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How to Save for a Down Payment

11 Steps to Make Home Ownership a Reality

You’ve poured over Zillow. You’ve cruised through every street of your favorite neighborhood and know the houses by memory. There’s just one problem standing between you and your greige-walled homeowner dreams…how can you save enough money to cover a down payment?

A home is one of the biggest purchases that most of us will make in our lifetimes. Unfortunately, it’s one that can feel unachievable when you’re just getting started. Saving tens of thousands of dollars for a down payment? Yikes. That’s a lot of skipped coffees (and for the record...we might be a budgeting company, but we’re never going to tell you to skip the coffee. Sometimes that sparks real joy, you know?). 

So...how do you save for a down payment? You have 723 questions and aren’t sure where to even begin. We’ll take you through the steps to save enough money for a down payment step by step. 

Before You Even Begin Saving for a Down Payment

1. Get Your Debt Under Control

We’re not saying you have to have all your debt paid off (because um...have you ever heard of student loans?). But what we are saying is you should have it under control. Here’s why: to buy a house, you need to get a mortgage. To get a mortgage, you need to get approved by a bank. 

One of the most important factors in determining whether or not a bank will give you a mortgage is your debt-to-income ratio. Put another way: how much of your monthly income is eaten up by debt? Lenders like to see lower numbers here because they figure you’re more likely to pay them back—less of a risk. 

So what’s your debt-to-income ratio? Take your monthly debt payments divided by your gross monthly income. According to the Federal Housing Administration, a standard debt-to-income ratio is 43% when you include housing expenses and other debts. That means your estimated monthly mortgage payment plus debt should be less than half of your monthly income.

Stuck with a load of debt? We’ll show you how to pay it off in record time

2. Build an Emergency Fund

When you want to buy a house, you’re not just saving for a down payment, you’re also shoring up enough money to give you a cushion against financial emergencies (they tend to happen even more when you have a house). Plus, an emergency fund is actually a tried-and-true trick for saving money, because saved money saves money. Try to save at least a month of living expenses in addition to your down payment and closing costs before buying a home. 

3. Scope Out the Housing Market

If the other two feel like a bit of drudgery, this is the fun part. Do your Zillow homework! This part is about finding what you like and also setting your expectations accordingly. You can’t really know how much you’ll need to save until you take a look at the housing market in your area and in the neighborhoods you’re eyeing.

Consider what you really need in a house, and then look at homes on the market that meet those requirements. That’ll give you an idea of how much you can expect to spend.

Alright, now for the good stuff. Once you get those pregame activities checked off, then comes the actual saving for a down payment.

Money doesn’t have to feel messy. Check out our comprehensive guide on how to simplify finances.

How Much Do You Need to Save?

4. Lay Out Your Budget

We’re not just talking about the budget for your house—we mean your actual budget: how much money you have, how much money you spend on a monthly basis, and what dollars go where. If you don’t have a budget, you should put one together for the sake of your down payment.

This step comes first because it helps answer that ever-elusive question: how much house can I afford? The calculators can’t tell you that (they don’t know how much money you need for groceries every month): but a budget can!

Never done this before? Not to worry. To help illustrate how this all works, we’re going to look to aspiring homeowners Brian and Janna. Brian is a landscape architect, and Janna is a licensed marriage and family therapist. The two have a 16-month-old and two dogs.

Between the two of them, they bring home about $4,500 per month (with a yearly household salary of $68,000/year). Brian brings home roughly $3,900 in his job. Janna nets about $600 month as she completes her clinical hours and works part-time as an adjunct professor at her alma mater.

Brian and Janna’s current monthly budget looks like this:

You can see it’s a little tight between money coming in and money going out. They’ll need to loosen it up a bit to wiggle in this home ownership dream. But they have their budget! It’s all laid out and they already see some spots they can trim! Let’s move on to the next step. We’ll come back to Brian and Janna soon.

5. Get a Ballpark Range for How Much You’ll Spend on a House

All that browsing on Zillow will finally start to pay off here. You should have an idea of how much you’ll likely need to spend for the home that fits your needs. In the first quarter of 2020, the National Association of Realtors found that the starter median home price in U.S. metro areas was just over $230,000. 

Here’s what a down payment would look like on a $230,000 house:

  • 20% down: $46,000
  • 10% down: $23,000
  • 3% down: $7,000

Get that ballpark range for what you figure you’ll spend on the house (we’ll refine it soon) and calculate the down payment. 

