How To Save For a Down Payment on a Home

When you’re just starting on your journey to homeownership, saving for a down payment can seem like a daunting task — but it isn’t impossible. By planning wisely, spending carefully, and finding new ways to maximize your income, you could be well on your way to reaching your savings goal.

How Much Should You Save For a House Down Payment?

The first step to your savings plan is determining how much down payment you need. This will help you set a clear goal for your savings.

Your down payment will depend on the loan, the mortgage lender, and other factors, such as:

• The home’s purchase price. An expensive home requires a bigger down payment. You may be able to hit your savings goal sooner if you choose a modestly priced home.
• How much you want to pay for your loan. Putting more money down means you’ll have cheaper monthly mortgage payments — and lower overall costs.
• Your credit score. Better interest rates generally go to people with higher credit scores. If you want to save money on your mortgage but your credit isn’t great, making a larger down payment can help you get a lower rate.
• Private mortgage insurance. A smaller down payment means you’ll likely need to pay for PMI. Decide whether you’re willing to cover this additional cost to become a homeowner sooner.

Some people believe they can’t buy a home until they can afford to put 20% down, but that’s a myth. According to a survey by the National Association of Realtors, the typical down payment among first-time homebuyers in 2021 was 7%. Repeat buyers put down 17%.

At the same time, most loans require a minimum down payment:

Keep in mind that while saving for the minimum down payment may be faster, it likely won’t save you money in the long run. If you put less than 20% down with a conventional loan, your lender will require you to pay for PMI until you reach 20% equity in the home. Lenders may also charge you a higher interest rate.

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How Long Should You Plan To Save For a Down Payment?

Your financial situation and other factors will determine how long it’ll take to gather enough funds.

“The length of time you’ll need to save for a down payment on a house will depend on a few factors, including the price of the home, the size of the down payment, and your savings goals,” says Alex Shekhtman, CEO and founder of LBC Mortgage in Los Angeles. “Generally, you should plan to save for at least a few years in order to have enough money for a sizeable down payment.”

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11 Tips on How To Start Saving For a House

Here are some ideas that could help you make big strides in building your down payment savings fund.

1. Review your expenses and create a budget

Creating a budget is one of the best ways to start saving for a down payment on a house. Tracking your expenses and determining how much you save each month will help you figure out how much house you can afford, and map out how long it’ll take to reach your down payment goal.

As you review your expenses, you should categorize your spending into needs and wants. Needs include expenses like rent and utilities. These are nonnegotiable and must be paid every month. Wants, on the other hand, include expenses that you can generally live without — entertainment, eating out, and so on.

According to the common budgeting method known as the 50/30/20 rule, 50% of your income should go to needs, 30% to wants, and 20% to savings and debt payments. If you want to save faster, you can dedicate less money to wants and funnel the rest into your savings.

Before you start saving for a down payment on a house, however, make sure you have an emergency fund that can cover three to six months’ worth of expenses. While saving for your down payment is important, being prepared to deal with a financial emergency should be a priority.

2. Consider opening a high-yield savings account

The interest rate on a high-yield savings account is significantly higher than that of a typical savings account, which means it’s a good place to hold your down payment.

Using a high-yield savings account from an accredited financial institution offers several advantages:

• You can earn interest on your savings over time.
• It’s less risky than investing in the stock market, and it offers greater accessibility to your savings.
• Most banks allow you to make automatic deposits, which simplifies the process of saving.

High-yield savings accounts are typically found at online banks, though more brick-and-mortar institutions are starting to offer them. When you’re shopping for a high-yield savings account, make sure it’s from an institution insured by the Federal Deposit Insurance Corp. Additionally, find out if there are any fees, deposit minimums, withdrawal limits, and other potential charges associated with the account. 

3. Pay down your existing debts

Prioritizing the payoff of your debts can help you save money. The sooner you eliminate those payments and interest charges, the sooner you can redirect that money to your savings. Your total debt also matters because your debt-to-income ratio is a key factor that lenders will consider when deciding whether to approve your mortgage application. Decreasing your total debt lowers your DTI ratio.

Here are a few techniques to help you tackle what you owe:

• Snowball method: You address debts starting with the smallest one. As you pay off each debt, you dedicate its payment amount toward the next-smallest loan until you’re debt-free.
• Avalanche method: You pay off the debts with the highest interest rates first, working your way down and rolling previous payment amounts into other loans until they’re all paid off. This way, you save money by preventing interest from accumulating on the fastest-growing debts.
• Debt consolidation: If you have different debts, you could package them into a single loan with a lower interest rate. This simplifies your payments and may help you save money on interest.

4. Negotiate a raise at work

Increasing your income can also help lower your DTI ratio and bolster your savings. One way to increase your income is to ask for a raise at work.

