How to save for a down payment on a house: 10 strategies to try
Published 2:00 AM EDT, Wed April 10, 2024
Siri Stafford/iStockphoto
Buying a home is an exciting milestone, but saving for the down payment can be challenging. In fact, 38% of first-time homebuyers stated that socking away a down payment was the most difficult step in the homebuying process, according to a 2023 survey by National Association of Realtors (NAR).
Coming up with a plan to reduce expenses, boost income and maximize savings can help. You might also explore down payment assistance programs or loan types with no down payment requirement, like VA or USDA loans. To get started, set a savings goal and review our 10 strategies for saving for a down payment.
Determine how much money you need to save
The key to successfully saving is knowing how large of a down payment you need to save. While saving 20% of the home price can be a good goal and help you avoid mortgage insurance, you can put down less.
Down payment requirements vary and are based on the type of mortgage:
- Conventional loans: You may be able to put just 3% of the home price as a down payment with certain conventional mortgage loans, such as Freddie Mac’s Home Possible or HomeOne programs.
- FHA loans: The Federal Housing Administration (FHA) offers FHA loans with down payments as low as 3.5% of the purchase price, provided your credit scores are at least 580. You’ll have to put at least 10% down if your scores are between 500 and 579.
- VA loans: Eligible veterans and service members can purchase a home with no down payment using a VA loan, which is backed by the Department of Veterans Affairs.
- USDA loans: The US Department of Agriculture offers these loans to borrowers in qualifying rural areas with no down payment required.
- Jumbo loans: Mortgages above the conforming loan limits ($766,550 in 2024 for most areas) pose a greater risk to lenders. As a result, most lenders require 20% down for a jumbo loan.
For conventional loans, you must pay for private mortgage insurance (PMI) if your down payment is less than 20%, adding to your out-of-pocket costs. FHA loans also carry similar mortgage insurance premiums (MIP), which are required on all FHA loans regardless of down payment amount. But coming up with such a substantial sum may be out of reach for some. In fact, the typical down payment for first-time homebuyers was 8% of the purchase price in 2023, according to NAR.
Example: Suppose you have your sights set on a $350,000 home and plan to borrow a conventional mortgage. You must save a minimum of $10,500 to meet the 3% down requirement. If you want to avoid PMI dues and have adequate time to save, you’d need $70,000 to make a 20% down payment.
10 strategies to save for a down payment
Saving such a large amount requires dedication and a combination of methods to help you reach your goal.
“The best source for financing a down payment is to use your own savings, and if you don’t have sufficient funds, then a gift from a family member is the second-best option,” said Melissa Cohn, a mortgage broker and executive at William Raveis Mortgage. “If neither of these suffices, there are a number of down payment assistance programs and grant options for first-time homebuyers.”
1. Create (and stick to) a budget
The first step in any savings plan is to review your income and expenses. Having a budget will help you create a financial plan and provide some accountability. Start by noting your monthly, post-tax income. Using that number, assign a specific figure to each category of expenses, starting with the non-negotiables, like housing.
Some tips to get started include:
- Track every dollar you spend to ensure you’re sticking to your budget.
- Compare your actual spending to your budget and make changes as needed.
Here’s a sample budget for a single person who makes $4,500 a month after taxes, where every dollar of income is directed to an expense or saving goal.
| Expenses (needs) | Expenses (wants) | Debt payments and savings goals |
|---|---|---|
Rent: $1,500
| Streaming: $35
| Student loan repayment: $250
|
Utilities: $200
| Dining out: $200
| Credit card debt: $185
|
Groceries: $300
| Entertainment: $100
| Retirement savings: $400
|
Phone and internet: $150
| Hobbies: $100
| Down payment savings: $500
|
Gas: $100
| Shopping: $200
| |
Insurance: $280
| ||
Total: $2,530
| Total: $635
| Total: $1,335
|
In this scenario, you’ll put about 11% of your income toward down payment savings each month. If you want to meet the 3% down payment savings goal ($10,500) from the example above, it would take about 21 months to meet your goal using this strategy alone.
