Home 9 Real Estate 9 How to Save a Down Payment For a House

How to Save a Down Payment For a House

Jul 8, 2024

Are you dreaming of buying your home but daunted by the thought of how you are going to save money for a down payment?

What if I told you that you could save money for a down payment faster than you ever thought possible.

hand placing coin in clear jar labeled save with 2 wooden house near it - How to Save a Down Payment For a House
This website contains affiliate links, which means that if you click on a product link, we may receive a commission at no extra cost to you.

Saving for a house is huge task but when you change your mindset about money you will see that it’s totally possible.

So don’t give up on your homeownership dreams just yet!

With some out-of-the-box thinking and smart money moves you can save up faster than you think.

Knowing the basics of personal finance can help you make smart money moves and achieve your savings goals.

In this article, we’ll cover how to save for a down payment for a house, how much to save, where to save your down payment, what kind of loans are available and what are the creative ways to help you start saving.

Save a Down Payment for a House

Understanding Down Payment Requirements

Knowing how much you need to save for a down payment is key to achieving your homeownership goal.

wooden toy house next to jar filled with gold coins labeled for my home

The amount you need for a down payment will depend on the type of mortgage you choose.

The traditional rule is to save 20% of the purchase price for down payment but many mortgage lenders now offer other options with lower down payments.

According to the National Association of Realtors, the median down payment in 2024 was 13.6% which shows there’s flexibility in down payment options.

Screen shot of Median Percent Down Payment Chart provided by NARs Home Buyers and Sellers Generational Trends
Source: 2024 NAR Home Buyers and Sellers Generational Trends

However, putting down less than 20% may require you to pay private mortgage insurance (PMI).

Here are the most common loan down payment requirements:

  • Conventional loans typically require a minimum of 3% down payment with a minimum credit score of 620.

  • FHA loans require at least 3.5% down with a credit score of 580 or higher.

  • Veterans Affairs (VA) loans and USDA loans have no down payment requirement for eligible borrowers.

While putting less than 20% down is doable, hitting that 20% mark will help you avoid private mortgage insurance (PMI) on a conventional loan.

Here’s a quick calculation for a $300,000 home to give you an idea of how much you need to save for a down payment:

  • 3.5% down of $300,000 = $10,500

  • 10% down of $300,000 = $30,000

  • 20% down of $300,000 = $60,000

The more you can put down as your down payment, the lower your monthly mortgage payments will be and the less you’ll pay in interest over the life of the loan.

What is Private Mortgage Insurance (PMI)?

yellow pen and black pencil with drawing of cloud and a house

PMI is a form of insurance to protects the lender in case you default on your loan, and it can add anywhere from 0.2% to 1.5% of your loan amount to your annual costs.

For example, on a $300,000 mortgage, PMI could cost you an extra $600 to $4,500 PER YEAR!

The amount you put down on a home can affect your monthly mortgage costs.

  • Conventional loans typically require a minimum down payment of 3%, but putting down less than 20% usually means you’ll need to pay for private mortgage insurance (PMI).

Government-backed loans have their own down payment and mortgage insurance requirements.

The more you can put down, the lower your monthly payment will be and the less you’ll pay in interest and mortgage insurance over the life of the loan.

But low down payment options make homeownership accessible even if you don’t have a full 20% to put down.

Reviewing Your Finances

Before you start saving for a down payment, take a look at your current financial situation.

Review your budget

Review your budget to see where you can cut back and allocate more to your down payment savings.

Knowing your financial situation is important before applying for a mortgage loan so you can identify areas to reduce debt and increase your chances of approval.

Review your monthly income and expenses to see how much you can save each month. Include all necessary expenses like rent/mortgage, utilities, food, transportation, insurance, and any debt payments.

review discretionary Spending

Then look at your discretionary spending – things like entertainment, dining out, shopping, and travel. See if there are any areas where you can cut back to free up more cash for savings.

budget notebook written control your spending near money, a calculator and a black marker cap

It’s also good to have enough money on an emergency fund – usually 3-6 months of expenses – before you start saving for a house, in case of unexpected costs or job loss.

