How to Save for a Down Payment in 5 Years or Less

How Much Youll Need to Save

When granting a mortgage, a bank or other lender requires a down payment to help reduce its risk in financing the remaining cost of the home. Banks prefer borrowers who can pony up at least a fifth of a home’s purchase price. They typically won’t lend you more than 80% of a residence’s appraised value.

If you have excellent credit or qualify for certain loan programs, you may be able to secure a loan with less than 20% down, or even with no down payment at all. Keep in mind, though, that the programs that offer such generous terms usually require the borrower to pay private mortgage insurance (PMI) at an additional monthly cost.

Conversely, if you're deemed to be a high-risk borrower because of your credit history or other factors, the bank may seek a higher percentage of the home's value as a down payment before they'll grant the mortgage.

Of course, you’re free to opt for a down payment of more than 20% of the home’s value if you have the money available. The bigger the down payment, after all, the smaller the mortgage and the less onerous its monthly payments. (To calculate the numbers involved, you can use a loan amortization schedule.) 

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4. Use technology to make saving less painful

Cutting back and setting aside money is obviously important if you want to save up for a house, but taking a portion out of each paycheck can feel like it’s cramping your style. If that’s the case, try an app like Digit, which uses technology to automatically save a daily amount small enough that you won’t notice it or hurt your budget. There’s also Acorns, which rounds up your purchases to the nearest dollar and puts the difference in an investment account. Your spare change can add up quickly over time, and you can also make one-off deposits whenever you’re able to.

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How much should you save for a down payment?

You’ve probably heard the common homebuying myth that you need at least 20% of your home’s price for a down payment. But you actually have several options that can reduce your down payment to as low as 3%. Don’t be afraid to explore FHA loans, Freddie Mac and Fannie Mae loans, and VA or USDA loans, if you qualify.

Keep in mind, if your down payment is below 20%, you will likely have to pay private mortgage insurance, or PMI, along with your monthly mortgage payment. This protects your lender in case you aren’t able to pay your mortgage. Once you have 20% to 22% equity in your home, you can typically cancel the coverage or it drops off.

Month 8: Create a Plan to Pay Down Your Existing Debt

Before saving for a down payment, Redding focused on paying off her student loan debt. Without monthly debt payments, she was able to set aside more for a home. She knew she needed to save 20% for a down payment because that would make her monthly mortgage payments more affordable. Plus, it would help her avoid the additional cost of private mortgage insurance, which lenders require homebuyers to get if they make a down payment of less than 20 percent. “Having no debt also increased my buying power, as lenders will only let you borrow up to a certain amount based on your debt to income ratio,” she said. In a hot housing market like Portland, Redding knew she needed as much buying power as possible.

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.

The Bottom Line: Saving For A Down Payment Early Can Be A Wise Decision

The process of saving up for a down payment will take time and patience. After you determine how much you need to save, start making progress towards this monumental financial goal. The sooner you get started, the better off your home search process will be.

Want more tips as you prepare for the home buying process? Take advantage of our free resources for the complete buying process.

7. Use windfall money

Stimulus checks, tax returns, holiday bonuses, a check from grandma and grandpa: Send ’em straight to savings. If you’re lucky to receive windfall money, it’s a great way to give your down payment fund a major boost without having to tap into your regular budget.

What is the average down payment percentage for a house?

The median down payment percentage for a house is 6% for first-time homebuyers, 16% for repeat buyers, and 12% overall. Repeat buyers can often sell or borrow against a previous home to help them afford a larger down payment.

The Bottom Line

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.

Whether you’ve already started saving for a house or you’re starting to save for the first time, 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.

If you’ve been saving and are ready to take the next step, get approved with Rocket Mortgage to get the home buying process started.

Month 4: Create a Budget

Gowen saved $20,000 in two years for a 5% down payment on a home in Portland, Oregon. “When I first started saving, I began by writing down every penny I earned each month, and everything that I spent,” she said. “Just through the act of keeping track, I spent less money and made better choices.” To make tracking her spending easier, she decided to use a budgeting tool. Tawnya Redding also created a budget to help her save for a down payment in four years. “Once I built a budget, I knew exactly what expenses I had and how much I was putting away,” said Redding, who writes about personal finance on the blog, Money Saved Is Money Earned.

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9 Tips for Saving a Down Payment

Here are nine things you can do to save for a down payment so you get a home of your own more quickly than you might have thought.

1. Create a Budget

When you’re trying to save enough money for a down payment, it’s important to know where your money is going. Once you get a look at how much you’ve been spending on extras like clothing, shopping and entertainment, you may find it easier to cut back and start saving more. Creating—and sticking to—a budget is the first step. There are many budgeting methods to choose from, and the one that works best for you will be the one you’re best able to stick to.

2. Decide How Much You Can Afford to Spend on a House

A common recommendation for the amount of your income you should devote to housing is 30%. This does not mean taking on a mortgage equal to a third of your income, however. That 30% should include all housing expenses, such as taxes, utilities and insurance.

Figure out how much house you can afford and commit to saving up a reasonable down payment.

3. Automate Your Savings

It can be painful to move money into your savings account when it would be more fun to spend it. That’s why it’s a good idea to automate your savings.

When you set up an auto-deposit into your down payment fund on a set date every month, your savings will grow without you having to think about it. You could even take it a step further and auto-deposit your money into a savings account at a separate institution from your checking account, such as an online high-yield savings account. Savings accounts limit the number of withdrawals you can make each month, so it won’t be as easy to tap your savings when you’re feeling spendy.