While some companies tie raises to regular performance reviews, you can still approach your manager outside of those reviews — especially if you’ve contributed a great deal to your company’s bottom line or you’ve picked up new skills, certifications, or degrees since your salary was last reviewed. In general, if a year or more has passed since your last raise, it could be a good time to negotiate another one.

Before asking for a raise, it’s helpful to research the current market salary for a job and skill set like yours. This can give you an idea of what other companies are paying people with similar experience.

5. Search for a side hustle

It’s not always possible to ask for a raise or switch to a better-paying job. Finding an additional income stream is another path that can help you save for a down payment on a house fast.

Here are potential side hustles you could consider pursuing:

• Freelance work. You might not have the time or energy for a second job, but freelancing offers flexibility in the amount of work you take on. Depending on your expertise, there could be plenty of opportunities in your professional network or on sites like Upwork.
• Monetizing a hobby. Your passion can make a profit. If you’re involved in a certain sport, many parents will hire tutors and coaches to help their kids learn. Or, if you enjoy creating things such as knitted scarves or jewelry, you can sell your projects online or at local marketplaces.
• Pet sitting. There are several apps and booking services that can introduce you to new clients, or you could ask your family and friends if they need help watching their pets.
• Rideshare services. Working for a rideshare app like Uber or Lyft could bring in additional income, especially during popular times of the day.
• Taking surveys. Market research companies collect feedback from consumers to help improve products from different brands. Sites like Survey Junkie and Branded Surveys compensate you for sharing your behaviors and opinions.

6. Sell what you don’t need

If your living space is cluttered, parting ways with some of your possessions could free up your space and fill up your bank account. Items such as gently used clothing, toys, CDs and DVDs, and furniture can have a decent resale value. Online marketplaces like Mercari and Carousell allow you to list items, find buyers, and get paid in cash.

A potential alternative to selling your items is donating them and claiming a deduction on your taxes, so be sure to keep notes about what you donate.

7. Ask for cash gifts

If you’re getting married, or if a birthday or holiday is coming up, you could consider asking your loved ones for a cash gift. If you tell them upfront that you’re saving for a down payment on a house, then they will know where their money is going and may be happy to help you achieve your goal.

Keep in mind that if you receive a large cash gift, your lender will need to know where it came from. You should ask your loved one to write a gift letter certifying the amount and that they gave it to you freely.

8. Get creative to stick to your budget

Saving money doesn’t mean never having fun. Here are creative ways to shave more off your spending:

• Make gifts instead of buying them. Rather than purchasing the latest gizmo, consider making personalized gifts for your family and friends. You can put together a photo album of your favorite memories, bake treats, or even offer to run errands for them.
• Learn to do it yourself. While certain tasks such as installing electrical wiring and replacing garage door springs are best left to the professionals, simple household repairs — like fixing leaky faucets, unclogging toilets, and replacing old taps — can be done on your own.
• Plan tasty meals at home. Knowing what you’ll cook each week can help cut down on waste and prevent unnecessary purchases. Cooking with seasonal ingredients also tends to cost less.
• Take advantage of loyalty programs. Don’t miss out on rewards you could be getting for the money you’re already spending. You can sign up for customer loyalty programs that give you freebies or discounts, and choose credit cards with rewards programs that allow you to redeem points for things like cash or travel.

9. Seek down payment assistance

Down payment assistance is a loan or grant provided by nonprofits, the government, or other organizations. These programs vary in terms of requirements, the amount they may offer, and whether the money will need to be repaid. Once approved, borrowers can apply the funds to their down payment, as long as their lender accepts these types of programs.

Many down payment assistance programs operate on a local scale, so check if your state offers assistance programs.

10. Automate your savings

It’s simple to forgo saving if you need to manually move money from a checking account, and if you have easy access to whatever’s left over from your paycheck. Instead, you can set up automatic deposits so you’re not tempted to spend the money on other things.

“Try setting up automatic transfers from your checking account into your savings account each month,” Shekhtman says. “This will help you stay on track with your savings goals and make it easier to reach your target amount.”

11. Downsize where possible

Downsizing can be a great way to reduce your expenditures. Similarly, you’ll save faster if you maintain a simpler lifestyle while you’re working toward a down payment. This could mean living in a smaller apartment, getting rid of your car and sticking to public transportation, or temporarily moving back home with family if that’s an option available to you. Whatever approach you choose, every extra dollar put toward your savings counts.

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The Bottom Line on Saving For a Down Payment

If you’re wondering how to save for a down payment, there are plenty of tips and strategies out there. By setting a savings goal, reviewing your finances and budget, paying off your existing debts, and maximizing your savings through additional income, you’ll be many steps closer to achieving your goal of becoming a homeowner.

Rory Arnold contributed to the reporting of this article.