How Much Do I Need to Save for a Down Payment?

For a conventional mortgage, traditional wisdom says to save up 20% of a home’s purchase price for a down payment. A down payment of that size reduces interest costs and means you won’t have to pay for a mortgage insurance policy that covers the lender if you are unable to keep up with loan payments.

A down payment of that size is out of reach for many homebuyers, however—especially first-time homebuyers. An October 2021 survey by the National Association of Realtors found that 50% of homebuyers made a down payment of less than 20% of the home’s purchase price. Among first-time homebuyers, 72% of homebuyers had a down payment less than 20%.

A conventional mortgage can require as little as a 3% down payment, and there are several other loan options that allow for low down payments—or even no down payment. For example, a government-backed FHA loan may allow a minimum down payment of just 3.5% if your credit score is 580 or above. Research your loan options to understand the types of loans you may qualify for and the down payment amounts they require.

4. Get a side hustle

Same idea, different strategy. Think about a side job to earn extra income, whether it’s in the gig economy (ride-share driving, grocery delivery, dog walking, etc.), starting a small business (like selling crafts on Etsy), or an online service (like online tutoring or transcribing). You might even think about working part-time at a shop or restaurant. These can be a great way to earn money in your off hours.

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The Bottom Line On Saving For A House And Down Payment

If you want to save for a house, you should have a solid plan in place. But first, make sure you know how much you need for the down payment. Though many people believe they need a 20% down payment to buy a home, it’s actually possible to buy a house with as little as 3% down.

VA Loans, for instance, allow you to buy a home with $0 down. Research your loan options and make an estimate of how much money you’ll need before you start saving.

There are plenty of ways you can save money for a down payment. Start by creating a budget for your household that includes saving a certain amount of money every month for your down payment.

You may also want to consider picking up a second job, moving into a more lucrative career or downsizing to save more. Reducing your debt, asking for help from friends and family members or renting out an extra bedroom can all also help you put away more money.

When you’re ready, apply online to get the homebuying process started.

Month 10: Find Side Hustles

You also can boost your income by finding ways to make extra cash. “Side-hustle your way to your down payment,” Sun said. You could set up an eBay store, find gigs on Fiverr or Craigslist, freelance or do odd jobs, she said. Redding worked multiple jobs — from tutoring to freelance writing to coaching basketball — to save money faster. “In addition to my full-time income, I probably made between $5,000 to $10,000 extra a year with my part-time jobs,” she said.

Month 3: Set a Savings Goal

When you have an idea of how much house you can buy based on the monthly mortgage you can afford, you can set a down payment savings goal. Start with the total amount you want to save then divide it by the number of months over which you plan to save to figure out how much to set aside each month. For example, the median price of homes sold in the U.S. is $412,156, according to Redfin data from March 2022. To save 20% of the down payment, or $82,431.20, you would need to put aside $1,373.85 per month for the next five years. Of course, the actual sales price of the home you want to buy may be more or less than the U.S. median sales price, which would change the amount you would need to save.  

3. Add saving for your house down payment to your budget

Once you’ve identified your monthly savings goal, you need to add it to your budget. This means you will begin treating it as an expense—making sure that it gets paid every month. Simply add it as another line item in your current budget and allocate funds toward it each month.

Brokerage Account

If you have an appetite for higher risk, you can opt to have your down payment fund accumulate in an investment account at a major brokerage. The account will allow you to invest the money in stocks and mutual funds that will potentially earn far higher returns than even a high-yield savings account.

However, given the volatility of the stock market, you may not realize those healthy returns as quickly as you need—or when you need them. So equity brokerage accounts, then, are best reserved for those whose timeline to buy a home is flexible and can afford to wait out any fluctuations in the market. As a rule, the stock market generally recovers from downturns over time, and funds held in stocks achieve healthier earnings in the long run.

If you’re unsure about how to choose a broker you can check out this list of the best online stock brokers.