4. Cut Costs

At some point in the down payment savings process, you’ll have to take a hard look at your expenses and decide to cut costs if you want to save faster.

Start with nonessential expenses, such as streaming services, restaurant meals or even your gym membership. Exercise is essential, but do you need to pay $50 a month to do it? Free alternatives include jogging outside or exercising along with instructional YouTube videos.

Think about how you can cut costs on essential items too. You may already have an affordable phone bill, but can you go lower by swapping to a prepaid or pay-as-you-go plan? When big savings are on the line, think outside the box to cut costs.

5. Get a Side Gig

Increasing your income is always an ideal move when it comes to making financial progress. If you don’t expect a raise or promotion at your full-time job anytime soon, you can try making money on the side in the gig economy.

But don’t go into a side hustle blindly. Selling handmade keychains on Etsy may not get quite the return you’re hoping for. Look for gig work that has low overhead and a good opportunity for profit, like tutoring, freelancing or consulting. Or consider putting in a few hours a week doing food delivery or driving for ride-hailing services.

6. Buy Used and Save the Difference

You may be surprised by how much you can save when you buy clothes, shoes, furniture, appliances, vehicles and other goods used instead of new. It’s important to be strategic with your buying practices, though. You don’t want to spend money on items that will need to be fixed or replaced quickly.

When saving for a down payment, buying second hand is an effective strategy for both wants and needs. It can satisfy cravings for new things like outfits, which can be found for pennies on the dollar. And it can also save you money on needs, such as a replacement phone in the form of a less expensive certified refurbished model.

7. Cook More

It may seem cliche, but there’s a reason personal finance experts suggest you cook more at home when you’re trying to save money: It works.

In 2020, Americans spent about 8.6% of their disposable income on food on average. Of this, 3.6% percent was on food outside of the home while 5% was on home-cooked food. Restaurant dining tends to be much more expensive than home cooking, so shifting some of the meals eaten out to home-cooked could save you even more money for your down payment.

8. Become a Champion Reseller

When you’re trying to save up a down payment, some of the property you already have could help get you there. Look at the items you no longer use or need and consider reselling them on online marketplaces, at local pawn or consignment shops or through a yard sale.

Include things like furniture you would otherwise donate or clothes in good condition. Other savvy shoppers will be happy to take these items off your hands, putting money right back into your pocket.

9. Move Back Home

Once upon a time, kids could move out from their parents’ home after high school or college and never look back. Today, however, many young people are realizing that living at home for a while longer might be the only way they can afford to save up a down payment for a home of their own.

Even if you are contributing to the household through shared rent, utilities or groceries, you can still save on the costs associated with renting such as first, last and security deposits. Saving money by living with family can accelerate your down payment savings by years.

How Much Should I Save for a House?

One of the first steps when preparing to buy a house is figuring out how much money you’ll need upfront. There are a variety of costs to cover, from the down payment to compensating movers. Your costs as a homebuyer can vary depending on factors such as your loan type, your lender’s fees, the location of your new home, the size of your down payment, and the home’s purchase price.

Let's say you're going to buy a house that costs $523,900, which was the average sale price in March 2022. Here's an estimate of how the costs would break down with an FHA loan.

Cost Description Cost Home Inspection $400 Down Payment on FHA Loan (3.5%) $18,336 Closing Costs (4%) $20,956 Mortgage Insurance Premium (1.75%) $9,168 Homeowner's Insurance (2 months) $200 Moving Expenses $1,633 Home Furnishings $16,000 Incidentals (1%) $5,239 Total Costs $71,932

Schedule a home inspection as soon as you're under contract to buy a house. A professional inspector can ensure that you're aware of any necessary repairs or underlying problems with the property.

The required down payment amount can range from 0% to 20% of the purchase price, depending on the loan you choose.

The costs associated with finalizing your mortgage, also known as closing costs, typically range from 2% to 5% of the home’s purchase price. They often include expenses such as credit check fees, origination and underwriting fees, title insurance, and prepaid interest.

You’ll typically be required to get private mortgage insurance (PMI) to protect the lender against the risk of default if you make a down payment of less than 20%. PMI is paid as part of your monthly mortgage payment in many cases, but an upfront payment will typically be required.

Most mortgage lenders require borrowers to carry homeowner's insurance. The insurance premium is usually paid monthly, but you'll most likely be asked to put two months of estimated annual real estate taxes and insurance payments into an escrow account at closing.

The average cost to hire movers for a move of less than 100 miles is $1,633 as of April 2022, according to HomeAdvisor.

Your existing belongings may not fill the home, may not match, may not fit in some rooms, or may need replacing. The average cost of furnishing a home is about $16,000, according to HomeAdvisor.

There are bound to be other things you'll need for your new home that you weren't expecting, whether it's landscaping or repairs. Something may go over budget during the home-purchase process, so it's always a good idea to have a bit of a cushion to cover incidentals. The general rule is to set aside about 1% of the purchase price of your home every year for repairs and maintenance.

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.

Mortgage rates where you live

Mortgage or refinance rates depend on different factors, including where you live. To better understand what rates you may qualify for, including what the average mortgage or refinance rate is in your area, take a look at Credit Karma’s marketplaces for mortgage rates and mortgage refinance rates  as well as our latest state-specific guides.

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