Also, consider using the 50/30/20 rule to allocate your income towards necessities, discretionary spending, and savings.

Once you have a clear picture of your cash flow and savings potential, you can set a realistic goal of how much house you can afford, how much down payment you will need, and a timeline.

Remember you’ll also need to budget more money for closing costs, moving expenses, and any initial repairs or upgrades to your new home.

Assessing your finances is the first step to making sure you’re on solid ground as you start saving for a down payment.

Where to Save Your Down Payment Funds

hand holding cell phone with monthly budget showing - another hand on laptop with online banking on the screen

When saving for a down payment, look for a savings account with a high interest rate so your money can grow faster. Some good options are:

Don’t invest in riskier investments like stocks when saving for a short-term goal like a house. You want to protect your principal.

How Much House Can You Afford?

Knowing how much house you can afford is key when saving for a down payment.

As you save and get ready to buy, it’s good to estimate what your future mortgage payment will be.

Black sign with How Much House Can I Afford? near wooden blocks

Plug different home prices, down payment amounts, and interest rates into a mortgage calculator to see how they impact your potential monthly payment. A great tool for this is the Rocket Mortgage calculator.

Playing around with these numbers can help you set a realistic purchase price to shoot for which in turn helps you determine how much to save for a down payment.

Saving for a down payment based on an affordable mortgage payment is a good way to keep your homeownership costs in check.

Debt to Income Ratio

Your debt-to-income (DTI) ratio is one of the key things lenders look at when you apply for a mortgage.

Debt to income ratio spreadsheet - calculator and blue marker

DTI is the total of all your monthly debt payments divided by your gross monthly income. It’s calculated by taking your monthly debts (including the mortgage payment) then dividing them by your pre-tax monthly income and expressed as a percentage.

Most lenders like to see a DTI of 36% or less, but some loan programs will go up to 43-50% in certain situations.

A lower DTI means you have a good balance of debt to income and a higher DTI means you may be over-leveraged.

Paying down debt or increasing income will help you qualify for a mortgage at a better interest rate.

When saving for a down payment keep in mind your target home price and monthly mortgage payment so your DTI will fit within lender guidelines.

Understanding Your Monthly Mortgage Payment

Understanding how the different components of a monthly mortgage payment affect your monthly payment will help you budget effectively and make smart decisions when buying a home and mortgage.

Your monthly mortgage payment is made up of 4 parts: principal, interest, taxes, and insurance (also known as PITI).

Notebook with hand doodle PITI - Principal, Interest, Taxes, Insurance - paper clip and binder clip and calculator

Principal is the part of your payment that goes towards paying down the loan balance.

Interest is the cost of borrowing the money, calculated on the loan amount, interest rate, and loan term.

Property taxes and insurance are typically paid into an escrow account each month as part of your mortgage payment.

Your lender will pay these bills for you when they are due. Depending on the loan type and down payment, you may also have to pay private mortgage insurance (PMI) as part of your monthly payment.

How Much Should You Save for a Down Payment?

Think you need to save 20% for a house down payment? Think again. You have more options than you realize.

The amount you need for a down payment depends on the type of mortgage you get:

  • Conventional loans typically require a minimum 3% down payment with a credit score of 620

  • FHA loans require at least 3.5% down with a credit score of 580+, or 10% down with a score of 500-579

  • VA loans and USDA loans allow for 0% down

While you can buy a home with a small down payment, 20% down is ideal if you can do it.

Screenshot of the 2024 NAR Home Buyers and Seller Generation Trends - Sacrifices Made to Purchase Home
Source – NAR Home Buyers and Sellers Generational Trends

Putting 20% down allows you to avoid private mortgage insurance (PMI) on a conventional loan, which adds to your monthly costs.

Saving Strategies to Build Your Down Payment

Saving tens of thousands of dollars is no easy task, especially when you’re paying rent and other bills. But with the right mindset and plan, you can make steady progress.

