Best Ways You Can Save for a Down Payment on a House

You’ve found the home of your dreams. It has the perfect layout, a nice backyard, and it’s located in your ideal neighborhood. But there’s one thing standing in the way: the house down payment.

Saving for a house down payment is one of the biggest obstacles for some first-time homebuyers. But while it can take time to drum up enough cash, your patience will pay off.

In this article:

• What is a down payment?
• Challenges of saving for a down payment
• How much do I need for a down payment?
• Strategies to help you save for a down payment
• The bottom line

What is a down payment?

A down payment is the upfront payment a homebuyer makes toward the purchase of a property. It’s a percentage of the home purchase price, with common down payment amounts ranging from 3% to 20%.

The size of your house down payment can determine the type of loan you qualify for, and it can affect your home loan terms.

It reduces the amount you need to borrow. This can result in a lower monthly mortgage payment and decrease how much you pay in interest over the life of the loan.

A down payment also shows the bank that you’re financially stable. This can boost their confidence in your ability to handle the costs associated with homeownership.

Additionally, some home sellers prefer buyers with down payments. This shows that you’re serious and more likely to complete the sale.

This upfront payment can also give you immediate equity and offer protection against market fluctuations.

Challenges of saving for a down payment

Saving for a house down payment can be challenging due to numerous economic factors, such as an increase in the cost of homes in certain markets. This makes it harder for some would-be home buyers to save enough money.

According to the Federal Reserve Bank, the median price tag of homes during the second quarter of 2023 was a hefty $416,100. Based on this home price, borrowers opting for a 3.5% down payment would need a minimum of $14,560 to purchase a home (excluding closing costs).

Another issue in certain areas is demand. Home prices tend to rise when there are more homebuyers than properties available.

Inflation is a problem, too. As the price of goods and services increase, purchasing power decreases. The cost of living often rises faster than pay, especially for essentials like housing, healthcare, education, and utilities. This leaves less money for saving.

Also, rising interest rates can further complicate affordability. When the cost of borrowing goes up, monthly payments can stretch beyond a comfortable amount.

How much do I need for a house down payment?

Some people believe they need a 20% down payment to buy a house. However, this is an outdated standard.

Guidelines have changed, so there are plenty of loan programs that require far less.

For example, a conventional loan typically calls for minimum down payment requirements of 3% to 5%, whereas FHA loans (insured by the Federal Housing Administration) allow house down payments as low as 3.5%.

If eligible, you can also take advantage of government loans that don’t require a down payment.

VA loans backed by the U.S. Department of Veterans Affairs offer no down payment mortgages to eligible active-duty service members, veterans, and eligible spouses.

Another option is a USDA loan backed by the U.S. Department of Agriculture. These no money down home loans are designed for low-to-moderate-income buyers purchasing in rural areas.

Keep in mind, if you’re using a conventional or FHA mortgage loan and putting down less than 20%, you might have to pay private mortgage insurance (PMI) or mortgage insurance premiums (MIP), respectively. This insurance protects the lender in the event of default.

To avoid PMI, one option is taking out a piggyback loan, which involves using a second mortgage to cover a portion of your house down payment. Additionally, you can ask about lender-paid mortgage insurance. This is when the lender pays the insurance in exchange for a slightly higher interest rate.

FHA mortgage insurance is typically for life, so you’d have to refinance the mortgage loan once you have at least 20% equity to remove this premium. The exception is when you put down at least 10%. In this case, your lender removes mortgage insurance after 11 years.

USDA and VA loans don’t have mortgage insurance, although the former does charge borrowers an annual guarantee fee.

Strategies to help you save for a house down payment

Saving for a down payment on a house is a significant financial milestone that can seem daunting at first. However, with the right approach and some practical strategies, you can turn this dream into a reality. Here’s a look at 10 ways to help first-time buyers save.

Decide how much to save

Use a mortgage affordability calculator to figure out how much you can potentially borrow. You’ll need to provide information about your monthly income, existing debts, loan term, and estimations for interest rate, property taxes, and insurance. Once you know how much you can possibly borrow, you can then decide how much to save.

Review your budget and set a timeline

Review your monthly income and expenses to determine how much you can comfortably afford to save each month. Be honest and establish a timeline that’s realistic for your circumstances. For example, if you need $30,000 and you’re able to save $800 each month, you can likely purchase a home in about three years.

Automate your savings

Set up automatic transfers from your checking account to a dedicated high-yield savings account. Automating your savings can help you save on a consistent basis.

Reduce unnecessary spending

Identify areas where you can trim your budget, such as eating out less, reducing entertainment expenses, or limiting impulse purchases. Skip any unnecessary credit card purchases, especially vacations or big-ticket purchases, and then redirect these funds to your down payment for a house.

Explore side hustles

Seek additional income streams through part-time jobs, freelancing, or gig work. Earnings from a side hustle can significantly accelerate your down payment savings. It may not be easy at first, but many existing homeowners achieved their down payment savings and purchased a new home this way.

Temporary downsize or move back home

If possible, consider temporarily downsizing to a smaller (and cheaper) home or moving in with family. Housing is likely your biggest expense. Reducing this monthly cost can help you save more in a shorter period.

Save windfalls and bonuses

Direct unexpected windfalls such as tax refunds, work bonuses, or monetary gifts into your house down payment fund. These unexpected funds can improve your financial situation and significantly boost savings.

Utilize gift funds

You can also buy a house using a down payment gift from family. However, make sure you understand the rules regarding gift funds. Typically, you’ll need a letter from the donor stating that the gift “is not” a loan. In other words, you don’t have to repay it.

Negotiate existing bills

Contact your insurance companies and service providers to see if you can negotiate lower rates. You can also shop around and compare best rates from competitors. If you’re able to save money, redirect this savings to your house down payment fund.

Ask for a raise

Evaluate your work performance and consider asking for a raise, if you believe you deserve it. A salary increase can provide extra funds to quickly grow your down payment savings.

The bottom line

Don’t let a large down payment stand in the way of homeownership. From automating your savings to earning additional income, you can gradually build your house down payment fund and achieve your goal.

Low down payment home loans and competitive mortgage rates can make the path to owning easier. Discuss these down payment options with your mortgage lender, and don’t forget to ask about down payment assistance programs available to you.