Homes routinely cost in the mid-six figures these days — so even if you plan to finance the purchase, your down payment can be a considerable amount. The inability to come up with the cash is one of the top three reasons non-homeowners are still renting, a recent Bankrate survey shows. It’s not impossible to cover these costs, though. The funds for a down payment on your first home might be closer than you think.
How much to save for a down payment
While you might have heard you need 20 percent of the home’s purchase price as a down payment (and there are a few reasons why it’s ideal to put down that much), the reality is that most mortgages have much smaller minimum down payment requirements.
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Conventional loans: Some conventional loans allow down payments of just 3 percent of the purchase price. For a $300,000 home that would be about $9,000. When making a down payment of less than 20 percent however, you’ll be required to pay for private mortgage insurance until you’ve acquired at least 20 percent equity in the home.
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FHA loans: Loans backed by the Federal Housing Administration (FHA) only require a 3.5 percent down payment of the purchase price. On a $300,000 home that would be $10,500. In order to qualify for an FHA loan, you’ll need a credit score of at least 580.
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VA and USDA loans: Loans from the U.S. Department of Veterans Affairs do not require any down payment at all. Similarly, if you qualify for a U.S. Department of Agriculture loan, there is no down payment required.
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Jumbo loans: Jumbo loans are used for home purchases that exceed conventional loan limits set by the Federal Housing Finance Agency. These larger loans typically require a more significant down payment than conventional loans — think 10 to 20 percent, minimum — though requirements vary by lender. As home prices have soared, some lenders might even offer loans with as little as 5 percent down.
Bankrate insight
The median down payment for all homebuyers was 13 percent in 2022, according to the National Association of Realtors (NAR) “Home Buyers and Sellers Generational Trends” report. Not surprisingly, the amount increased with age: 23-to-31 year-olds paid 8 percent; 42-to-56 year-olds, 15 percent; 76-to-96 year-olds, 30 percent.
How long should you plan to save for a down payment?
How long it’ll take you to save for a down payment depends on:
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How much money you can set aside
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How much you can or want to spend on a home
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How much you plan to contribute to the down payment
Where you’re buying will play a big role in how much time it takes you to save, too. The higher the home price, the higher the down payment. Consider that the median down payment in California in 2022 was $103,000, while the median down payment in Mississippi was less than $7,000.
If you’re on a tight budget already, coming up with a 10 percent or 20 percent down payment might take a really long time. So, if you want to save enough money in just a year or two, plan on a low-down payment loan, and consider these tips.
10 ways to save for a down payment
1. Park the savings somewhere you can earn more money
Before you start socking away funds, think about the best place to stash them. Compare high yield savings accounts, money market accounts and CDs. While traditional CDs come with penalties for early withdrawals, that could actually prove helpful in this case: With the additional restriction in place, you might avoid the temptation to dip into your down payment savings for other expenses.
Be mindful of the timeline, though. If you want to buy a house within the next two years, say, you’ll want to look at 18-month CDs. That way, you’ll have an extra buffer if you decide you can buy even earlier.
2. Ladder your CDs
If you decide to keep your down payment money in a CD, you could maximize earning power by opening different CDs at varying maturity dates. Instead of one big CD, for example, spread your money into three-month, six-month and one-year certificates. This is called laddering, a strategy that gives you the flexibility to adjust your investment as rates change. Laddering also allows you to lock in a higher rate. When rates aren’t so favorable, laddering keeps you from being stuck for long with low returns.
The good news is interest rates have been increasing over the past year. The Federal Reserve raised the benchmark interest rate eight times in 2022 and 2023 in an attempt to control inflation. As the benchmark interest rate went up, so too did the national average APY offered on CDs. Some CDs now offer APYs as high as 4.75 percent.
Another benefit of CDs is that they are FDIC-insured and don’t have the same risk and volatility as stocks do.
3. Automate your savings
One of the best ways to save for anything — including a down payment — is to set it and forget it. If you receive a regular paycheck, ask your employer to direct a portion of that payment into a savings account. If you’re a freelance worker or independent contractor, set up a recurring transfer from a checking account to a savings account to establish the routine.
4. Look for down payment matching programs
The road to saving up for a down payment doesn’t have to be a solo journey. Depending on where you bank, you might be able to find a matching program in which the bank or lender contributes a specified amount for every dollar you put toward your home purchase. For example, online-only mortgage lender Lower offers up to a $1,000 match for homebuyers.