2. Reduce unnecessary expenses
After setting up a budget, examine the “wants” category of monthly expenses and identify ways to tighten your purse strings.
Example: You could reduce your dining-out budget from $200 to $100 by committing to cooking at home more often. That might seem like $100 more each month toward your down payment, but keep in mind that eating at home will increase your grocery budget. Canceling one streaming service may reduce your monthly spending from $35 to $20, saving $15 per month. And if you cut your shopping habits in half, you could save another $100.
Those three changes would result in $215 in monthly savings, and you’d meet the example goal of $10,500 six months sooner.
Note: There’s a lot of disdain out there for the “avocado toast” argument — and rightly so, since cutting out your splurges isn’t a sound long-term strategy. However, cutting “wants” in small amounts is a surefire short-term plan; it’ll help you save your down payment faster.
3. Increase your income
Reducing expenses is helpful, but it’s only one piece of the puzzle — increasing your income can help you reach your savings goal faster. Boosting your income is far easier said than done, but here are three ways to bring in more money each month.
- Ask for a raise. Document your recent accomplishments and request a pay bump from your employer, especially if you’re overdue for a cost-of-living increase. Your employer may not agree, but it doesn’t hurt to ask. You might also investigate higher-paying positions in your field. Any additional income you earn can be funneled directly into your down payment fund.
- Get a side hustle. Use your existing skills to freelance or take advantage of gig economy opportunities like Uber, Lyft, Postmates or Instacart.
- Sell items. Gather unused or unwanted items and sell them via online marketplaces or an old-fashioned garage sale.
4. Earn a better return on your savings
Where you park your down payment savings also matters. Avoid keeping your funds in your checking account to reduce the temptation to spend that money. Instead, use a separate savings vehicle with higher returns so your money can grow more quickly. Here are a few low-risk ways to earn better returns on your down payment fund than a traditional savings account might offer:
- High-yield savings accounts offer a higher Annual Percentage Yield (APY) than regular savings accounts, boosting your returns.
- Certificate of deposit (CD) accounts can earn even more on your savings. The catch? You must keep your money in the account for a specific term while it matures, which can be anywhere from three months to ten years. This can be a good option if you know you won’t buy a home for a certain period. If you access your money before the term ends, you’ll pay early withdrawal penalties, negating some of your earnings.
- Money market accounts (MMAs) offer competitive APYs and often allow check writing and ATM access. However, many MMAs have minimum deposit requirements and monthly maintenance fees.
Before deciding where to house your savings, consider how flexible you need to be and compare the APYs and potential fees on each account.
5. Set up automated savings
To remove hurdles or distractions, set up automated transfers from your checking account into your preferred savings account. Your employer may also allow you to designate more than one destination for your paycheck to be directly deposited. These measures can help you stay consistent and ensure seamless savings.
6. Put windfalls directly into savings
If you receive a sizable tax return, an annual bonus, a commission or an inheritance, consider depositing those earnings directly into your down payment fund. Lump-sum injections of cash are always a boon, but while you’re saving for a home, resist the urge to take a vacation or buy a new gadget. Instead, accelerate your savings and meet your goal faster by transferring that money straight into your savings account.
7. Explore down payment assistance programs
Your city or state may offer down payment assistance programs that help cover some of the costs. (You may be eligible for first-time homebuyer programs if you haven’t owned a home in the past three years.) Each program has its own eligibility requirements and benefits, but many contribute a specific amount toward your down payment or closing costs.
To get started, select your state on the US Department of Housing and Urban Development website to find homebuying programs in your area.
Some lenders also offer their own down payment assistance programs. For example, Bank of America’s Down Payment Grant program offers up to 3% of the purchase price (up to $10,000). And if you qualify for a 3% down payment with Rocket Mortgage, the lender will pay 2% and you cover 1% through its ONE+ program.
Related >> The best mortgage lenders for first-time buyers
8. Put other savings goals on hold
If you’re serious about saving for a down payment, you may need to pause other savings goals. That dream vacation you’re planning may need to wait, for example.
