How to Save for a Down Payment

How much to save for a down payment

How much you’ll need to save for a down payment depends on home prices in your area, whether you want to avoid paying private mortgage insurance (PMI) and what type of loan you may qualify for.

“While it’s traditionally recommended to put down 20% on a new home purchase to avoid paying [PMI], there are some lenders that will accept as little as 3% down,” said Ron Goforth, former senior vice president of product development at PNC Bank.

While you don’t always need a large down payment to secure a home loan, it can help you save money in the long run.

“A smaller down payment will typically result in higher monthly payments and more interest paid over time,” Goforth said.

How much to save by loan program

While some loan options require smaller minimum down payments, you may still need to pay PMI.

• Federal Housing Administration (FHA) loans: 3.5% down for credit scores of 580 or higher and 10% down for credit scores of 500 to 579
• U.S. Department of Veterans Affairs (VA) loans: Typically 0% down
• U.S. Department of Agriculture (USDA) loans: Typically 0% down
• Conventional loans: As low as 3% down

Other types of loans, such as jumbo loans or multi-family unit loans, might require larger down payments.

» MORE: What is the average down payment on a house?

7 ways to save for a down payment

Consider the following saving methods to reach your down payment goals faster.

1. Open a dedicated savings account

Open a savings account that’s solely dedicated to your down payment savings. This way, you won’t be tempted to spend it and you’ll keep it separate from any other savings goals. Plus, the best high-yield savings accounts currently earn a 3% to 4% annual percentage yield (APY) on your entire balance, helping you to earn more toward your down payment.

2. Set up automatic transfers

Set up automatic transfers from your paycheck or checking account to a savings account that’s dedicated to your down payment savings. The amount can be as little as $25 to $50 per week, and there’s a good chance you won’t even miss it. Some banks even offer automatic savings options that round up your purchases to the next dollar and deposit the difference into a savings account.

3. Consider CD laddering

If you don’t plan on buying a house for three to 10 years, putting your down payment savings in a certificate of deposit (CD) can help you earn a higher APY over time than a savings account. A CD is a type of savings account where you’ll agree to keep your money in the account for a specified amount of time, like six months, two years or five years.

You could even consider a CD laddering strategy, where you’ll open multiple CDs with varying maturity dates. Laddering helps you have access to some of your savings over time instead of locking it all away in one CD for five or 10 years.

4. Start budgeting

Budgeting can help you save for a house and manage a new mortgage payment after you get a house. To save for a house, you’ll first need to figure out how much you need to save. Once you figure that out, you can set a deadline for your goal. The more aggressive your savings goal is, the more you’ll need to save per month.

The 50/30/20 budgeting rule puts 50% of your income toward wants, 30% toward needs and 20% toward savings or debt.

50/30/20 budgeting rule

The 50/30/20 rule can be a good starting point for creating a budget, but you may need to adjust this rule depending on your needs. The 50/30/20 rule states that you should put 50% of your income toward needs like housing, utilities and food, 30% toward wants like subscription services or dining out, and 20% toward savings and debt payoff goals.

However, if you want to save for a house within an aggressive timeframe, you may decide to put 50% toward needs, 40% toward your down payment goal and 10% toward wants. No matter what budgeting plan you decide on, make sure to track your savings progress.

» MORE: How to manage your money

5. Cut back and downsize

Look at your current spending habits and determine which expenditures are easiest to cut back on like dining out or takeout, subscription services, travel or concert tickets. While you don’t want to cut your budget back so excessively that life is unbearable, it’s good to remember that wants are not needs, and you can live without an expensive gym membership or your favorite streaming services temporarily.

In the same tune of tightening your budget temporarily, downsizing your current living situation and selling items you don’t need can free up a lot of extra cash. For example, if you currently rent a home for $2,500 per month and can downsize to a smaller apartment for a year at $1,500 per month, that’s $1,000 in monthly savings or $12,000 per year.

6. Save gifted funds and windfalls

You can reach your savings goal faster by saving unexpected gifted funds or windfalls. Plan to save any funds — like tax refunds, birthday presents, work bonuses or an inheritance — toward your down payment fund.

7. Earn extra income

If you’re unable to reach your monthly savings goals with your current income, you may need to take on a second job or gig work temporarily to meet your goals. Grocery delivery, rideshare, task-hire and tutoring services can offer flexible working hours and help you earn extra cash.

How long does it take to save for a down payment?

How long it takes to save for a down payment can vary depending on how much you can save each month, your income level and your desired down payment amount. The first step to creating a down payment savings timeline is determining how much you can afford for a house.

For example, if your goal is to purchase a $350,000 home with 3.5% down and an additional 3% set aside for closing and moving costs, you will need $12,250 for the down payment and $10,500 for closing and moving costs, totaling $22,750.

So, if you want to buy a home in one year, that means you’ll need to save $1,895 per month. If you want to buy a home in three years, you’ll need to save $632 per month.

It can help to start searching for homes when you’re within six months of your savings goal since there’s the possibility you could find a lower-priced home, or the seller may cover a portion of your closing costs.

» MORE: How to negotiate your mortgage closing costs

How to get help with a down payment

Down payment assistance programs are available for first-time homebuyers to help bridge the gap between what they have saved and the required down payment amount.

Some down payment assistance programs offer additional benefits, such as reduced interest rates on mortgage loans or assistance with closing costs. These programs are available at the county, state and federal level, and most programs consider a first-time homebuyer as someone who has not owned any property for the past three years.

You can find these programs by searching for down payment assistance programs in your county or state. The U.S. Department of Housing and Urban Development (HUD) also lists programs by state.

Bottom line

Saving for a down payment requires discipline and commitment, but it will all feel worth it once you get the keys. Start by researching down payment assistance programs and loan programs to see if you qualify for any, and research homes in your area that are within your budget to get an estimate of how much you might need for a down payment.

Depending on the area you live in, monthly mortgage payments can be more affordable and predictable than rent costs. And while your home might not be your fastest-growing investment, owning does give you the benefit of having something tangible to sell that renting doesn’t.