First Steps

How to Save for a Down Payment on a House

Published on: May 31, 2022

how to save for a down payment

One of the most significant issues first-time homebuyers face is how to save for a down payment on a house. Saving money can be challenging when it seems like you need your entire paycheck to cover the basics like rent, food, student loans, and other bills. But with effort, you can save enough to buy a house.

Understanding various ways to save for a down payment can help you choose the options that work best for you and fulfill your dream of homeownership

Determining how much to save for a down payment on a house

Before you can create a savings plan, you need to know how much to save for a down payment on a house. The amount you need to save depends on how much you expect your future home to cost.

Use a mortgage affordability calculator to determine what price you can afford based on your annual income and monthly debts. Avoid buying at the top of your budget because doing so leaves you little cushion for other expenses or financial emergencies.

The calculator will illustrate how a bigger down payment affects your monthly mortgage payments. In turn, that helps you pinpoint what homes are within your price range so you can decide how big of a down payment you should save. 

You may have heard that you need a 20% down payment to buy a house, however, that’s an outdated myth. Some conventional loans require as little as 3% down, and loans insured by the Federal Housing Administration (FHA) require 3.5% down. However, if your down payment is less than 20%, you must pay for private mortgage insurance (PMI), which increases your monthly payment.

How to save for a down payment on a house: 7 strategies

The ability to save for a down payment — and how quickly you can do it — depends on your income, monthly debts, and other factors. However, following some of these strategies, including cutting expenses and increasing your monthly income, can put you on the right track.

1. Create a budget

A budget helps you track where your money comes from and where it goes. You need to know how much you spend each month to see where you can cut back.

List out all your expenses, including rent, student loan payments, car payments, and credit card payments as well as other monthly bills (childcare, tuition, utilities, groceries, healthcare, etc.). Add all of your bills up and subtract the sum from your after-tax monthly income. The result is the amount you have available each month to save for your down payment.

2. Find areas to cut spending

Once you see your expenses listed out, you may see obvious places to cut, including:

  • Limiting eating out
  • Reducing the number of streaming services you have
  • Cutting spending for entertainment or evenings out
  • Replacing costly vacations with more affordable staycations
  • Taking public transportation rather than paying for gas and parking

If your monthly rent payments are significantly high, you may struggle with how to save for a down payment while renting. Consider getting a roommate to share expenses or temporarily moving in with family to reduce costs. Cutting expenses may require you to sacrifice some things you enjoy now in order to save for a down payment and homeownership later. In turn, you’ll build your own equity.

3. Consider ways to increase income

Even if you can find places to cut spending, increasing your income will allow you to save for a down payment faster. Ways to increase your income might include:

  • Finding a job that pays more
  • Asking your current employer for a raise or promotion
  • Volunteering to work more overtime
  • Taking on a part-time job or side hustle 

Look for side hustles that don’t require a big investment or a long time to build your business. For example, tutoring students, pet sitting, freelance writing or photography, or working for a meal delivery company are all ways to generate extra income.

4. Sell some belongings

If you don’t want to take on an extra job, you can raise cash by selling some of your belongings. Selling expensive items you no longer want or need might jumpstart your down payment fund.

Hosting a large yard sale can bring in a surprising amount of money, too. Spend some time doing a thorough cleaning of your home to offload belongings that might sell at a yard sale. Alternatively, consider putting items for sale online on Facebook Marketplace, Nextdoor, and other online selling sites. Just make sure you meet buyers in a public place to ensure your safety.

5. Automate your savings

Many people find it’s easier to save for a down payment if the money goes directly into a designated account expressly for the down payment. It’s a good idea to put the money into a money-market account or other high-yield savings account. It’s even better if the account isn’t at your regular bank, so it’s harder for you to access it.

If you’re going to deposit a set portion of every paycheck into your savings account, ask your employer to direct-deposit the money. This helps you avoid spending the money.

Another option is to use an app to help you save. For example, Digit analyzes your spending habits and moves small amounts of money to your savings account whenever possible. Chime helps you save by rounding up any purchases to the nearest dollar and depositing the difference in a savings account. 

6. Deal with your debt

When you’re paying down debt, you’re spending extra money on interest every month. The faster you pay off your credit cards, student loans, or auto loan, the more money you’ll be able to save for a down payment. Paying off your debt will also lower your debt-to-income ratio, or DTI, and may boost your credit score.

You may wonder if it’s better to pay off debt or to save for a down payment. It’s best to try to do both simultaneously. If you’ve found extra money in your budget, dedicate some to your down payment savings and some to paying off your debts.

Ideally, start paying down debts at least a year before you’re ready to buy a house because reducing debt will improve your ability to get a mortgage, but it takes time and discipline. Speaking with a local Finance of America Mortgage Advisor before you get started can help you figure out what debts to tackle first. 

7. Look into first-time homebuyer programs

Many government and local agencies offer programs to help people buy their first home. The assistance may include help with the down payment or closing costs. The Department of Housing and Urban Development (HUD) maintains a list with links to local homebuying programs in every state. 

Several first-time homebuyer programs require low down payments, and a few don’t require a down payment at all. FHA loans, for example, require just 3.5% down if your credit score is at least 580. VA and USDA loans don’t require a down payment, but you must meet other qualifications. VA loans are for military borrowers, while USDA loans have income limits and are available only in USDA-approved rural areas. 

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

How long it takes to save for a down payment depends on many factors, including how much money you start with, the type of loan program, and how much you’re able to set aside each month.

For example, say you want to buy a $250,000 home with 3% down, so you need to save at least $7,500 for the down payment. If you save $300 each month, it will take just over two years (25 months) to reach your goal.

While you’re saving for a down payment, review the steps involved in buying a home to know what to expect when you begin house hunting.

Other costs to consider as you save for a down payment

A down payment isn’t the only money you need to buy a house. You’ll also have to pay closing costs, which cover fees such as an appraisal, title insurance, and lender’s fees. Closing costs generally range from 3% to 6% of the loan amount. 

While you save for a down payment, remember that you’ll also need money to pay for a home inspection, moving expenses, and potential home repairs or upgrades.

Ready to explore your mortgage options? Contact a local Finance of America Mortgage Advisor today to get the process started.

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