How to Save for a Down Payment on a House

Step 1: Figure out how much youll need to save

Before you begin saving a down payment for a house, you first have to know how much you’ll need to save. Plan to sit down with a mortgage lender who will let you know how much of a mortgage you can qualify for.

Generally speaking, your housing expense should not exceed 28% of your stable monthly income. So if your income is $5,000, you can safely allocate $1,400 of that ($5,000 x .28) to your future house payment.

The $1,400 will include mortgage principal and interest, real estate taxes, private mortgage insurance (PMI), homeowners insurance, and homeowners association (HOA) dues, if any.

With mortgage rates at about 4.5%, this will translate into a mortgage loan amount of about $177,500.

To arrive at the amount that you can afford to pay for a house, you’ll have to add the down payment on top of that. In today’s tight lending market, you should generally expect to make a 20% down payment on a house. No, that’s not a requirement–it’s just the minimum down payment to get the best-priced deals.

You can certainly put down less, but you will likely be paying a higher rate and, if you have any kind of credit issues, you may not be able to get a mortgage at all.

So taking our example of a mortgage for $177,500, and making a provision for a 20% down payment, we can calculate the actual dollar amount this way:

$177,500 divided by .80 = $221,875, minus the $177,500 mortgage loan = $44,375, or rounded up, $45,000

Rounding the numbers up, you’ll be purchasing a house for $222,000, with a $177,500 mortgage, and a down payment of about $45,000.

Don’t get hung up on those calculations– a mortgage lender can perform the same calculations for you based on your own financial circumstances. We’ve done this for illustration purposes only, and so that we can carry that $45,000 number forward for more calculations.

Related: Get pre-approved for a mortgage online

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6. Knock out high-interest debt

Expensive debt, like that from credit cards, can make it more difficult to reach savings goals. Focus on eliminating high-interest debt, so you can have more to save. Or consider refinancing debt (from credit cards, student loans, etc.) to receive lower interest rates and free up cash from your monthly expenses, which you can then direct toward your down payment savings.

Step 5: Set up an automated savings plan

Unless you’re a saver by nature, and most of us aren’t really, you’ll need to automate the savings process. That will mean some sort of payroll savings plan. Just like your 401(k) plan, you should allocate a certain percentage or dollar amount of your regular pay to go directly into a savings account or money market account dedicated to accumulating the funds for your down payment.

Not only does this make the process automatic, but it also makes it invisible. Money moves from your paycheck to your dedicated savings account without you even seeing it happen. That will remove both the temptation and ability to spend the money on other purposes.

Related: Put your money on autopilot

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.

The Bottom Line

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.

Whether you’ve already started saving for a house or you’re starting to save for the first time, 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.

If you’ve been saving and are ready to take the next step, get preapproved with Rocket Mortgage to get the home buying process started.

How much should you save for a down payment?

You’ve probably heard the common homebuying myth that you need at least 20% of your home’s price for a down payment. But you actually have several options that can reduce your down payment to as low as 3%. Don’t be afraid to explore FHA loans, Freddie Mac and Fannie Mae loans, and VA or USDA loans, if you qualify.

Keep in mind, if your down payment is below 20%, you will likely have to pay private mortgage insurance, or PMI, along with your monthly mortgage payment. This protects your lender in case you aren’t able to pay your mortgage. Once you have 20% to 22% equity in your home, you can typically cancel the coverage or it drops off.

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.

Month 3: Set a Savings Goal

When you have an idea of how much house you can buy based on the monthly mortgage you can afford, you can set a down payment savings goal. Start with the total amount you want to save then divide it by the number of months over which you plan to save to figure out how much to set aside each month. For example, the median price of homes sold in the U.S. is $412,156, according to Redfin data from March 2022. To save 20% of the down payment, or $82,431.20, you would need to put aside $1,373.85 per month for the next five years. Of course, the actual sales price of the home you want to buy may be more or less than the U.S. median sales price, which would change the amount you would need to save.  

Savings Account 

Storing your funds in a savings account at the bank or credit union where you do your checking is probably the simplest and easiest choice. As an existing customer, you can open a savings account quickly, and then readily transfer money to it from your checking account, either manually or through recurring transfers every payday.

The funds are secure since they’re guaranteed by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA). There is a downside to this option, though. That’s a meager return on your funds since regular savings accounts come with very low interest rates.

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.

FAQs

  • To save for a down payment on a house, take these seven steps:Determine the amount you need to saveFactor in closing costsDecide where to keep your down payment accountSet a timeline for savingDevelop a budget that prioritizes savingsAutomate your account contributionsTrack your progress

  • Generally a high-yield savings account is the best place to put money you're saving for a down payment. A high-yield savings account offers a more competitive rate of return than traditional savings accounts or checking accounts. Your money remains accessible. If it's in an FDIC-insured account, there's no risk of losing it. And you're separating your savings from your checking account, where it's more likely to be spent. Other options exist. These include money market accounts, CDs, or bonds. Most have downsides, such as an inability to access your money exactly when you need it without incurring penalties.

  • The amount you'll need to save for a down payment depends upon:How much you plan to spend on a homeYour lender's down payment requirementsThe amount of equity interest you want in your homeWhether you hope to avoid mortgage insurance, which raises your monthly payment Traditionally, a would-be home buyer was required to put down 20% of a home's value. Now, it's possible to buy a home with just 3% down. Certain kinds of government-backed loans, such as VA loans, may even let you purchase with no down payment at all. Still, a larger down payment can lead to a wider choice of loan options. It can also help you reduce your monthly payment since you avoid private mortgage insurance. And it can reduce the chances you'll end up owing more than your home is worth. As a result, when possible, aim to put at least 20% down.

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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.

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.

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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