How to save for a down payment

Don’t let this step delay your homeownership dreams

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PNC Bank
hand dropping coin to a piggybank next to a house figurine

Many new and seasoned homebuyers alike find saving for the down payment the hardest part of the whole mortgage process. With house prices on the rise, homebuyers need more money for a down payment. Even if you don’t plan on putting 20% down, saving up the average down payment of 3.5% for an FHA loan still takes some planning.

Key insights

  • You don’t need 20% saved for a down payment; that’s just the recommendation to avoid extra insurance costs.
  • Using saving strategies like CD laddering and automatic savings can help you reach your goal faster.
  • Down payment assistance programs are available for first-time homebuyers and can provide extra funds for the down payment or closing costs.

How much to save for a down payment

You’ve probably heard “20% down payment” mentioned often in the mortgage world. “While it’s traditionally recommended to put down 20% on a new home purchase to avoid paying private mortgage insurance (PMI), there are some lenders that will accept as little as 3% down,” said Ron Goforth, senior vice president at PNC Bank.

The following loans have smaller minimum down payments but can also come with additional fees or mortgage insurance:

  • FHA loans: 3.5% down for credit scores over 580; 10% for credit scores less than 580
  • VA loans: 0% down
  • USDA loans: 0% down
  • Conventional loans: 3%

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

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,” said Goforth. Along with saving for a down payment, potential buyers need to save additional funds for closing costs, which can tack on another 2% to 5% to the overall mortgage bill.

How long does it take to save for a down payment

The time 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 house you can afford.

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 around $22,500 in savings. This means you would need to save:

  • $1,875 per month to be ready to purchase in one year
  • $625 per month to prepare to purchase in three years

Remember, you can reach your savings goal faster by using gifted funds or windfalls, such as large tax refunds. You can 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

Best ways to save for a down payment on any budget

Saving for a down payment requires discipline and commitment, but it will all feel worth it once you get the keys. Depending on the area you live in, monthly mortgage payments can be more affordable and predictable than rent costs. Additionally, 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.

These saving methods can help you reach your down payment goals faster.

Smarter budgeting
Paying attention to your budget can help you find saving opportunities now and help you manage a new mortgage payment after you get a house. Look at your current spending habits and determine which expenditures are easiest to cut back. Don’t scoff at small saving areas – even saving $5 a day adds up to $150 per month.

While you don’t want to cut your budget back so excessively that life is unbearable, it’s good to remember that you can live a season without an expensive gym membership or your favorite streaming services.

In the same tune of tightening your budget temporarily, downsizing your current living situation and selling items you don’t need can help free up extra cash. For example, if you currently rent a home for $2,500 per month and can downsize to a smaller apartment or RV for a year at $1,500 per month, that’s an instant $1,000 monthly savings.
Automatic savings
Set up automatic transfers from your paycheck or checking account to a dedicated down payment savings account . 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 options that round up your purchases to the next dollar and deposit the difference into a savings account.
CD laddering
Don’t just dump all of your savings into one high APY certificate of deposit (CD). Instead, use the strategy of CD laddering , which allows you to open multiple CDs with varying maturity dates. Laddering helps you have continual access to some of your savings while earning more than a traditional savings account.
Gifted funds and windfalls
Some loan types, like FHA loans , allow family members or your employer to contribute up to 6% of your down payment as a gift. Plan to save any unexpected gifted funds or windfalls, like a tax refund, birthday present, work bonus or inheritance, toward your down payment fund.

» MORE: How to save money for a house

Down payment assistance programs

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 “down payment assistance program” plus your county or state. The U.S. Department of Housing and Urban Development (HUD) also lists programs by state.

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    Should I prioritize saving for a down payment over paying off debt?

    The answer depends on which would ultimately put you in a better financial position. If buying a home would help you save on living expenses, you will have more disposable income for your debt. Ideally, you’ll be able to strike a balance between your two goals, focusing on credit card debt first rather than student loans or auto loans, since credit card debt is revolving debt.

    Can I use my retirement savings for a down payment?

    Yes, you can use any retirement contributions toward your down payment, but you need to be wary of the tax implications and fees involved. First-time homebuyers can take up to $10,000 out of their Roth IRA without any penalties for their home purchase.

    What are some common mistakes to avoid when saving for a down payment?

    A common mistake is underestimating how long it can take to save for a down payment, especially if you feel you’re living paycheck to paycheck. Another mistake is not asking about down payment assistance programs to see if you qualify. Most areas have options for first-time homebuyers.

    Bottom line

    Today’s the perfect time to start saving for your down payment. It takes budget discipline and savings perseverance to reach your down payment goal, but it will all be worth it when you have a place to call your own. Start today by figuring out how much down payment you’ll need based on how much house you can afford and which local programs you qualify for.

    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. IRS, " Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs ." Accessed June 11, 2023.
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