How To Save For A Down Payment On A House
Sarah Sharkey6-minute read
March 22, 2022
A home is a major financial commitment, perhaps the biggest purchase you’ll ever make. That purchase starts with a down payment. Are you ready to learn how to save for a down payment? Let’s explore everything you need to know about how to save for a down payment.
How Much Do You Need For A Down Payment On A House?
You might think that you need to come up with a down payment of 20% of your home’s final purchase price. But this isn’t true.
Yes, the bigger your down payment, the better. You’re more likely to qualify for a lower interest rate if you put down a larger amount. And when you put down at least 20%, you won’t have to pay private mortgage insurance on conventional loans, or loans not insured by the federal government.
Private mortgage insurance, better known as PMI, protects lenders in case you default on your mortgage. The cost of PMI will vary, but it usually runs from 0.1% to 2% of your total mortgage amount each year.
But many buyers can’t afford a down payment of 20%. If you were buying a home costing $200,000, a down payment of 20% would come out to $40,000, a big chunk of change.
However, it’s possible to qualify for mortgages with much smaller down payments. So, how much do you actually need to save? Here’s a breakdown of your low down payment options:
- FHA loans: You’ll only need a 3.5% down payment on this loan insured by the Federal Housing Administration.
- VA loans: Veterans and military members who qualify don’t need a down payment for VA loans backed through the U.S. Department of Veterans Affairs.
- USDA loans: Rural home buyers can qualify for a USDA loan with no down payment requirement.
- Conventional loans: Loans backed by Fannie Mae or Freddie Mac may only require a minimum down payment of 3%.
Even if you are able to tap into a low down payment option, you’ll still need to have enough money on hand to finalize the home purchase. As a home buyer, expect to pay for closing costs, homeowners insurance, property taxes, and appraisal fees upfront.
How To Save For A Down Payment
Saving thousands of dollars for a down payment can be challenging.
But the good news is that it’s absolutely possible to learn how to save for a down payment on a house. The tips below serve as a roadmap to the down payment you need for your homeownership dreams.
1. Create A Monthly Budget
The first step is to build a monthly budget centered around your financial goals.
Start by taking a realistic look at your income and current financial obligations. If you determine you can spend $1,500 on a monthly mortgage payment after listing your monthly income and expenses, make sure you don’t consider homes with price tags that will bust that budget.
Say you plan on buying a home that costs $150,000 and you want to come up with a down payment of 10% of that price, or $15,000. If you have 12 months before you want to move, you’ll have to save $1,250 a month to reach your $15,000 goal.
Maybe you don’t have as much time. In this case, you can tweak your down payment needs. You might decide to come up with a down payment of just 5% of that $150,000 price, or $7,500. If you want to move in 6 months, you’ll need to save that same $1,250 a month. But if you only need $7,500 for a down payment and you have 12 months to save for it, you’ll only need to save $625 a month.
Tinker with the numbers until you build a realistic monthly budget that reflects this savings goal.
2. Trim Unnecessary Expenses
Homeownership is in reach through diligent saving each month. But it might take some trimming of your expenses to meet your savings goal.
Here are a few places to consider cutting back on:
- Streaming services
- Restaurant meals or fast food
- Travel and airfare
- New clothes
- Splurge purchases
The categories above are just to get your wheels turning. You’ll need to dig into your own spending habits to look for possible savings. Even just small cuts can add up quickly. For example, skipping your $10 ice cream outing every week will add up to $520 for the year.
And remember, this is a temporary savings goal. You can return to your normal spending after you hit your down payment goal. Keeping that in mind can make it easier to cut back for now.
3. Reduce Outstanding Debts
If you have high interest debt on the books, that can significantly slow down your savings efforts. Consider focusing on repayment of high interest loans before you jump into saving for a down payment.
Here’s a quick look at some of the outstanding debts you should consider repaying:
As you pay off debt, the effect can be twofold. First, you’ll free up funds from your monthly budget to funnel towards your savings goals. Additionally, paying down debt can increase your credit score. A higher credit score will bolster your homeownership application.
4. Find Extra Earnings
It’s possible to significantly accelerate your savings goal by finding ways to bring in extra income. The expansive reach of the gig economy means there are plenty of ways to earn.
Here are a few ideas to help you get started:
- Side hustle
- Second job
- Delivery driver
- Fitness instructor
Although these are just a few ideas, a secondary income source could be just the thing you need to build a down payment quickly.
6. Open A Dedicated Savings Account
When saving up for a down payment, you’ll need a place to safely store thousands of dollars.
A high-yield savings account is the perfect spot. Not only is it separated from your checking account to limit temptations, but it also lets you earn interest on your savings. The interest rates you can earn vary. Scoring a rate around 2% would be a coup in today’s relatively low-interest rate environment.
Although you can make a withdrawal at any time, the separation of this account makes it easier to meet your personal finance goals. After all, there’s no need to talk yourself out of a big splurge directly from your checking account. The extra step of have to move the funds to your account might stop you in your tracks.
7. Look For Assistance
Here’s where to start your search for this option:
- Second loans
Importantly, you can’t hide the source of your down payment funding from mortgage lenders. Although you can even accept funds from family members, you’ll need to let the lender know before using those funds as a down payment for your real estate purchase.
The Bottom Line: Saving For A Down Payment Early Can Be A Wise Decision
The process of saving up for a down payment will take time and patience. After you determine how much you need to save, start making progress towards this monumental financial goal. The sooner you get started, the better off your home search process will be.
Want more tips as you prepare for the home buying process? Take advantage of our free resources for the complete buying process.
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