Other Costs to Consider When Saving for a Down Payment

Brace yourself. A down payment isn’t the only expense you need to save for before buying a house. But don’t worry, the other costs are smaller and won’t take much longer to save for:

  • Closing costs. On average, buyers pay 3–4% of a home’s purchase price for closing costs.2 When you close on a house—which is basically just signing all the paperwork that officially makes your new home yours—you have to pay for expenses like loan origination fees, credit reports, underwriting fees, appraisal fees and title fees.
  • Moving expenses. You can always save money on moving costs by asking friends for help. Otherwise, hiring movers can cost anywhere from $240 to $2,000 depending on how much stuff you’re moving and how far away you are from your new home. (If you're moving really far away, you could pay up to $8,000!)3 If you go that route, be sure to get quotes from local moving companies ahead of time to help with budgeting.

Keep in mind: The seller might actually cover your closing costs. But don’t bank on it. That usually only happens if the seller is in a hurry to move or if it’s an alternative to repairing something that comes up during the home inspection.

Shop around to reduce major monthly expenses

It’s a good idea to check rates for your car insurance, renter’s insurance, health insurance, cable, Internet or cell phone plan. There may be deals or promotions available that allow you to save hundreds of dollars by adjusting your contracts.

Temporarily Downsize Your Life

One of the biggest monthly expenses people face is rent. It can account for the lion’s share of your monthly expenses and make saving for a down payment far more difficult. But if you are serious about amassing money to purchase a home, temporarily downsizing your living arrangements is a sacrifice that can make sens.

These days, it’s common for adult children to move back in with their parents to save money. TD Ameritrade found in one of its recent Young Money Surveys that, upon college graduation, 48% of Millennials moved back into their parents’ home to save money.

If shacking up with your parents is out of the question, downsizing to a smaller apartment or taking on a roommate to share in the costs can reduce your monthly expenses. That, in turn, means more money for your down payment fund.

The Bottom Line

One of the first steps when you’re thinking about buying a home is to figure out how much you need to save. There’s no shortage of mortgage options that can suit almost every budget and credit score. Review reputable mortgage lenders, loan programs, and down payment assistance options to figure out which route is best for you.

Savings Account 

Storing your funds in a savings account at the bank or credit union where you do your checking is probably the simplest and easiest choice. As an existing customer, you can open a savings account quickly, and then readily transfer money to it from your checking account, either manually or through recurring transfers every payday.

The funds are secure since they’re guaranteed by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA). There is a downside to this option, though. That’s a meager return on your funds since regular savings accounts come with very low interest rates.

5. Ask for gift money

When your family asks what you want for your birthday, Christmas or Hanukkah, anniversary or any other special occasion, tell them you’d love to forgo tangible items and instead receive gift money that you can put toward a house down payment. While not everyone may oblige, some of your relatives may enjoy knowing they’re helping you attain your dream of homeownership.

How Does Your Down Payment Affect Your Mortgage?

Your down payment affects your mortgage in two primary ways.

First, if you don’t come up with a down payment of 20%, you’ll have to pay PMI. This could add $100 or more to your monthly mortgage payment, depending on the size of your loan.

Secondly, lenders are more willing to give you a lower interest rate if your down payment is a bigger one. That’s because lenders think you’ll be less likely to walk away from your mortgage payments if you’ve already invested more dollars in your home.

Of course, your three-digit credit score and debt levels play a significant role in determining your interest rate, too. But providing a larger down payment will increase your odds of nabbing that lower rate.

When do I have to have my down payment for a house?

You must pay a portion of your down payment (1% to 3% of the sales price) when you make your offer in most cases. This is referred to as "earnest money." It's a good faith deposit.

The earnest money is deposited into an escrow account and will be credited toward your closing costs or down payment when the sale closes. The remainder of the down payment will be due at closing, although a lender or seller may want to see proof of funds in the days or weeks before closing.

8. Improve your credit to save on mortgage interest

While not directly related to saving for a downpayment, improving your credit has a huge impact on what your mortgage will cost you. By improving your credit, you can qualify for the lowest interest rate possible.

