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How to Save for a Down Payment

You typically need a minimum down payment of 3%, but many homebuyers aim for 20%. Learn how to save for a down payment in this guide.

January 10, 2022

Buying a home is part of the American dream. But as house prices skyrocket, homeownership seems out of reach for many. 

One of the biggest things holding back would-be homebuyers is the requirement to have a large down payment saved up. Many of us can afford mortgage payments (we pay rent, after all) but having tens of thousands of dollars saved for a down payment is a different story. 

This guide will explore how to save for a down payment, so you can turn your home-buying dreams into reality. 

What is the minimum down payment amount? 

The minimum down payment varies depending on the type of loan and the lender. But, generally speaking, 3% or 3.5% of the home’s value is the absolute minimum. 

For example, if you are purchasing a $300,000 home and the lender requires 3% down, you would need to save up a minimum of $9,000 for your down payment. 

So, how much should you have saved to buy a house? That depends on the type of loan you qualify for and the cost of the home you plan to purchase.

  • Conventional loans have a minimum down payment of 3-15%, depending on the lender and the loan size/term. A 5% minimum down payment is common.

  • FHA loans and FHA 203k loans typically have a minimum down payment of 3.5%.

  • Jumbo loans (usually for luxury homes) may require a down payment of 15%-30%.

  • VA loans (for veterans) and USDA loans (for certain rural buyers) may require no down payment at all (0%), but eligibility for these mortgages is limited.

The benefits of putting 20% down on a house

Many people believe that 20% is the minimum down payment, but this isn’t necessarily true. As described above, many loans only require 3% (or even less in some cases). 

That said, 20% is an important benchmark that many people choose to aim for. 

If you put a minimum of 20% down ($60,000 on a $300,000 home), you likely won’t need to pay for private mortgage insurance (PMI). 

PMI is a type of loan insurance that many lenders require for buyers who have smaller down payments. It adds extra costs to your monthly mortgage payments. 

PMI shouldn’t keep you from purchasing a home, so don’t worry too much if you can’t afford to save 20%. 

And, although plenty of people aim for 20%, the average is much lower. In 2019, the median down payment amount was 6% for first-time homebuyers. 

How to save for a down payment

If you’re planning to buy a house at any point in the next 1-5+ years, now is a great time to start saving for a down payment. These tips for saving for a house can help you build up a better down payment.

Make a detailed plan

By asking yourself these questions, you can get a more accurate sense of your savings goal:

  • When do you want to buy a home? 

  • How much do you expect to spend? 

  • What type of loan will you get? 

  • How much do you want to have saved for a down payment? 

From there, make a detailed plan. 

For instance, if you decide you want to buy a roughly $400,000 home in five years, and you know you want to put a minimum of 10% down, that means you’ll need to save $40,000 over five years — or roughly $8,000 each year ($667 per month). 

Take advantage of first time home buyer programs

Many states offer first time home buyer programs, which aim to help people purchase their first home. Often, this help comes in the form of an interest-free loan you can use to increase your down payment. 

For example, Washington State has a program where you can borrow up to 4% of the home’s value from the state program — and payments are deferred until the end of the 30-year term. Many buyers may receive a 0% interest rate on this loan. 

In other words, the state will loan you money to bolster your down payment — and you don’t have to worry about paying it back until the mortgage is paid off. 

Each state has their own program, and details vary — this article has a roundup of information on your state’s available program(s).

Cut unnecessary expenses

Take a hard look at your spending habits, and notice where you can reduce unnecessary spending. For instance, you could save around $100 a month by cancelling cable and switching to Netflix — that adds up to about $1,000 per year! 

If you’re not already doing so, it’s helpful to follow a budget while you’re saving for a down payment. 

Press pause on other savings goals

Many of us have a variety of financial goals we’re saving to accomplish. We have long-term goals like retirement and mid-term goals like a well-deserved vacation or a wedding fund. 

If your focus is shifting towards saving for a down payment, it’s okay to press “pause” on your other savings goals. In this way, you can funnel all your savings into your down payment fund. 

It’s even okay to temporarily pause your retirement savings plans, according to Dave Ramsey (who is constantly reminding us of the importance of saving for retirement).

However, these pauses should be temporary, and last only until you have enough saved for your down payment. 

How long does it take to save for a house? That all depends on how aggressively you save towards your down payment goal. 

According to some estimates, it takes an average of 6.5 years for a typical renter to save a 20% down payment; but that’s assuming the renter is able to save 20% of their income every month. 

Pay off other debts

When thinking about how to save for a down payment, this savings strategy may sound counterintuitive. Why would you pay off other debt if you’re trying to save for a down payment? 

The answer is that your debt to income ratio (DTI) is the very first thing mortgage lenders will look at when you apply. And the better your DTI is, the more favorable loan terms you’ll be offered (lower interest, lower minimum down payment, etc.)

Therefore, lowering your debt to income ratio by paying off other debt can make it so you don’t need to save as much for your down payment. Plus, you may get a lower interest rate on your mortgage, which can lead to major savings over the life of the loan. 

Focus first on high-interest debts, such as personal loans and credit cards. 

For credit card debt, Tally† is a tool that can potentially help. Tally helps qualifying Americans get out of credit card debt more efficiently, while potentially saving on interest along the way. 

Click here to learn more about how Tally works

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.