If buying a new home is on your agenda, saving for a down payment is also likely top of mind. While amassing the funds to put down on a home can be a big challenge, several strategies can help you grow your savings more quickly — and you might need less money than you think.
Here’s what you should know about saving for a down payment.
How much should I save for a down payment on a house?
A common rule of thumb is that you’re required to save 20% for a home down payment. But this isn’t true in all cases. Depending on the kind of mortgage you get, you might not need that much at all.
Here are some of the most common types of mortgage loans and their typical down payment requirements:
Conventional loans
Conventional mortgages, which aren’t backed by a government program, can require a down payment as low as 3%. First-time and low-income homebuyers, in particular, could be eligible for mortgage programs offering reduced down payment requirements.
It’s important to remember, however, that when you put less than 20% down on a conventional loan, you’ll usually have to pay the added cost of private mortgage insurance (PMI) each month.
Jumbo loans
A jumbo loan is another type of conventional mortgage with a loan amount exceeding the conforming limits set by the U.S. government. As of 2023, the loan limit for jumbo loans is typically $726,200, but this can go up to $1,089,300 in some more expensive areas of the country.
These loans often come with larger down payment requirements from 10% to 25% to even 30%, depending on the lender.
FHA loans
The amount you’ll need to put down on a loan backed by the Federal Housing Administration (FHA) will depend on your credit score. Borrowers with credit scores of 580 or higher are permitted to put only 3.5% down. If you have a credit score ranging from 500 to 579, you’ll have to put at least 10% down.
Note that these mortgages — which are designed for low- to moderate-income borrowers — don’t require PMI, regardless of the down payment amount. However, FHA loans do come with an upfront mortgage insurance premium (MIP) as well as an ongoing MIP, which you might have to pay for 11 years or the entirety of your loan.
USDA loans
Unlike FHA loans, mortgages guaranteed by the U.S. Department of Agriculture (USDA) don’t require a down payment. However, USDA loans come with an upfront guarantee fee of up to 3.5% of the principal and annual fees of up to 0.5% of the average unpaid principal balance.
You’ll also have to meet additional requirements to qualify for a USDA loan, such as falling under median household income guidelines and purchasing a home in an eligible rural area.
VA loans
Military service members, veterans and their surviving spouses can qualify for mortgages backed by the Department of Veterans Affairs (VA). Like USDA loans, VA loans don’t require a down payment. However, they do require an upfront funding fee.
More stability for your budget: See how a fixed-rate mortgage works.
How to save for a down payment
Here are eight strategies that can help you put together the funds for a down payment:
1. Cut unnecessary spending
If you want to increase your down payment savings, consider cutting unnecessary spending. It might not be easy to temporarily forgo weekly takeout or other nonessential purchases, but doing so could help you meet your savings goals more quickly.
Tip: Review your day-to-day expenses and identify areas of spending that can be eliminated, whether it’s streaming services you don’t use as often as you once did or gym memberships you’re not making full use of.
2. Use high-return savings accounts
Opting for a high-yield savings account instead of a traditional savings account could also help boost your savings. While traditional savings accounts have an average rate of just 0.46%, many high-yield accounts currently have rates above 4%.
3. Ask for a raise
Consider asking your employer for a raise, especially if you’ve been in your role for a while and haven’t received one in some time. Doing so can’t hurt, and it could help you increase your down payment savings more quickly.
Tip: If you plan to ask for a raise, prepare in advance by identifying the skills you bring to the workplace or a list of recent accomplishments to share with your employer.
4. Follow a budget
Developing and sticking to a budget takes some work, but it can pay off in the form of extra down payment savings. Creating a budget requires identifying all of your expenses, as well as all of your income, including any additional funds from a spouse or partner.
Tip: To simplify the budgeting process, consider using one of the many free budgeting apps available, such as Mint or Goodbudget. These apps can help you develop a better grasp of your income versus expenses and stay on track each month.
For example, an app can categorize your expenses and provide recommendations of where you might be able to reduce spending, allowing you to achieve down payment saving goals more quickly.
5. Sell things you no longer use
Chances are you probably have items in your home that you don’t need or use anymore. Consider having a yard sale or using online marketplaces such as eBay or OfferUp to sell these items and boost your down payment savings.
6. Save your windfalls
If you typically receive an annual tax return, bonuses or commissions, consider putting a large portion of this income toward your down payment savings. You won’t need to change your habits or do any heavy lifting with this saving strategy, which can make it easier to stick with.
7. Consider a side hustle
If you have some free time on the weekends or after work, consider picking up a side gig temporarily. For example, you could walk dogs, deliver food, join a rideshare service or find another side hustle related to your interests.
8. Look into down payment assistance
Depending on where you live and if you’re a first-time homebuyer, down payment assistance programs might be available on the local, county or state level. Down payment assistance options can include interest-free loans or grants that don’t have to be repaid.
How much house can you afford? Use our mortgage calculator to set your budget.
Other costs to save for when buying a home
In addition to your down payment, you’ll also need to prepare for other costs when buying a home, such as:
- Closing costs: These are the expenses you pay when you finalize your home purchase, and they typically range from 3% to 6% of your loan amount. Closing costs often include real estate attorney fees, mortgage origination fees, home appraisal expenses and more.
- Moving costs: It costs $1,250 on average to hire movers for a local move, according to Moving.com. This expense will likely be higher if you’re moving a significant distance away. You could also cut costs by renting a truck and moving your belongings yourself.
- Furnishings: If you’re a first-time homebuyer with few belongings, you’ll also need to account for the cost of furnishing your new home. As of 2023, the average cost of furnishing a home ranges from $10,000 to $60,000, according to Awning. However, this can vary significantly based on the size of your home purchase and your choice of furnishings.
- Utilities: These can include electricity, natural gas or oil, water, sewer, recycling or trash expenses, and they can amount to hundreds of dollars. You can expect to spend about $290 per month on electricity, natural gas, water and sewer, according to Move.org. But this price tag can vary significantly based on where you live and the size of your home and family.
- Home maintenance and repairs: Maintaining your new home is a critical part of owning a property. Common expenses include routine landscaping, gutter cleaning and more, but unexpected costs can also crop up — such as replacing a failed water heater or central air conditioner. It’s generally a good idea to set aside 1% to 4% of your home’s value in a home maintenance fund to prepare for these expenses.
Frequently asked questions (FAQs)
The ideal time to start saving for a down payment will depend on your financial situation. For instance, if you have a large amount of credit card debt, you might prioritize repaying those high-interest balances before you begin saving.
It’s possible to use gift funds for a down payment on a primary residence or second home, though they can’t be used for an investment property. If you qualify for a grant, such as a first-time homebuyer grant, you can use those funds for a down payment if the grant issuer permits it.
In some cases, it could be a good idea to save for a larger down payment.
“Doing so has several advantages,” says Mike Romano, vice president of business development at Stairs Financial. “It allows you to reduce your loan-to-value (LTV) ratio, which can result in a lower interest rate and save you money on monthly mortgage payments. Additionally, a larger down payment can help you avoid or reduce PMI premiums.”
However, if making a large down payment exhausts your cash reserves, opting for a smaller down payment could be less risky.