This in turn can save you tens of thousands of dollars on mortgage interest over the life of your loan. Since saving for a down payment takes time, you can also take advantage of the time you have to improve your credit. This would include:

  • Pulling your credit score
  • Paying down debt to reduce your  debt to credit ratio
  • Disputing any issues
  • Avoid applying for new lines of credit as your home purchase timeline gets closer

Saving For A Down Payment

Start With A Budget

First, determine how much of a mortgage payment you can afford by creating or tweaking a monthly household budget. If you determine you can spend $1,500 on a monthly mortgage payment after listing your monthly income and expenses, make sure you don’t consider homes with price tags that will bust that budget.

Determine How Large Of A Down Payment You’ll Need

Once you know how much you can afford, determine how large of a down payment you want to contribute. Maybe you want to come up with 20% down so you can avoid PMI. Maybe cash flow is an issue and you only want to provide a down payment of 3%. Either approach is fine, but you need to make this decision before you can start saving. 

Determine When You Want To Buy

How soon do you need or want to be in your new home? This will impact how much you need to save each month. It’s best to give yourself plenty of months to save up the money you need to buy a home. But if you must move faster, don’t panic. You’ll just need to sock away your savings at a faster rate. 

Calculate How Much You’ll Need To Save Each Month

Say you plan on buying a home that costs $150,000 and you want to come up with a down payment of 10% of that price, or $15,000. If you have 12 months before you want to move, you’ll have to save $1,250 a month to reach your $15,000 goal.

Maybe you don’t have as much time. In this case, you can tweak your down payment needs. You might decide to come up with a down payment of just 5% of that $150,000 price, or $7,500. If you want to move in 6 months, you’ll need to save that same $1,250 a month. But if you only need $7,500 for a down payment and you have 12 months to save for it, you’ll only need to save $625 a month.

Create A Separate Savings Account For Your Down Payment Dollars

Ben Mizes, a real estate agent in St. Louis, Missouri, and chief executive officer and co-founder of real estate tech company Clever Real Estate, says that saving for a down payment can be challenging. It’s all about making the commitment, he said. And part of that means opening a savings account dedicated directly to your down payment. Deposit money in it and never borrow from it. 

“Saving for a down payment can be difficult. It’s important to build a plan far in advance,” Mizes said. “Cut excess items from your budget. Eating out less and reducing expenses are usually the easiest ways to save each month.”

If you skip those restaurant meals, Mizes recommends that you add those savings to your down payment savings account. This could provide a boost to your ability to scrape together those down payment funds.

Remember The Other Costs

The down payment isn’t the only cost to buying a home. You’ll also need to save for closing costs, which could run 3% to 6% of your mortgage loan amount. Lenders usually want to see that you have enough additional savings to cover 3 months or more of mortgage payments should your income stream unexpectedly dry up.

Saving for a home can be complicated. If you want more advice on the process, check out our tips on how to buy a house.

Tips to Save for a Down Payment in 1 Year

So, you need to save around 13 grand for a decent down payment on your first home, and you only have one year to do it. No worries, start by opening a savings account dedicated to accumulating down payment money. Next, write out a detailed budget listing all of your expenses and income.

Shave a little here and add a little there each week, and you’ll meet your goal before you know it! Here are some easy-to-follow tips to get you there:

Cutting Expenses

  • Bring Lunch to Work: $2,000 saved a year and $11,000 left to go

It shouldn’t come as a surprise that brown-bagging your lunch to work saves money, but the amount is almost shocking. The average cost of eating lunch out is around $10. Packing your own lunch costs about $3.00, but if you go the cheap (and simple) route with a peanut butter and jelly sandwich (70 cents), an apple (70 cents), a bag of chips (60) and a glass of water, you’re down to $2. That’s a savings of $35-$40 a week.

