2017, according to real estate data provider ATTOM Data Solutions. With an FHA loan issued by a lender approved by the Federal Housing Administration, homebuyers only need to make a 3.5% down payment. Using the median home sales price of $383,281 that was referenced earlier, a 3.5% down payment of $13,414.83 would be much more affordable, and you might be able to reach your savings goal more quickly. You could save that amount in one year by putting aside $1,117.80 per month or in five years by saving only $223.58 each month. 

4. Get a side hustle

Same idea, different strategy. Think about a side job to earn extra income, whether it’s in the gig economy (ride-share driving, grocery delivery, dog walking, etc.), starting a small business (like selling crafts on Etsy), or an online service (like online tutoring or transcribing). You might even think about working part-time at a shop or restaurant. These can be a great way to earn money in your off hours.

3. Put retirement savings on temporary hold

Caveat: This might not be advisable if you’re close to retirement. But if you’re young and actively contribute a percentage of your income to a retirement plan, like a 401(k) or IRA, consider temporarily diverting that money to down payment savings. This should only be short term, but it can make a big difference in how quickly you can save for a house, especially if you currently put a sizeable chunk of every paycheck into a retirement account.

Tips to Save for a Down Payment in 1 Year

So, you need to save around 13 grand for a decent down payment on your first home, and you only have one year to do it. No worries, start by opening a savings account dedicated to accumulating down payment money. Next, write out a detailed budget listing all of your expenses and income.

Shave a little here and add a little there each week, and you’ll meet your goal before you know it! Here are some easy-to-follow tips to get you there:

Cutting Expenses

  • Bring Lunch to Work: $2,000 saved a year and $11,000 left to go

It shouldn’t come as a surprise that brown-bagging your lunch to work saves money, but the amount is almost shocking. The average cost of eating lunch out is around $10. Packing your own lunch costs about $3.00, but if you go the cheap (and simple) route with a peanut butter and jelly sandwich (70 cents), an apple (70 cents), a bag of chips (60) and a glass of water, you’re down to $2. That’s a savings of $35-$40 a week.

  • Cut the Cable Bill: $1,036 saved, $9,964 left

This one should be easy in today’s crowded TV market. Cord cutters save an average of $103/month by dropping their cable service, according to Simple Dollar. With a good internet service and all the streaming options, you should be able to see what you want, when you want it without have to pay for cable every month.

  • Kick the coffee habit: $2,444 saved, $7,520 left

This takes discipline, but it’s a tremendous saver. The average Starbucks drinker spends $3.15 for a cup of coffee. Brewing your own coffee is around 20 cents a cup. The National Coffee Association says American coffee drinkers average three cups day. That’s about $50 a week, if you buy versus $3 a week, if you brew at home.

  • Lower Credit Card Interest Rate: $250 saved, $7,270 left

A survey from claimed 8-out-of-10 people who asked their credit card company to reduce their interest rate, drop annual fees or waive late charges were successful. The average American has $6,270 in credit card debt, according to the Federal Reserve. Many customers start out with rates over 20%. If that’s you, call and see if they’ll get you down near the average.

Increasing Income

  • Sell Unused Junk: $1,050 saved, $6,220 left to go

Challenge yourself to sell $20 of things you no longer use each week. Not only will this bring in some extra coin, but your friends will thank you for decluttering before they have to help you move.

List some of these items you might have laying around your apartment that belong on Craigslist, Amazon, EBay and Facebook Marketplace and see how much you can get:

  • Electronics
  • Musical Instruments
  • Power tools
  • Memorabilia
  • Exercise equipment
  • Sports equipment like golf clubs or fishing rods
  • Cooking appliances
  • Books
  • DVDs
  • Board Games
  • Camping Equipment
  • Save Tax Return: $2,850 saved, $3,370 left to go

The average tax return was $2,850 for an individual filer in 2021. Deposit that money directly in the down payment savings account and you’re 20% of the way home.

  • Get a part time job: $3,900, Mission Accomplished! $13,850 Saved

The COVID-19 pandemic spelled out loudly how underpaid many entry-level positions are and businesses are reacting. It’s not uncommon to earn $12-$15 an hour as starting pay for part-time jobs. If you just worked a five-hour shift one night or one weekend day at the $15 an hour salary, you’d not only reach, but surpass the goal. If you could make it 10 hours a week as a part-timer, you’d have another four grand for the down payment.

Stretch Goal

Of course, the larger the down payment the lower the monthly payment will be, so don’t limit savings anywhere along the way.

You’ll have to work for it, but adding more income each week makes a $15k down payment or even $20k realistic.

Given the same budget cuts, you would only need an extra $118 per week to make a $20k down payment. If you don’t mind starting a little smaller, a $20k down payment could get you to the 20% lenders are looking for on a $100k starter home and the optimal interest rate.

However, the fact is there is a market out there for part-time work and just about every entry level job pays enough to make it worth your while. If you could score a $15 an hour part-time job and work a 10-hour week, that’s $7,800 a year. Double that – 20 hours of part-time pay – and you’re up to $15,600 from one source.

Bar tending or waiting tables on the weekend could bring in the extra couple hundred dollars you need. If that isn’t your speed, there are several ways to make money on your own.

Driving for Uber, Lyft or one of the many delivery services like Instacart, Doordash, Grubhub or Postmates will give you the flexibility and earning potential to match your schedule and budget.

TaskRabbit is a good way to make money on the side and could be good practice doing handy work before becoming a homeowner. Fiverr and UpWork give anyone the opportunity to freelance.

It might take some discipline and patience to reach the goal of saving a down payment in one year, but when you break it down into small chunks, it starts to add up quickly.

Celebrate savings milestones

Saving enough for a down payment can be daunting. To avoid getting discouraged, break it up into smaller goals and reward yourself when you reach each one. If you need to save $30,000, consider treating yourself to a nice meal every $5,000 saved. This will help you stay motivated throughout the process.



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