Screenshot of Source of Down Payment from NARs 2024 Report
Source: NAR Home Buyer and Seller Generational Trend

Here are some of the best ways to save for a house:

1. Trim your monthly budget

Look for areas to cut back where you don’t need to spend, like:

  • Dining out and food delivery

  • Cable TV and streaming services

  • Gym memberships

  • Shopping and impulse buys

Put that money straight into your down payment savings and don’t spend more than you have to.

2. Boost your income

Taking on a side hustle or working overtime can help you save more, faster.

Here are some ideas for that extra income:

  • Freelancing

  • Pet sitting or dog walking

  • Driving for a ride-share service

  • Selling items online

3. Automate your savings

Pay yourself first by setting up automatic transfers from your checking account to a separate savings account each payday. Start with a small amount and increase it over time.

4. Bank your windfalls

Commit to saving any extra cash that comes your way, like:

  • Tax refunds

  • Bonuses at work

  • Cash gifts

5. Tap into your retirement funds

Some retirement plans allow you to borrow against your balance for a home purchase.

But consider this carefully, as it can set back your retirement goals, have tax implications, and if not documented correctly you may have to pay it back to your retirement fund.

6. Look for down payment assistance programs

Many state and local governments offer down payment assistance programs for eligible home buyers.

black marker next to post it stick note labeled Down payment assistance - near $100 bills spread out

These may provide grants or forgivable loans to help with your down payment and closing costs. Research what programs are available in your area and the terms and conditions as these may change over time.

Here are some of the key government programs that offer down payment assistance to homebuyers:

Federal Programs

  • The Chenoa Fund provides up to 3.5% of the purchase price as a zero-interest second mortgage to cover the down payment on a Federal Housing Administration (FHA) loan. The second mortgage is forgiven after 36 on-time payments.

State and Local Programs

Many states, counties, and cities offer their own down payment assistance programs, usually in the form of grants or low/no-interest second mortgages.

Here are just some examples of programs that may be available to you – make sure to check your state and local government for the program available:

Most Common Eligibility For Some Programs

Down payment assistance programs are usually for:

  • First-time homebuyers (usually defined as not owning a home in the past 3 years but may be different for each program)

  • Low- to moderate-income buyers

  • Home buyers purchasing a primary residence

  • Buyers meeting local purchase price limits and location

  • Buyers using an approved mortgage program or specific lender

How to Find Programs

  • Contact your state’s Housing Finance Agency

  • Search for city and county programs in your area

  • Ask your local lender about down payment assistance options

  • Use online search tools like FHA.com to find programs you may qualify for

  • Check out the HUD website for local homebuying assistance

The amount of assistance varies by program but can range from a few thousand dollars up to 20% of the home’s purchase price in high-cost areas.

By combining down payment assistance with a low down payment mortgage, many buyers can get into a home with little to no money out-of-pocket at closing.

Other Ways to Save Money For a House

1. Automate Your Savings

Pay yourself first!

Set up automatic transfers from your checking account to a dedicated down payment savings account each payday to help you save money faster. 

Start small if needed, then bump up the amount over time.

Keep your house fund separate from your everyday spending account so you won’t be tempted to spend it.

Check out SoFi savings accounts for their ability to create separate sinking fund vaults to help you keep your savings goals separate.

Also, make sure to install Rakuten on your web browser when you open your SoFi account – it will help you earn extra cash toward your savings for your house! Win-Win!

Screen shot of SoFi Bank website showing Rakuten pop up on the screen showing savings
Source: SoFi – High Yields Savings Account

2. Bank Your Windfalls

Commit to saving any extra cash that comes your way, like tax refunds, bonuses at work, or even birthday money from Grandma. 

Treating these windfalls as bonus contributions to your down payment fund can add up fast.

3. Sell Your Stuff

woman looking at 2 bowls she is holding

Take a look around your home for how much stuff you have and for items you no longer need or use. Selling furniture, electronics, clothes, or collectibles online can put some serious cash back in your pocket. 

Host a yard sale for smaller items or use sites like Facebook Marketplace, Craigslist, or eBay to reach more buyers.

4. Pick Up a Side Hustle

Increase your income with a second job or side gig and save faster

Here are a few ideas for additional side hustle to earn extra money:

5. Cut Your Spending

Take a look at your budget to see where you can cut back and stop spending money.