  • Cut the Cable Bill: $1,036 saved, $9,964 left

This one should be easy in today’s crowded TV market. Cord cutters save an average of $103/month by dropping their cable service, according to Simple Dollar. With a good internet service and all the streaming options, you should be able to see what you want, when you want it without have to pay for cable every month.

  • Kick the coffee habit: $2,444 saved, $7,520 left

This takes discipline, but it’s a tremendous saver. The average Starbucks drinker spends $3.15 for a cup of coffee. Brewing your own coffee is around 20 cents a cup. The National Coffee Association says American coffee drinkers average three cups day. That’s about $50 a week, if you buy versus $3 a week, if you brew at home.

  • Lower Credit Card Interest Rate: $250 saved, $7,270 left

A survey from CreditCards.com claimed 8-out-of-10 people who asked their credit card company to reduce their interest rate, drop annual fees or waive late charges were successful. The average American has $6,270 in credit card debt, according to the Federal Reserve. Many customers start out with rates over 20%. If that’s you, call and see if they’ll get you down near the average.

Increasing Income

  • Sell Unused Junk: $1,050 saved, $6,220 left to go

Challenge yourself to sell $20 of things you no longer use each week. Not only will this bring in some extra coin, but your friends will thank you for decluttering before they have to help you move.

List some of these items you might have laying around your apartment that belong on Craigslist, Amazon, EBay and Facebook Marketplace and see how much you can get:

  • Electronics
  • Musical Instruments
  • Power tools
  • Memorabilia
  • Exercise equipment
  • Sports equipment like golf clubs or fishing rods
  • Cooking appliances
  • Books
  • DVDs
  • Board Games
  • Camping Equipment
  • Save Tax Return: $2,850 saved, $3,370 left to go

The average tax return was $2,850 for an individual filer in 2021. Deposit that money directly in the down payment savings account and you’re 20% of the way home.

  • Get a part time job: $3,900, Mission Accomplished! $13,850 Saved

The COVID-19 pandemic spelled out loudly how underpaid many entry-level positions are and businesses are reacting. It’s not uncommon to earn $12-$15 an hour as starting pay for part-time jobs. If you just worked a five-hour shift one night or one weekend day at the $15 an hour salary, you’d not only reach, but surpass the goal. If you could make it 10 hours a week as a part-timer, you’d have another four grand for the down payment.

Stretch Goal

Of course, the larger the down payment the lower the monthly payment will be, so don’t limit savings anywhere along the way.

You’ll have to work for it, but adding more income each week makes a $15k down payment or even $20k realistic.

Given the same budget cuts, you would only need an extra $118 per week to make a $20k down payment. If you don’t mind starting a little smaller, a $20k down payment could get you to the 20% lenders are looking for on a $100k starter home and the optimal interest rate.

However, the fact is there is a market out there for part-time work and just about every entry level job pays enough to make it worth your while. If you could score a $15 an hour part-time job and work a 10-hour week, that’s $7,800 a year. Double that – 20 hours of part-time pay – and you’re up to $15,600 from one source.

Bar tending or waiting tables on the weekend could bring in the extra couple hundred dollars you need. If that isn’t your speed, there are several ways to make money on your own.

Driving for Uber, Lyft or one of the many delivery services like Instacart, Doordash, Grubhub or Postmates will give you the flexibility and earning potential to match your schedule and budget.

TaskRabbit is a good way to make money on the side and could be good practice doing handy work before becoming a homeowner. Fiverr and UpWork give anyone the opportunity to freelance.

It might take some discipline and patience to reach the goal of saving a down payment in one year, but when you break it down into small chunks, it starts to add up quickly.

Where are the best places to keep your funds for a down payment?

If you want your money to earn interest while you save, a high-yield savings account could be a smart option. With competitive rates and organizational buckets to keep your down payment funds separate from other savings, Ally Bank’s Online Savings Account helps you maximize your money. Plus, FDIC insurance keeps your savings secure, so you can have peace of mind while get closer to the home of your dreams.

Turn your home goals into reality by saving with an account that works hard for you.

View our Online Savings Account.

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