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Buying your first home is an exciting milestone! But saving up enough cash for the down payment can feel like a daunting task, especially when you look at the total dollar amounts. The average down payment for first-time home buyers was over $60,000 in 2022. Where in the world are you supposed to find that kind of money when you’re just starting out?
Don’t sweat it! With some strategic planning and smart money moves, saving for a down payment is very doable. This step-by-step guide will walk you through everything you need to know to reach your down payment goal. Let’s get started!
Key Takeaways:
- Aim to save at least 20% of the home’s price for your down payment to avoid extra costs, but programs exist that allow less.
- Keep your down payment savings in a high-yield savings account to earn interest while retaining access.
- Making a budget, earning extra income, and reducing expenses can all help accelerate your savings.
- Take advantage of down payment assistance programs and other first-time home buyer benefits.
- Give yourself at least 1-2 years to reach your savings goal through consistent monthly deposits.
Crunching the Numbers on Your Target Down Payment Amount
When it comes to determining how much you need to save, the first step is calculating your specific down payment goal. This requires factoring in the home purchase price you can afford along with mortgage requirements.
Determining the down payment percentage you need
The standard recommended down payment amount is 20% of the home’s purchase price. So on a $300,000 home, for example, you’d aim to save $60,000 for the down payment. This avoids paying private mortgage insurance (PMI), an added cost you’ll incur with less than 20% down.
However, for many first-time home buyers, coming up with 20% down may not be realistic. Here’s the good news – several mortgage programs allow down payments as low as 3-5% for qualified buyers, including:
- FHA loans: Require just 3.5% down if your credit score is 580+ or 10% down if your credit is below 580.
- VA loans: No down payment required for veterans and active military.
- USDA loans: No down payment required for rural/suburban areas if income limits are met.
- Conventional 97: Allow 3% down payments and have looser standards than FHA.
The trade off is you’ll have to pay PMI until you reach 20% equity in the home. Still, it makes buying possible years sooner! Get quotes from multiple mortgage lenders to find the best rates and terms if going with a low down payment program.
Calculating your specific down payment goal
Once you know the down payment percentage you plan to put down, you can calculate your specific dollar amount goal based on the home prices in your target location.
Let’s say you find a nice starter home for $250,000. If you plan to put 10% down with an FHA loan, your down payment would be:
$250,000 home price x 0.10 (10%) = $25,000 down payment
With a $250,000 purchase price and 10% down, you’d need $25,000 saved up for your down payment. Of course, you can always choose to put more down if you have the funds!
Understanding additional costs beyond the down payment
When budgeting and savings for a home purchase, keep in mind that the down payment isn’t your only expense. You’ll also need cash on hand for:
- Closing costs: 2-5% of the loan amount, pays for loan fees and prepaid costs.
- Moving expenses: Costs of moving your belongings to the new home.
- Home repairs: For any fixes needed shortly after moving in.
- Emergency fund: 3-6 months’ worth of savings as a financial cushion.
Ideally, you’ll want to have these costs covered in addition to your down payment. But if needed, you can finance closing costs into your mortgage if your lender allows it.
Mapping Out Your Down Payment Savings Timeline
Once you know your target down payment amount, it’s time to map out a realistic savings plan. Saving up tens of thousands of dollars doesn’t happen overnight. But with consistent deposits over time, you’ll get there sooner than you think!
Considering your home buying horizon
Think about your ideal timeline for buying a home. Do you hope to purchase within the next year? Or are you looking at a 2-3 year plan? This will impact how aggressively you need to save.
As a general guideline, plan to save for at least 1-2 years to build up sufficient funds for a down payment and other costs. The Federal Reserve found that it takes the average first-time home buyer over 2 years to save enough to buy.
Be realistic about your goals. While ambition is great, there’s no sense in frustration if you can’t buy as quickly as you hoped. Patience and discipline are key!
Setting realistic savings milestones
Once you know your total down payment goal and timeline, break it down into monthly milestones. Consistently hitting small targets each month will get you there faster than trying to save a huge lump sum all at once.
Let’s go back to our example:
Total down payment goal: $25,000 Timeline: 2 years (24 months)
To save $25,000 in 2 years, you’d need to save $1,042 each month ($25,000 / 24 months). Set up automatic monthly transfers to your down payment savings account for $1,042 or as close as you can get.
If your timeline is shorter, you may need to set a more aggressive savings goal per month. If it’s longer, you can go with a smaller monthly amount. The key is consistency in hitting your savings milestones month after month.
Tips for fast-tracking your savings
What if you want to buy sooner? Here are some tips to help accelerate your down payment savings:
- Increase your income with a side hustle or part-time job
- Cut back discretionary spending as much as possible
- Lower large bills like your rent, car payment, or insurance
- Take advantage of any 401K or employee retirement plan match
- Use windfalls like tax refunds, bonuses, or monetary gifts
Look for every opportunity, both big and small, to grow your down payment fund faster. Even earning an extra few hundred dollars a month from a weekend side gig can shave months off your timeline.
Choosing the Right Accounts for Your Down Payment Funds
As your down payment savings grow, you need to make sure you’re keeping the money in the right place. Where you stash your funds matters both for returns and for ensuring the money is easily accessible when it’s time to make an offer.
The pros and cons of traditional savings accounts
The easiest option is to simply open a dedicated down payment savings account at your current bank or credit union. The convenience factor is hard to beat. But interest earned will be minimal – generally only 0.01-0.10% APY through a traditional savings account.
Still, it provides security since balances are FDIC insured up to $250,000 per depositor, per insured bank. And you can easily set up automatic recurring transfers into the account from your checking account.
