Buying a house is one of the biggest financial decisions most people will make in their lifetime. Saving up enough for a down payment can be challenging, but is an essential part of achieving homeownership.
How much do you need for a down payment?
A down payment is the amount of money you pay upfront when purchasing a home, before taking out a mortgage loan for the remainder of the purchase price. Down payments are usually expressed as a percentage of the total home price.
Traditionally, a 20% down payment has been recommended. However, in recent years it has become more common for buyers to put down less. Here are some typical down payment amounts:
- 20% down payment – This avoids private mortgage insurance (PMI) and gives you equity right away.
- 15% down payment – A reasonable goal that avoids jumbo loan territory.
- 10% down payment – You’ll have to pay PMI but this gets your foot in the door.
- 5% down payment – The minimum required for conventional loans.
- 3% down payment – The minimum required for FHA loans.
The larger your down payment, the better. A bigger down payment lowers your monthly payments, builds immediate equity, and shows lenders you are financially committed.
How much will you need to save?
To determine how much cash you need to save, first estimate how much home you can afford. Online mortgage calculators can help you estimate a price range based on factors like:
- Your gross annual income
- Debt obligations like student loans
- Down payment percentage
- Estimated interest rate
- Loan term (e.g. 30 years)
Next, multiply the home price by your target down payment percentage. For example:
Target home price | $300,000 |
Down payment percentage | 10% |
Down payment needed | $30,000 |
In this example, you’d need $30,000 cash saved up for a 10% down payment on a $300,000 home.
How long will it take to save?
How many months or years it will take to save your target down payment amount depends on:
- Your current savings – Money you already have put away for a home.
- Your monthly savings contribution – How much you can set aside from each paycheck.
- Your timeline – When you hope to buy a home.
You’ll need to crunch some numbers to create a realistic savings plan. Here are some steps to follow:
- Calculate your total target down payment amount needed.
- Subtract any money you’ve already saved for a home.
- Determine how much you can save each month for a down payment.
- Divide your remaining amount needed by your monthly savings goal.
Using our example above, let’s say you have $10,000 already saved, and you can save $800 per month. It would take you 25 months to save the remaining $20,000:
Total down payment needed | $30,000 |
Current savings | – $10,000 |
Remaining needed | = $20,000 |
Monthly savings | $800 |
Months to save remainder | $20,000 / $800 = 25 months |
Giving yourself a realistic timeline is important. Try to ramp up your monthly savings if your current contribution won’t meet your homebuying goals.
How to increase your down payment savings
If your current savings timeline is longer than you hoped, here are some ways to give your down payment fund a boost:
- Reduce expenses – Cut back discretionary spending and look for ways to trim existing bills.
- Find extra income – Take on a side gig or explore promotion opportunities at your job.
- Sell unused items – Turn clutter into cash using sites like Craigslist and Facebook Marketplace.
- Save windfalls – Use tax refunds, bonuses, and gifts to grow your down payment fund.
- Change your direct deposit – Automatically route a portion of each paycheck into savings.
With consistent effort, you may be able to double your monthly savings in just a few months. This can drastically speed up your homebuying timeline.
Down payment assistance programs
Beyond your own savings, there are programs that provide down payment assistance for qualifying homebuyers. These include:
- Mortgage programs – FHA, VA, and USDA loans offer 100% financing options.
- State/local programs – First-time buyer and affordable housing programs provide grants and loans.
- Employer programs – Some companies offer matching gifts or loans to help employees buy homes.
Assistance funds typically have eligibility requirements based on your income, credit, and home location. They essentially give you free money to put toward your down payment and closing costs.
Low down payment risks
While putting less money down makes homes more affordable, it also comes with some drawbacks:
- You’ll need to pay private mortgage insurance.
- Your interest rate may be higher.
- You won’t build equity as quickly.
- It’s more difficult to get approved.
- You have less of a financial cushion if housing values drop.
Make sure you fully understand the trade-offs before choosing a low down payment loan option.
Tips for saving for a down payment
Here are some top tips for building your down payment fund faster:
- Automate savings – Set up automatic transfers from each paycheck so the money is out of sight.
- Cut expenses – Evaluate needs vs. wants and trim fat from your budget.
- Earn more – Increase your income with a promotion, second job or side gigs.
- Lifestyle downsize – Consider getting a roommate or moving to a cheaper area.
- Save windfalls – Use work bonuses, tax refunds, and monetary gifts to grow your savings.
With disciplined saving over time, you’ll watch your down payment fund grow. Try to save at least 20% for the optimal home buying experience.
Using retirement savings for a down payment
Some prospective buyers consider tapping their 401(k) or IRA to come up with their down payment amount. This can be risky, but there are a couple responsible ways to leverage retirement savings:
- 401(k) loan – You can borrow up to 50% of your vested balance, up to $50,000.
- Early IRA withdrawal – Withdrawals are taxed but allowed for first-time home buyers.
Keep in mind the financial trade-offs, like losing expected investment growth and compounding returns in your accounts. Only use this option as a last resort.
When to stop saving for a down payment
At some point, you’ll be ready to stop down payment saving and start seriously house hunting. This is when:
- You’ve saved your target down payment amount.
- You have an additional emergency fund of 3-6 months’ expenses.
- You’ve paid down other high-interest debts.
- Your credit score is in good shape.
Having your down payment ready is just one piece of the puzzle. Make sure the other aspects of your finances are just as solid before starting your home search.
Down payment saving tips by age
Your down payment savings strategy may vary depending on what stage of life you’re in:
In your 20s
- Save at least 10% of your income for down payment and other goals.
- Invest lump sums like bonuses and tax refunds.
- Reduce expenses and consider getting roommates.
In your 30s
- Make mortgage preapproval a priority.
- Determine your target home price and down payment.
- Be aggressive about cutting costs and increasing income.
In your 40s
- Shift focus from retirement saving to down payment saving.
- Consider downsizing or moving to a lower cost area.
- Discuss tapping retirement funds if needed.
The earlier you start saving, the easier it will be to reach your down payment goal on time. But it’s never too late to ramp up your savings strategy.
Frequently asked questions
Is a 20% down payment really necessary?
No, it’s possible to buy a home with a down payment as low as 3% or 5% for certain types of loans. But a 20% down payment is ideal because it allows you to avoid paying private mortgage insurance.
What’s the best way to save for a down payment?
Automating your savings through direct deposit or automatic transfers is the easiest way to build your down payment fund over time. Routinely setting aside money prevents you from spending it elsewhere.
How long does it take to save for a 20% down payment?
Most people take 2-5 years to save a 20% down payment for a moderately priced home. Exactly how long it takes depends on your income, spending, cost of living, and how aggressively you’re able to save.
Can I use a 401(k) or IRA to help buy a house?
Yes, you can take out a 401(k) loan or make an early IRA withdrawal for a first-time home purchase. But this will reduce your retirement savings, so only do so as a last resort.
Should I stop retirement saving to build my down payment?
It’s generally not advisable to pause retirement contributions in order to save up for a home. Retirement takes priority and you want your contributions to remain consistent. Look at cutting costs elsewhere instead.
The bottom line
Saving up enough cash for a down payment requires planning, discipline, and making trade-offs. Set a realistic savings target based on your goals and timeline. Automate transfers, reduce spending, and supplement with windfalls and assistance programs whenever possible. With persistence, you can amass the down payment you need to achieve homeownership.