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How To Save For A Down Payment

7-Minute Read
Published on February 1, 2023
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If you’re a prospective home buyer, you might know that one of the most important parts of pursuing homeownership is saving up for a down payment. Through a few actionable financial moves, the amount you need to save for a house’s down payment can be within your reach.

Let’s explore how to save for a down payment and what a good down payment looks like, and review some common questions about this part of the home buying process.

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 real estate market, you typically won’t be required to pay that much. Instead, you can use a smaller down payment and get private mortgage insurance (PMI) or mortgage insurance premiums (MIP), which is an extra cost on top of your monthly payment.

Of course, the type of loan you decide to use will help determine how big of a down payment you’ll need and whether you’ll be required to purchase mortgage insurance.

Loan Type

Minimum Down Payment

Mortgage Insurance

Conventional loan

3%

Private mortgage insurance (PMI)

FHA loan

3.5%

Mortgage insurance premiums (MIP)

VA loan

0%

None

USDA loan

0%

None

You could shave thousands of dollars off your expected down payment – and possibly months off of your savings strategy – by putting down less than 20%. But keep in mind: A higher down payment can mean a lower interest rate and a lower principal balance on your mortgage overall, as well as, saving you interest and PMI costs in the long run.

How To Save For A Down Payment On A House

The process of saving for any major expense can be a challenge, but the good news is that you can steadily build your down payment fund in several ways.

Here are the top steps you should take when saving for a house down payment.

1. Plan Your Down Payment Savings Budget

As with all major financial goals, you’ll need a plan to start building up your down payment.

The first component of the plan is to determine how much you’ll actually need to save. You can strategize by looking at the homes in your target area for homeownership. Consider the prices and decide what would be the right budget for your homeownership dreams and your finances.

Once you have an idea of how much you plan to spend on your home purchase, consider your loan options to see what size down payment you’ll need. If you’re considering a fixed-rate conventional loan, you may be able to put down as little as 3%. For instance, that would lead to a down payment of $6,000 on a $200,000 house.

Don’t Forget Your Closing Costs

But don’t forget to factor in closing costs, which can be another significant expense. Typically, closing costs run between 3% – 6% of the home purchase price. Keep that in mind when deciding on your savings goal.

Consider exploring our mortgage calculator if you aren’t sure how much you’ll need for closing costs and a down payment on your new home. With a number in mind, it’s time to set aside money in your budget for a down payment goal each and every month.

2. Increase Your Income

Even with a budget in place, you might find that there is simply not enough money available to quickly allocate toward your down payment fund.

Some prospective home buyers might need to get creative and boost their income in order to increase their savings in a short amount of time. There are lots of ways to make extra cash, including working overtime, selling unused items, taking on a second job or finding a side hustle. You could also negotiate for a raise at your current job, too.

Though it might take some brainstorming to find the right source of extra income for you, the extra effort will be worth it when you make your dream of homeownership a reality.

3. Cut Unnecessary Spending

In addition to increasing your income, cutting out extra spending can give your savings a boost. Although cutting out spending isn’t necessarily fun, it can help you achieve your savings goal. Seek creative ways to cut back on costs. Although small cuts may not seem dramatic, a series of small changes can lead to big savings.

4. Pay Off Your Debt

If you have high-interest debts, such as student loans and credit card balances, that could be eating into your ability to pay for a new home. High interest rates can wreak havoc on your finances. With that, it’s a smart move to pay off your high-interest debt before saving up for a down payment.

This strategy offers three main benefits:

  1. You can save more of your paycheck. Without high-interest debt burning through your paycheck, you can rapidly improve your ability to save for a down payment.
  2. Paying down debt can increase your credit score. Since a credit score is a key component in the home buying process, this can help you obtain better loan terms when you apply for a mortgage.
  3. Less debt can lower your debt-to-income (DTI) ratio. Besides evaluating your credit score, lenders will also compare your monthly income to your monthly debt payments. The lower this ratio is, the better you’ll look as a borrower.

It’s never a bad idea to pay off debts with high interest rates. But as you prepare for homeownership, the pressure to eliminate these expensive debts is higher than ever.

5. Automate Your Savings

If setting aside down payment money is just one more chore on your plate, take your mind off of it by setting up automated transfers. You can do this through your bank and automate a regularly scheduled withdrawal from your checking to your savings account, or authorize your employer to deposit a certain amount of your paycheck into savings.

Make sure you mark on a calendar or elsewhere when your automated withdrawals take place. You wouldn’t want to be short on funds in your account when the time for the transfer comes around.

6. Ask For Financial Help

Don’t be afraid to ask for help when it comes to making a big financial decision like a house, especially if it can get you a bigger down payment. Gift letters from friends or family can be put toward down payments, if doing so is within the rules of your mortgage or lender. You could also consider crowdfunding through various websites, apps, etc.

7. Research First-Time Home Buyer Programs

If you’re saving up for your first home, take some time to explore the common first-time home buyer programs.

These programs are designed to help you achieve your goal of buying a home by assisting with a down payment or offering a low down payment option. A few to consider include government-sponsored lenders Fannie Mae and Freddie Mac’s down payment assistance programs, Department of Veterans Affairs (VA) loans and grants, U.S. Department of Agriculture (USDA) loans and Federal Housing Administration (FHA) loans.

You might be surprised by how much help is available. Depending on your personal finance situation, you might be able to cut your required amount by thousands of dollars with down payment assistance.

8. Avoid Emptying Your Savings

While you save money for your first home, you might be tempted to empty your other savings accounts to help speed up the process. However, you should try to resist this temptation as you might need those funds later. That means any money in emergency funds, IRAs, 401(k)s or other retirement accounts should be left untouched.

Some first-time home buyers might make this mistake in their excitement to get started on the buying process. But if you empty all of your savings for a down payment and closing costs, you might be in a tight spot if you need to make repairs to the home.

For example, let’s say you buy a beautiful home with an older HVAC system. If the furnace suddenly stops working, you might need to replace or repair the unit, which could be costly. But since you emptied your emergency savings account for the down payment, you’d have to take out a loan or use a credit card to cover the expense, both of which might cause a financial issue later on.

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FAQs About Saving For A Down Payment

Here’s what other people are asking regarding saving for a house down payment.

Where can I save for a down payment?

Instead of leaving the funds sitting in your checking account, consider transferring these specific savings into a high yield savings account or certificate of deposit (CD). Using a separate account should prevent any accidental spending. Plus, a high annual percentage yield (APY) will help push you toward your ultimate goal.

What is the lowest down payment I can make?

Minimum down payments may differ depending on your mortgage. For a conventional loan, you can make a down payment as low as 3%, whereas an FHA loan requires a minimum of 3.5%. If you’ve earned the benefit from military service, a VA loan requires 0% down.

Remember that the lower your down payment, the higher your interest rate may be. Plus, down payments under 20% usually require you to purchase mortgage insurance.

Can I buy with no money down?

Qualified home buyers can buy with no down payment if they qualify for VA or USDA loans. In lieu of mortgage insurance, VA and USDA loans charge an upfront funding fee and an annual guarantee fee, respectively.

The Bottom Line

The process of saving for a down payment will take some time, but with diligent action, the process might not take as long as you think. As you implement the steps above, you’ll be well on your way to becoming a homeowner sooner rather than later. First-time home buyers may also be eligible for low or no down payment loan options or programs.

If you’ve saved enough money or are curious about your rates, start the mortgage approval process today.

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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, RocketMortgage.com and RocketHQ.com.