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, especially when you’re trying to balance other financial goals and expenses. So how much of your salary should you devote to saving for a house?
How big of a down payment do you need?
Most mortgage lenders recommend saving up a 20% down payment on a home. With conventional loans, you may qualify for as little as 3% down, but that will require paying private mortgage insurance (PMI). Here are the down payment amounts required for different types of mortgages:
- Conventional loan: 3-20%
- FHA loan: 3.5%
- VA loan: 0%
- USDA loan: 0%
The more you’re able to put down, the lower your monthly payments will be and the less interest you’ll pay over the life of your loan. Putting down 20% also allows you to avoid PMI.
Estimate your target home price
To determine how much money you need to save, you first need to estimate the home price range you’re targeting. Home prices vary significantly across the country, so your target will depend on your local market. According to the National Association of Realtors, the median existing home sales price in Q3 2022 was $384,800. However, prices are often double or more that amount in high cost areas like Los Angeles, New York, and San Francisco.
Think about the type of home, location, and amenities you want. Get an idea of current prices by looking at real estate listings in your target neighborhoods. Add a buffer so you have some room for prices to increase before you’re ready to buy. Once you have an estimated price range, you can calculate the down payment amount.
Factor in other upfront costs
In addition to the down payment, buying a home requires paying closing costs, which average 2-5% of the total purchase price. Closing costs include origination fees, appraisal fees, title insurance, recording fees, and more. You’ll need to factor these costs into your total savings goal.
Here are some typical upfront costs for buying a home:
- Down payment – 3-20% of home price
- Closing costs – 2-5% of home price
- Home inspection – $300-$500
- Appraisal fee – $400-$800
- Loan origination fee – 1-2% of loan amount
- Title insurance – $700-$2000
- Property tax escrow – 1-2 months worth of property taxes
- Homeowner’s insurance – First year premium
Consider your income and budget
Your income, expenses, and existing financial obligations will determine how much you can feasibly allot to saving each month. Budgeting tools can help you analyze your spending and find areas to cut back, freeing up more cash to put toward your down payment fund each month.
As a general guideline, housing expenses (mortgage payment, insurance, property tax) should be no more than 28% of your gross monthly income. Use an online mortgage calculator to estimate payments on loan amounts you may qualify for based on your income and existing debt obligations.
Be realistic about what you can afford. Stretching your budget too thin could make you house poor and leave you unable to comfortably cover your mortgage and other monthly bills.
Automate saving to build your down payment faster
The key to saving up your down payment quickly is to make it automatic. Here are some tips to automate the process:
- Set up automatic transfers from each paycheck into a separate savings account earmarked for your down payment. Start small if needed, then increase the amount as your budget allows.
- Some companies offer payroll deductions into savings accounts. See if your employer has this option.
- Sign up for automatic transfers from your checking account to savings each month.
- Direct a portion of any side income, tax refunds, gifts or bonuses into your down payment savings.
- Take advantage of employer retirement plan matches, then redirect those payroll deductions toward house savings once you’ve maxed out the match.
Automating your savings takes the effort out of trying to manually move money each month. This hands-off approach makes it easier to stick to your savings goals.
Shop for the best rates on savings
To maximize your down payment savings, store the money in an account that earns competitive interest rates, like high-yield savings accounts. Here are some of the best savings rates currently available:
| Bank | Savings APY |
|---|---|
| CIT Bank | 4.00% |
| BrioDirect | 3.75% |
| First Foundation Bank | 3.50% |
| Quorum Federal Credit Union | 3.25% |
| Salem Five Direct | 3.25% |
Opening an account at an online bank typically offers the highest rates. Try to avoid big traditional banks, since they tend to pay almost no interest. With interest rates rising, be sure to frequently check rates for competitive accounts.
Explore down payment assistance programs
For first-time home buyers and others who may struggle to save, there are many down payment assistance programs available. These programs provide grants, loans orcredits to cover some or all of your required down payment. VA and USDA loans allow 0% down for those who qualify.