You can also choose to cut back on retirement savings for a short period but don’t skip out on it entirely. Cutting back just 5% to 10% may help bolster your savings without a detrimental impact on your nest egg. (Remember to return to your full investment when you’ve met your down payment goal.)
We receive compensation from our partners for Featured Offer placements, which impacts how and where their offer is displayed.
Earn a $200 cash rewards bonus after spending $500 in purchases in the first 3 months
Credit Score ranges are based on FICO® credit scoring. This is just one scoring method and a credit card issuer may use another method when considering your application. These are provided as guidelines only and approval is not guaranteed.
9. Consider a cash back credit card
Cash back credit cards help you earn rewards on your spending that you can add to your down payment fund. As long as you pay off your full credit card balance each month, you can avoid accruing interest charges that would negate your earnings. Don’t fall into the trap of spending more than you can afford just to get rewards, or worse, getting into credit card debt while trying to save for a down payment.
Good to know: These types of credit cards are generally reserved for consumers with good to excellent credit. That means you must have credit scores in the high 600s or better to qualify.
10. Pay down debt
When you pay down debt, you lower your debt-to-income ratio (DTI), a metric used by mortgage lenders that shows how much of your pre-tax income goes toward monthly debt payments. Mortgage lenders typically like borrowers to have a DTI of 36% or less. While some lenders may accept a higher DTI, lowering your DTI can only help your odds of loan approval or of getting a lower mortgage rate.
Crucially, paying down debt also means paying less in interest — and once the debt is paid off, you can allocate that monthly payment toward your down payment savings fund.
“The goal is to be able to gather enough money for a down payment so that you can buy a home,” said Cohn. “It doesn’t matter how many sources you have to tap if you get to the finish line and become a homeowner.
Other mortgage costs to save for
A down payment is just one of the costs associated with homeownership. There are other mortgage costs to save for, including:
- Closing costs: These are fees paid to the lender to cover the costs of creating and underwriting your mortgage. Closing costs vary by lender, loan type and area, but generally, expect to pay between 2% and 6% of the loan amount in upfront costs. (So, for a $300,000 mortgage, your closing costs may range from $6,000 to $18,000.)
- Moving expenses: The amount you’ll pay to move into your new home varies widely depending on whether it’s a local or cross-country move, and whether you hire a professional moving company. Average moving costs can range from $1,250 to $4,890, according to Moving.com.
- Emergency fund: As a homeowner, you’re responsible for all costs if something breaks down and needs repair. An emergency fund can help insulate you from the unexpected. When saving for a down payment, avoid dipping into your emergency fund, if possible — you’ll be glad to have that money set aside on a rainy day.
- Utility deposits: When setting up the utilities for your new place, you may be required to put down deposits, which can be a flat fee or the equivalent of several months’ bills.
- Home maintenance: Any homeowner will tell you that there’s almost always something to fix, from painting or gardening to more serious repairs like heating systems or electrical issues. Homeowners insurance will cover some repairs, but must first meet your plan’s deductible. There are also miscellaneous costs of homeownership that aren’t covered by insurance.
Frequently asked questions (FAQs)
The time it takes depends on your savings target and how much you set aside each month. For example, if you want to save a $20,000 down payment and can set aside $500 per month, it’ll take you almost three and a half years to hit your desired savings amount. Your timeline will vary if you plan to save less or can afford to save more.
Most homebuyers need a down payment to purchase a home — if you have strong credit, you may qualify for a down payment as small as 3% on a conventional loan. However, some government-backed programs, like VA and USDA loans, offer mortgages with no down payment to eligible borrowers.
Yes, you can use gifted money toward a down payment if you disclose the source of the funds and include a letter from the donor that states the funds don’t require repayment. The gift funds must be from an acceptable source, like a family member, and may not be used toward investment properties.
Editorial Disclaimer: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airlines, hotel chain, or other commercial entity and have not been reviewed, approved or otherwise endorsed by any of such entities.
This content is for educational purposes only and is not intended and should not be understood to constitute financial, investment, insurance or legal advice. All individuals are encouraged to seek advice from a qualified financial professional before making any financial, insurance or investment decisions.
Note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed or may no longer be available.