Exploring high-yield savings options
To earn higher interest returns (upwards of 2%+ APY), consider an online high-yield savings account through providers like Marcus, Ally, or Synchrony. The rates are significantly better. Just be prepared to budget a few business days for transferring money vs. instant access at your brick-and-mortar bank.
Look for high-yield savings accounts that allow easy account opening, have low or no fees, and provide free transfers to external accounts for down payment fund access. Shop around online to find the best rates from reputable providers.
Investing your down payment – is it wise?
Newer investing apps like Robinhood and Acorns make it tempting to try investing your down payment money for higher potential returns. But proceed with extreme caution if going this route!
Investment accounts lack FDIC insurance and carry the risk of loss. Stock market volatility and unpredictable downturns could leave your down payment fund depleted right when you need it for an offer. Unless your home buying timeline is at least 5+ years away, play it safe and stick to savings accounts.
Boosting Your Down Payment Savings Efforts
Saving up enough for a down payment in a short period takes dedication. But you don’t have to just rely on cutting back spending. There are proactive steps you can take to boost your down payment funds too.
Budgeting tips to help you save more
- Downsize to a cheaper apartment to reduce housing costs
- Negotiate lower rates for cell phone, internet, insurance, etc
- Cut back discretionary expenses like dining out and entertainment
- Use cash-back credit cards to get rewards on spending
- Meal prep at home rather than eating out for lunch at work
- Limit new clothing purchases and shop sales racks only
- Vacation locally rather than taking expensive trips
Getting strategic with cutting expenses in your monthly budget gives you more cash to divert towards hitting your down payment goal each month. Every dollar counts!
Smart ways to earn extra income
In addition to spending less, finding ways to earn more income accelerates your savings:
- Take on a side gig like rideshare driving, tutoring, or freelance work
- Sell unused items around your house on Craigslist or Facebook
- Ask for a raise at your current job if you’re due for one
- Negotiate discounts on monthly bills in exchange for longer contracts
- Switch insurance providers to find cheaper rates if you haven’t shopped lately
- Do handyman work, house cleaning, lawn mowing, or pet sitting
- Get a seasonal job or part-time retail work over the holidays
Even an extra few hundred dollars per month from a weekend side hustle or seasonal work gives your down payment fund a boost.
Seeking down payment assistance programs
If you’re still having difficulties saving enough, look into down payment assistance programs. Local housing agencies, the FHA, VA, and USDA all offer programs that help first-time buyers cover down payments and closing costs through grants, loans, or matched savings programs.
Down payment help is available in every state. Reach out to HUD-approved housing counseling agencies to find programs you may qualify for based on location, income level, first-time buyer status, and other eligibility criteria.
Assistance isn’t guaranteed, but it’s absolutely worth exploring if you’re struggling to save, as it could make home ownership a reality much sooner. Every little bit helps on the road to home ownership!
Frequently Asked Questions
How much do I need to save every month to buy a house in 3 years?
A good rule of thumb is to save at least 10% of your monthly take-home income. For example, if your net income is $4,000/month, aim to save $400/month. Over 3 years, that would give you $14,400 saved up, which is sufficient for a 5-10% down payment on a median priced home. Increase the percentage if you can.
Where is the best place to keep my down payment savings?
A high-yield savings account is generally the best option, as it provides higher interest earnings than a regular account while keeping your money liquid and accessible. An online bank usually offers the highest rates on high-yield accounts.
Should I use my 401k or IRA to save for a down payment?
It’s generally not recommended to use retirement accounts, as you’ll face taxes/penalties for early withdrawal. You can make a one-time IRA withdrawal of $10K if you’re a first-time buyer, but ongoing retirement contributions should stay invested.
How can I speed up my down payment savings?
Contributing any windfalls, cutting discretionary spending as much as possible, earning extra income, and taking advantage of employer retirement plan matches and down payment assistance programs can all help accelerate your savings.
Is a 20% down payment required to buy a house?
No, there are many mortgage options that allow down payments as low as 3-5% for first-time buyers, including FHA, VA, and conventional 97 programs. The trade-off is you’ll have to pay PMI until reaching 20% equity.
Should I stop saving for retirement to buy a house?
Temporarily pausing retirement savings can free up more money for the down payment, but it’s not recommended long-term. Try to keep some level of retirement contributions going, and resume fully after buying.
Is a down payment of 10% enough?
While 20% down is ideal, 10% is also a solid down payment goal as a first-time buyer. It keeps your loan balance reasonable while still allowing you to buy sooner than if you saved up 20%.
How do I budget for a down payment and closing costs?
Factor both into your savings goals. Budget 2-5% of the total loan amount for closing costs and aim to save up your down payment separate from that. Add in moving costs and emergency savings too.
Should I use all my savings for a bigger down payment?
Don’t drain all your savings, as you’ll still need an emergency fund after buying. Ideally have 3-6 months’ worth of expenses saved post-closing. Only put extra savings beyond that toward a larger down payment.
Saving up for a down payment is challenging but rewarding. With a strategic approach, consistent savings habits, and determination, you can make your first home purchase happen. Use this guide to map out your plan of attack. You’ve got this!
Disclaimer: The information provided in this blog post is for general informational and inspirational purposes only. We’re sharing this information to offer ideas, tips and motivation for starting a business, but this should not be considered professional advice. Starting a business is complex with many moving parts, and what works for one aspiring entrepreneur may not work for another. Before taking any action, please consult with legal, financial, tax and other relevant professionals to determine the best steps to take for your own specific circumstances. The financial estimates, costs, revenues, timelines etc. mentioned in this post are approximate numbers gathered at the time of researching & publishing this post and are subject to change. We do not guarantee any specific financial or other results/outcomes.