Down payment assistance programs are offered by:
- State and local governments
- Employers
- Housing finance agencies
- Non-profit organizations
Eligibility is typically based on your income, credit score, and location. Resources like DownPaymentResource.com make it easy to find programs you qualify for.
How long will it take to save your target amount?
Now that you know how much you need for a down payment and closing costs, how much can you reasonably save each month? You can use a simple savings calculator to estimate how long it will take to reach your target amount.
For example, let’s say you determine you need $60,000 total for a 20% down payment and estimated closing costs on a $300,000 home. If you’re able to set aside $800 per month, it will take you approximately 6 years and 4 months to save the full amount, assuming a 1% return:
- Total needed: $60,000
- Monthly savings: $800
- Interest rate: 1%
- Number of months: 75
Increasing your monthly contributions or earning a higher return could shorten your savings timeline. But staying consistent with automated transfers is key – don’t get discouraged by the years it may take.
Tips for fast-tracking your down payment savings
If your projected timeline seems dauntingly long, here are some options for reaching your savings goal faster:
- Reduce expenses – Critically re-evaluate your budget and look for areas to cut back on, from housing to transportation, food, utilities and other discretionary spending. Funnel the savings to your down payment fund.
- Increase income – Consider taking on a side job or freelance work to bring in extra cash you can put straight toward housing savings.
- Sell assets – Do you have any assets like a car, valuable collectibles, inheritances or investments you could sell to add a lump sum to your down payment savings?
- Use windfalls wisely – Put any tax refunds, gifts from family, work bonuses or insurance payouts toward your home buying goal.
- Negotiate a lower price – As you get closer to your target amount, talk with your lender to see if they can help you qualify for a lower-priced home than you originally budgeted for.
- Compromise on features – Consider getting a smaller home with fewer upgrades in the neighborhood you want rather than a larger or newly renovated home that pushes your limit.
The sooner you start saving, the better. Give yourself time to accumulate the necessary down payment and closing cost funds. But know there are options if you need to speed up the process.
How much should you save each month?
As a general rule of thumb, aim to save at least 10% of your take-home pay each month toward your home down payment savings goal. But ideally, strive for 20% or as much as you can afford to put away each month.
Here are some saving rate guidelines based on your income:
| Monthly Income | 10% Savings | 15% Savings | 20% Savings |
|---|---|---|---|
| $3,000 | $300 | $450 | $600 |
| $5,000 | $500 | $750 | $1,000 |
| $10,000 | $1,000 | $1,500 | $2,000 |
In high cost areas where home prices are steep, aiming for the top end of your savings capacity is wise. But scale your monthly savings to what you can reasonably afford based on your earnings, existing expenses and financial obligations.
Make saving a consistent habit
More than a specific percentage or dollar amount, consistency is vital. Make saving an ingrained habit by:
- Automating transfers into your down payment savings account
- Starting small if needed, then increase contributions as finances allow
- Treating savings as a required monthly expense, just like your utilities and car payment
- Enlisting a friend or partner to hold you accountable
- Tracking your progress and celebrating savings milestones
With time and a disciplined approach, your down payment funds will grow. Don’t get discouraged – a little bit saved every month goes a long way over time.
Conclusion
Saving up enough for a down payment to buy a home requires dedication, focus and patience. But with some calculations, budget adjustments and consistent monthly transfers to a dedicated savings account or two, you can make your dream of homeownership a reality.
Aim to save at least 10-20% of your monthly take-home income, factor in all upfront housing costs beyond just the down payment, and get an estimate of how long it will take to reach your savings goal. Automate the process for hands-off habit building.
While it can take years to amass sufficient funds, go into it with realistic expectations. Stay focused on your target amount and timeline, and before you know it, you’ll have the money you need to finally become a proud homeowner.