How to save for a down payment on a home
Saving up for a down payment on a house can be one of the most difficult parts of the process—learn how to save up and resources to help you.
The decision to buy a home is not an easy one. A lot of time, calculations, and considerations all go into just the decision to purchase, rather than continue renting. Once you decide you’re ready to take the leap and become a homeowner, the fun doesn’t necessarily begin right away. If you haven’t already, you’ll need to calculate not only how much home you can afford—but also how much you can afford to put down right away, via the down payment.
A down payment is the amount of money spent upfront to purchase a home. Usually, combined with your home loan, it will make up the entire cost of purchasing the home. Saving up for a down payment can be one of the most difficult parts of the home buying process, even deterring some potential would-be homeowners away from the process. While 20% is the typical amount suggested, only 45% of buyers actually put a down payment of 20% or more on their home, according to a 2017 study.1 This suggests that over half of homebuyers paid under 20% for their down payment. In fact, 29% of first-time homebuyers put down 3 to 9%.1
Why put down 20%?
Contrary to popular belief, a 20% down payment is not required. Given this, you might think, “well, why even try to put down 20% if I don’t have to?” Saving up to that number is certainly not an easy task and 29% of home buyers expressed that saving for their down payment was a very difficult part of the process.1 However, putting as much as you are able to down upfront can carry some fairly substantial benefits:
- Buyers putting down less than 20% will likely have to pay more, most likely in the form of Private Mortgage Insurance (PMI), due to the added risk that lenders take on when servicing them1
- Buyers paying 20% or more will likely see significantly less in interest costs
- Buyers paying 20% or more will likely see a reduction in monthly mortgage payments
If you do decide to go for the 20% or more down payment, a helpful exercise to pinpoint what your target number is could be breaking down how much to save by month, week, or even day. For example, in 2018 the average home in Minneapolis, MN according to Zillow costs $248,000. 20% of this is $49,600. Saving up for this over a 2-year period would mean saving $2,066 per month, $516 per week, or about $73 per day. A more manageable time frame could be saving up over a 5-year period, which would equal out to $826 per month, $206 per week, or about $29 per day. No matter the time frame you decide works best for you and your family, it will likely require some serious thought about what needs to be done in order to hit your target amount.
What if you can’t get to 20%?
If 20% is not a feasible option for you, there are plenty of alternatives to help you pay a little less upfront:
- FHA loans. FHA (Federal Housing Administration) loans help to make the home buying process more affordable for consumers. Dating back to 1934, FHA loans require as little as 3.5% down and can be a great fit for a wide variety of consumers, including first-time home buyers and/or buyers ages 62+.3 These loans do, however, require buyers to pay mortgage insurance premiums for the entire duration of the loan.
- VA loans. VA (Veterans Affairs) loans help to make purchasing a home more affordable for military buyers, from current service members to veterans to surviving spouses of deceased veterans and more. One of the only home loans available with no down payment required, a VA loan also does not require PMI, can still help you qualify for competitive interest rates, and limits certain closing costs.4
- Conventional loans. For those who may not align with the requirements of either FHA or VA loans, there are still options available to purchase a home with a smaller down payment. It is certainly possible to qualify for a conventional (meaning not government-funded) home loan with a down payment between 3 and 15%, depending on the lender.
Depending on your specific situation, another loan or program may be right for you. Talk to both your financial professional and your realtor about any other options that may be worth considering.
How can you save up for a down payment?
Saving for a large amount of money can be daunting. While it certainly requires some hard work, it’s absolutely attainable with the right mindset and time frame.
The first step to deciding how to increase your savings is to review your budget. Track your expenses over the past several months to identify any areas where you can cut back and implement changes to accommodate your savings plan. If your rent payment accounts for a large portion of your income, consider moving to a more cost-friendly option when possible. Typically, rent and related housing costs should account for about 30% of your income—if you find yourself well above that mark or even just think you could downgrade, consider looking for more affordable options.1 Other options could include cutting back on expenses like going out to eat, entertainment, shopping, purchases of décor or furniture, cable, any subscription services you can live without (streaming or otherwise), and so on.
Another option to increase your savings is to eliminate costly monthly payments, such as high-interest forms of debt (credit cards, student loans, etc.) If you’re paying a credit card bill saddled with high interest each month, it can be difficult to find room to increase your savings. By prioritizing paying off your debt, you’ll find much more room to add to your savings.
Lastly, if you’re looking for a way to save up quicker, consider looking for ways to supplement your income. This could include picking up a part-time job, freelancing (if possible), driving for an app-based ride service like Uber or Lyft, putting your apartment or house on Airbnb occasionally (if your rental agreement allows), and so on. If you’re in the position to receive a tax refund, year-end bonus, or any other form of income outside of your regular paycheck, prioritize putting these towards your savings to give it an extra boost.
While the home-buying process isn’t necessarily a quick or easy one, it will certainly be rewarding once you are in your own home. Work together with your financial professional and realtor to come up with the best strategy for you and your family to get into your dream home as efficiently (and cost-effectively) as possible.
1“Consumer Housing Trends Report 2017.” Zillow Group, Inc. Published September 2017.
2 “2017 Profile of Home Buyers and Sellers.” National Association of REALTORS®. Published November 2017.
3“Let FHA Loans Help You.” U.S. Department of Housing and Urban Development. Accessed March 30, 2018.
4“VA Home Loan Fact Sheet.” U.S. Department of Veterans Affairs. Updated March 2017.
Financial Advisors do not provide mortgage/real estate advice and this information should not be considered as such. You should always consult your mortgage/real estate advisor regarding your own specific situation.
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