Young couple sitting on floor planning and calculating how to save for a down payment.

How To Save For A Down Payment

Dan Rafter6-minute read
March 22, 2022

You know you earn enough to afford a monthly mortgage payment. Your three-digit credit score is strong too, something that could leave you with a low interest rate and make it more affordable to borrow mortgage dollars.

What, then, is preventing you from making the move from renting to owning? If you’re like many buyers, you’re worried about coming up with enough money for your down payment. 

Mortgage lenders require that you pay a percentage of your home’s Mnal purchase price at the closing table. This down payment offers Mnancial protection for lenders because if you fail to make your mortgage payments each month, your lender at least gets some money from you.

The good news, though, is that saving for a down payment today isn’t as difMcult as you might think. That’s because lenders offer several loan options that require smaller down payments. And the smaller the down payment, the easier it is to put together the money you need for it.

"The days of a 20% down payment are long gone," said Russell Volk, real estate agent with RE/MAX Elite in Huntingdon Valley, Pennsylvania.

Still, even coming up with a down payment of 3% of a home's purchase price can be challenging. That's why Volk recommends that buyers create a separate sinking fund or savings account for their down payment dollars and set up an automatic monthly transfer of funds to it. This way, buyers can save up without thinking about it.

Volk said he recently worked with a buyer who saved $10,000 in one year by automatically transferring money to a savings account. 

"This way allows buyers to stay consistent and disciplined," Volk said.

How Much Down Payment Do You Need For 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 0.5% to 1% of your total mortgage amount each year. If you have a $200,000 mortgage loan, you could pay up to $2,000 a year or about $166 a month for PMI.

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. If you take out a loan insured by the Federal Housing Administration, better known as an FHA loan, you’ll only need a down payment of 3.5% of your home’s final purchase price if your FICO® Score is at least 580.

On that $200,000 home, a 3.5% down payment comes out to a more manageable $7,000.

It’s also possible to qualify for conventional mortgage loans backed by Fannie Mae or Freddie Mac with down payments of 3% of your home’s final purchase price. If you served in the U.S. Military or are actively serving, you might qualify for a VA loan insured by the U.S. Department of Veterans Affairs. These loans require no down payment at all. If you’re in a rural area, you could use a USDA loan to buy a house with no money down.

And even without the help of special mortgage programs, you’ll find that most mortgage lenders will work with buyers who put down as little as 5% of their home’s final purchase price.

Joshua Hastings, founder of the financial blog Money Life Wax, says that committing to a 20% down payment might actually hurt buyers in hot housing markets. This is because it can take many months for buyers to save enough for 20% down. During these months, an area's home values and prices might continue to rise. When buyers have finally gathered enough for that big down payment, home prices have risen, meaning that buyers might have to pay more for their new home than they would have if they had come up with a smaller down payment and purchased earlier.

"A quick tip for saving a down payment rapidly is to first figure out your ideal monthly mortgage payment," Hastings said. "Let's say $1,500. Start by setting a goal to save that much each month. This will get you in the habit of paying your hypothetical mortgage, but also help you quickly add to your existing savings."

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How Does Your Down Payment Affect Your Mortgage?

Your down payment affects your mortgage in two primary ways.

First, if you don’t come up with a down payment of 20%, you’ll have to pay PMI. This could add $100 or more to your monthly mortgage payment, depending on the size of your loan.

Secondly, lenders are more willing to give you a lower interest rate if your down payment is a bigger one. That’s because lenders think you’ll be less likely to walk away from your mortgage payments if you’ve already invested more dollars in your home.

Of course, your three-digit credit score and debt levels play a significant role in determining your interest rate, too. But providing a larger down payment will increase your odds of nabbing that lower rate.

When Do You Plan On Buying A House?

Saving for a down payment will take commitment. You’ll need to put away a certain amount of money each month to build that down payment nest egg. This will be an easier task if you start saving early.

Once you determine that you’re ready to move from renting to owning, it’s time to start socking away dollars for your down payment. If you can, start doing this several months before you actually want to buy a home. It’s easier to come up with $7,000 for a down payment if you have 12 months to do it. If you want to buy a home next month, coming up with $7,000 might be more of a challenge.

Saving For A Down Payment

Start With A Budget

First, determine how much of a mortgage payment you can afford by creating or tweaking a monthly household budget. 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.

Determine How Large Of A Down Payment You’ll Need

Once you know how much you can afford, determine how large of a down payment you want to contribute. Maybe you want to come up with 20% down so you can avoid PMI. Maybe cash flow is an issue and you only want to provide a down payment of 3%. Either approach is fine, but you need to make this decision before you can start saving. 

Determine When You Want To Buy

How soon do you need or want to be in your new home? This will impact how much you need to save each month. It’s best to give yourself plenty of months to save up the money you need to buy a home. But if you must move faster, don’t panic. You’ll just need to sock away your savings at a faster rate. 

Calculate How Much You’ll Need To Save Each Month

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.

Create A Separate Savings Account For Your Down Payment Dollars

Ben Mizes, a real estate agent in St. Louis, Missouri, and chief executive officer and co-founder of real estate tech company Clever Real Estate, says that saving for a down payment can be challenging. It's all about making the commitment, he said. And part of that means opening a savings account dedicated directly to your down payment. Deposit money in it and never borrow from it. 

"Saving for a down payment can be difficult. It's important to build a plan far in advance," Mizes said. "Cut excess items from your budget. Eating out less and reducing expenses are usually the easiest ways to save each month."

If you skip those restaurant meals, Mizes recommends that you add those savings to your down payment savings account. This could provide a boost to your ability to scrape together those down payment funds.

Remember The Other Costs

The down payment isn’t the only cost to buying a home. You’ll also need to save for closing costs, which could run 3% to 6% of your mortgage loan amount. Lenders usually want to see that you have enough additional savings to cover 3 months or more of mortgage payments should your income stream unexpectedly dry up.

Saving for a home can be complicated. If you want more advice on the process, check out our tips on how to buy a house.

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Dan Rafter

Dan Rafter has been writing about personal finance for more than 15 years. He's written for publications ranging from the Chicago Tribune and Washington Post to Wise Bread, and