5. Search for assistance in your state or city
There are numerous programs for those struggling to save for a down payment, especially first-time buyers. If you can meet certain income limits, you might be able to get help from the housing agency in your state, too. There are deferred loans (loans you won’t pay back until you sell the house or you’re finished paying off the mortgage), forgivable loans (loans with a balance that gets wiped away if you live in the home for a certain period of time) and other down payment assistance options.
6. Scrutinize your expenses
If you want to save more, find ways to spend less. That means taking a hard look at your monthly banking statements to identify where you can cut. Do you really need a subscription to Netflix, Hulu, Disney+ and every other entertainment service? How often are you actually using your gym membership? Can you start making coffee at home instead of grabbing one at the cafe down the street each morning? While these are seemingly small expenses, they add up, and every little bit counts.
7. Request a raise
It’s an employee’s market right now, so put that power to work. Just make sure you do your homework and base your request for a raise on your accomplishments and the company’s pay scale, not your housing needs.
8. Ask for a gift
Many first-time homebuyers have turned to family members for help with a down payment. If a family member or friend is willing to give you some funds for your home, be sure to document this in a gift letter for your lender.
9. Press pause on other savings goals
If you’re decades away from leaving the workforce, it might make sense to consider shifting some of your retirement savings now toward your more immediate homeownership goal. This should be only a temporary strategy — one that you shift back toward retirement once you move into your new home.
If you have a considerable nest egg, tax law allows you to withdraw up to $10,000 in IRA funds to buy your first home. If you’re married and you’re both first-time buyers, you each can pull from your retirement accounts, meaning a potential $20,000 down payment.
Even better is the IRS definition of first-time homebuyer: Technically, you don’t have to be purchasing your very first home. You can qualify under the tax rules as long as neither you nor your spouse has owned a principal residence at any time during the three years prior to the purchase of the new home. In these instances, Uncle Sam waives the penalty for early withdrawal, but with regular IRAs, you will have to pay tax on the money (plus a penalty if you’re under 59-and-a-half). Withdrawals of your Roth IRAs contibutions, however, are tax- and penalty-free.
If your money is in a 401(k), avoid taking any money out, no matter how badly you want to own a home. Those withdrawals are subject to a 10 percent tax penalty, and income taxes as well. However, you could consider borrowing money from your 401(k). Assuming your employer allows loans, you can take $10,000 or half your vested amount in the plan (whichever is more), up to a maximum of $50,000. You’d then repay it at an interest rate and term set by your plan provider. The loan doesn’t incur taxes or penalties, but you won’t be able to contribute to your 401(k) while it’s still outstanding.
10. Move back home
The last tip on our list might feel like a last resort, but it’s truly one of the best ways to save money for a down payment: reducing or completely cutting out housing expenses — by returning to the familial homestead.
With rental prices rising across the country, it might be time to consider whether sleeping in your childhood bedroom again can be the difference-maker in saving up your dollars. The average monthly rental fee for a one-bedroom apartment was $1,978 as of December 2022, according to Rent.com. If you were to ditch that payment for a full year, you’d be sitting on more than $23,000 for your down payment. Once you’re settled in, just make sure you invite the folks over for a thank-you dinner.
Other costs to save for when buying a home
In addition to a down payment there are many other expenses associated with a home purchase. Perhaps the most significant additional upfront expense you’ll need to account for is closing costs. This cost amounts to two to five percent of the amount of your mortgage. For example, if your mortgage is $350,000 to purchase a home, your closing costs could range from $7,000 to $17,500. Closing costs include such expenses as your application fee, appraisal fee, home inspection, credit check fee and more.
In order to get a mortgage application approved, you may also need to show you have ample cash reserves, which is another expense to keep in mind. In many cases, lenders like to see about two months worth of living expenses available in reserves.
Finally, it’s also important to budget for moving expenses. You can expect to pay a local mover anywhere from $919 and $2,534, according to HomeAdvisor. The cost of long distance movers, meanwhile, can set you back anywhere from $2,900 to $6,900.
Final word on saving up for a down payment
The downpayment for a home purchase is a significant expense that often keeps many prospective home buyers on the sidelines. Not all mortgage loans however, require a 20 percent down payment. Some mortgage programs, such as conventional and FHA loans only require 3 to 3.5 percent down. VA and USDA mortgages meanwhile, don’t require any down payment at all.
If you’re still struggling to accumulate enough for a down payment, there are steps that can accelerate your savings efforts, including using high-yield savings and CD deposit accounts, cutting back on your spending elsewhere, and looking for down payment matching programs. If those steps aren’t enough, you might also consider asking for a raise at work or even moving back home for a while in order to eliminate rent payments altogether.