Making small changes to your budget can make a big impact on your savings and change your financial life.

Here are a few areas where you can improve and cut recurring expenses to help you save:

  • Cook more meals at home instead of dining out

  • Cancel subscriptions you don’t use

  • Shop secondhand for clothes and household items

  • Trim your cable or phone bill by switching to a cheaper plan

  • Skip expensive vacations in favor of staycations or low-cost road trips

6. Rent Costs a Cheaper Place

Housing is likely your biggest monthly expense. If your lease is up soon, consider downsizing to a smaller rental or moving to a less expensive area. 

If you can move in with a family member for a short period of time to help you save for a house consider that as well.

Pocketing the savings can help you build your down payment fund much faster. Just make sure to factor in any moving costs as well.

7. Ask for a Raise

If you’ve been at your job for a while, it may be time to request a pay bump.

List your recent accomplishments and the value you bring to the company. Even a small raise can supercharge your savings when applied directly to your house fund.

8. Use Your Retirement Accounts

As a first-time buyer, you can withdraw up to $10,000 from your IRA to buy a home without the normal 10% early withdrawal penalty. You may also be able to borrow against your 401(k).

This can be a big boost to your savings but be sure to weigh the pros and cons since you’re losing out on investment growth, and if not documented correctly, you’ll have tax implications and have to pay it.

How Long Will It Take to Save For a House?

What would you do if you could buy your dream home a year from now? The steps to get there are easier than you think.

iPad on table in a living room

The timeline for saving your down payment depends on your target amount and how much you can save each month.

Here’s a general idea to help you understand if you save $500 per month, it would take:

  • About 1.75 years to save 3.5% down on a $300,000 home

  • 5 years to save 10% down

  • 10 years to save 20% down

Saving $1,000 per month would cut those timelines in half. The more you can put away each month, the faster you’ll be ready to buy.

Frequently Asked Questions (FAQs)

How long does it typically take to save for a house down payment on one income?

The timeline for saving a down payment on one income varies depending on factors such as your income, expenses, and target down payment amount. On average, it can take anywhere from 3-10 years to save a sufficient down payment.

Is it better to save for a larger down payment or buy a home sooner with a smaller down payment?

This decision depends on your personal financial situation and goals. A larger down payment can lead to lower monthly mortgage payments and help you avoid PMI, but it may also mean waiting longer to buy a home. Consider your long-term financial objectives and consult with a financial advisor to determine the best approach for you.

Can I use retirement funds for a down payment?

In some cases, you may be able to use funds from a 401(k) or IRA for a down payment. However, this decision should be made carefully, as withdrawing from your retirement accounts can have significant tax implications and impact your long-term financial security.

What if I have debt while trying to save for a down payment?

If you have high-interest debt, such as credit card balances, it’s generally advisable to focus on paying these off before saving for a down payment. This will help you reduce your overall debt-to-income ratio and improve your financial standing when applying for a mortgage.

Should I work with a financial advisor when saving for a house down payment on one income?

Working with a financial advisor can provide valuable guidance and support as you navigate the process of saving for a down payment on one income. An advisor can help you create a personalized savings plan, identify areas for improvement, and offer expert advice tailored to your unique financial situation.

Final Thoughts

Saving for a down payment is never easy, but it’s so worth it. By thinking outside the box and using every opportunity to save you can make your homeownership dreams a reality sooner than you imagined.

Change your money mindset and stay focused on your goal, tap into assistance programs, and keep an eye on your budget.

With dedication and a solid plan, you’ll be ready to buy the home you’ve always wanted.

The keys to your new front door are within your reach!

The Budget Academy
Fab Kellum author of the Girl, Get Out of Debt! blog

Hey you! Welcome to The Budget Academy. I am Fab, a mom, and an entrepreneur at heart. Like many, I have overcome financial struggles, and now I get to share with you how I became debt-free and what I learned on my own personal journey.  I have a Finance and Real Estate background and am passionate about helping others succeed and achieve financial freedom.  So, please don’t be shy, let’s connect and start this journey together! Learn more about me here.