How to Save for a Down Payment on a House

How to Save for a Down Payment on a House

What Is A Good Down Payment For A House?

Most mortgage lenders would love if borrowers put down 20% for a home as it lowers their risk when funding the loan. However, in today’s market, you won’t be required to pay that much. But you’ll probably have to pay for private mortgage insurance (PMI) instead, which is an extra cost on top of your monthly payment.

First-time home buyers can access several mortgage options that allow for a more manageable down payment. Depending on your situation, you may qualify for one of three low down payment options:

  • A fixed-rate conventional loan: You can obtain these loans with as little as 3% down.
  • An FHA loan: You can obtain these loans with as little as 3.5% down.
  • A VA loan: You can obtain these loans with as little as 0% down.

As you can see, there are plenty of ways to avoid the large 20% down payment. That could shave thousands of dollars off your expected down payment – and months off of your savings strategy.

Consider exploring our mortgage calculator if you aren’t sure how much you’ll need to put down on your new home.

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.

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3. Seek a raise

One of the best ways you can increase your savings is by boosting your cashflow. If the timing is appropriate, and you feel confident in your performance on the job, consider asking your employer about opportunities for advancement or negotiating a raise. Then, if you receive a salary boost, direct your new income straight to savings — you won’t even miss it!

4. Determine your timeframe to purchase your first home

Timing is everything in the housing market especially given how quickly a seller’s market can change to a buyer’s market.

So, the more aggressive that you can get with reducing your expenses and increasing your income, the less time it will take to save for the down payment on your home. To estimate how much time it will take to save, simply divide your down payment target by your monthly savings goal.

If you want to shorten the time that it’ll take to save, simply find creative ways to further reduce your expenses and increase your income to add extra cash toward your savings. Here are a few things that you can try:

If you find ways to consistently increase your cash flow, simply update your monthly savings goal and budget to reflect that new number.

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.

Other Costs to Consider When Saving for a Down Payment

In addition to your down payment, you’ll have to pay other costs at the close of the sale. You should be prepared to pay 2% to 5% of your home’s purchase price in closing costs, which covers fees paid to your lender, like discount points, origination fee, and sometimes application fees or a processing fee. You’ll also be charged fees by third parties to cover the costs of the appraisal, home inspection, title search, insurance, attorney, credit bureau, flood certification, tax certification, and recording/state fees.

Read more: The down payment is just one piece of the puzzle. Start planning for the total cost of home ownership.

5. Ask for gift money

When your family asks what you want for your birthday, Christmas or Hanukkah, anniversary or any other special occasion, tell them you’d love to forgo tangible items and instead receive gift money that you can put toward a house down payment. While not everyone may oblige, some of your relatives may enjoy knowing they’re helping you attain your dream of homeownership.

What is the average down payment percentage for a house?

The median down payment percentage for a house is 6% for first-time homebuyers, 16% for repeat buyers, and 12% overall. Repeat buyers can often sell or borrow against a previous home to help them afford a larger down payment.

Month 2: Figure Out How Much House You Can Afford

Once you get a feel for the housing market in your area and are ready to start saving, figure out how much house you can afford. To do that, calculate how much of a monthly mortgage payment you could handle on your own or with a significant other if you’re buying with someone else, said Emily Gowen, owner of PDX Money Coaching. You can use an online mortgage calculator, which will require you to enter a home price and down payment amount. These can be estimates based on the housing market research you did in month one, but you’ll get an idea of what your mortgage payment will be depending on the home price and how much you put down. “Once you know what a responsible price tag for your future home would be, you can create a goal to save say 5% to 20% for a down payment, plus closing costs, moving expenses and furnishings,” Gowen said. Learn:

Month 6: Reduce Your Current Housing Costs

To create more room in your budget to save for a down payment, you might need to reduce your current housing costs. Gowen kept her rent low — about $550 a month with utilities — by sharing a house with friends. Redding moved back in with her parents after graduating from college in 2009 to save money. “They were kind enough to allow me to stay there until I bought my house,” she said. “I paid them a reduced rent and helped around the property to compensate them.” If you can reduce your housing costs by getting a roommate, moving back home or moving to a place with cheaper rent, add that extra cash to your automatic monthly transfer to savings. Find Out: How to Save for a House While Renting 

6. Automate your savings

To help ensure that you don’t lapse on your savings, automate your monthly transfers to your savings account. Saving money doesn’t come naturally to most people, so use automation to ensure that you are making progress toward your goal and sticking to your plan.

You can do this by having your employer deposit a percentage of your paycheck to your savings account or having your bank automatically transfer funds from your checking account on a specific day of the month. The less that you have to think about doing it, the easier saving for your down payment becomes.

The Bottom Line On Saving For A House And Down Payment

If you want to save for a house, you should have a solid plan in place. But first, make sure you know how much you need for the down payment. Though many people believe they need a 20% down payment to buy a home, it’s actually possible to buy a house with as little as 3% down.

VA Loans, for instance, allow you to buy a home with $0 down. Research your loan options and make an estimate of how much money you’ll need before you start saving.

There are plenty of ways you can save money for a down payment. Start by creating a budget for your household that includes saving a certain amount of money every month for your down payment.

You may also want to consider picking up a second job, moving into a more lucrative career or downsizing to save more. Reducing your debt, asking for help from friends and family members or renting out an extra bedroom can all also help you put away more money.

When you’re ready, apply online to get the homebuying process started.

Brokerage Account

If you have an appetite for higher risk, you can opt to have your down payment fund accumulate in an investment account at a major brokerage. The account will allow you to invest the money in stocks and mutual funds that will potentially earn far higher returns than even a high-yield savings account.

However, given the volatility of the stock market, you may not realize those healthy returns as quickly as you need—or when you need them. So equity brokerage accounts, then, are best reserved for those whose timeline to buy a home is flexible and can afford to wait out any fluctuations in the market. As a rule, the stock market generally recovers from downturns over time, and funds held in stocks achieve healthier earnings in the long run.

If you’re unsure about how to choose a broker you can check out this list of the best online stock brokers.

How does your savings rate impact how long you need to save for a down payment?

Olsen’s model assumes prospective homebuyers are saving 10% of their income toward a down payment, which she admits is “aggressive.” If you can only save 5% of your monthly income but still want to accumulate a 20% down payment, it would take you approximately 15 years and nine months to save for a median priced home today.

Achieving such a high rate may have been more common last April, when Americans were able to save an all-time high of 33.8% of their monthly income due to pandemic lockdowns and government assistance checks. Since then, the personal savings rate has come back down to earth.

In September of this year, the average savings rate in the U.S. was 7.5%, according to the Bureau of Economic Analysis— equal to the savings rate for the 10 year period prior to the pandemic. And those savings are likely to be split among different savings goals, not just for a down payment, says Olsen.

“That would include emergency savings, or retirement savings or college for your kids,” Olsen notes. Although people who are actively saving up for a home purchase are likely to make it a priority.

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Don't have the 20% down? No worries!With an FHA loan you can purchase your first home with a down payment as low as 3.5%. Click below to see if you qualify today!Get Started

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.

How can I get help with a down payment for a house?

You can look into down payment assistance programs. You may be able to find programs through your state’s housing finance authority, your local city and county governments, HUD, a housing counselor, or your lender. Assistance comes in various forms, including grants, second mortgage loans, and tax credits.

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