For Brian and Janna, they have the benefit of living in a low cost-of-living area and they estimate they’ll spend between $150,000-$175,000 on a house. That means a 20% down payment of $30,000-$35,000. Yep, I know some of you are screaming at those home prices. Sorry coastal city dwellers, your costs are often astronomically higher compared to those in other parts of the country. Just stick with us! The same principles apply no matter what your housing premium is!

Traditional advice says that you should plan to save 20% of the price of the home as a downpayment, but to many, that can feel totally unattainable. There are plenty of benefits that come with the 20% down payment, including:

  • No PMI. If you put down less than 20%, you’ll have to pay private mortgage insurance (PMI). Depending on the price of the home, this could amount to hundreds of dollars per month.
  • Easier approval process. The more money you’re able to put up as a down payment, the more smoothly your approval process will go. Lenders will see you as less of a credit risk.
  • Lower rates. Buyers that are able to put down the full 20% down payment often get lower interest rates than those that don’t.

Is a 20% down payment necessary?

In a perfect world, everyone would be able to put 20% down on their home purchase. Unfortunately, that’s simply not affordable for many people.

As of 2018, the average down payment for a first-time homebuyer was 7% down. For repeat buyers, the average was 16% down. 

Programs like the one from the Federal Housing Administration (FHA) allow borrowers to get a mortgage with as little as 3.5% down. If you’re a veteran or service member you can even get a loan with no down payment and no PMI through the Department of Veterans Affairs.

Even for those who don’t qualify for these federal programs, there are still plenty of options. Most mortgage lenders will allow you to take on a conventional mortgage for as low as 5% down, depending on your credit history, income, and debt-to-income ratio. 

In our example, let’s say Brian and Janna can find about $250 of wiggle room in their budget to put toward their down payment without too much effort. But if they want to buy a house in the range of $150,000-$175,000 and plan to put 20% down, they’re looking at about ten years before they’ll have the money to buy. Dang. That feels like forever when all you want is a house where you can paint the walls without having to ask anyone! 

Alright, so now Brian and Janna have their budget and their ballpark. Here’s what they learned:

  • Right now their budget doesn’t have much breathing room. They’ll have to free up some dollars in order to save for a down payment.
  • They want a house in the $150,000-$175,000 range.
  • A 20% down payment would be $30,000-$35,000.
  • They’d rather put a smaller amount down and get into the house sooner. They’re targeting to save for a roughly 10% down payment ($15,000-$17,500). 

Start Saving for Your Down Payment: Ludicrous Mode

No matter what percentage you put down, you’ve got to start saving some dollars! Let’s talk about a few levers to pull to make this happen fast!

6. Set a Clear and Specific Goal

Take that down payment number you’re shooting for and add 5-10% on top (you need money for closing cost fees!). Do you have an ideal timeline when you’d like to buy a house? This spring? Next spring? Sometime soon? Take your number, take your timeline: now you have your clear and specific goal. 

For Brian and Janna, they’re trying to save $19,000 in a year and a half (10% down plus closing costs on a $175,000 home): that means saving just over $1,000 a month.

7. Reduce Your Expenses

Now that you’ve got your target, it might feel a little like “Whoa! That’s a lot of money to save every month!” But you’d be amazed how much money can be saved when you work at it and have your eyes so clearly on the prize! 

One of the most effective ways to save more money each month is to reduce your monthly expenses. Unfortunately, this can be an emotional process for people, as they confront the prospect of giving up things they enjoy (I’ll never let you go, unlimited mimosas at brunch!). 

When you’re making spending decisions, it’s important to ask yourself, “Is this more important to me than buying a house?” Sometimes the answer will be a resounding yes, but you might be surprised how easy it is to cut something from your budget when that thing goes head-to-head with your dreams of buying a house.

Let’s look at Brian and Janna’s budget, for example. Some categories where they might decide to reduce their spending includes Christmas (they currently budget $720/year), food, clothing and personal spending. After a bit of this painless trimming, they freed up $300/month to get them closer to building that down payment.

By reducing their expenses, Brian and Janna save $3,600/year.

8. Increase Your Income

Generally speaking, the only two ways to increase the amount you’re saving every month are either to decrease your expenses or to increase your income. We’ve already talked about some ways Brian and Janna (and you) can cut back on spending. Now let’s talk about how someone might increase their income to help save for a home.

Let’s look specifically at Brian and Janna’s situation. Brian recently started a new job with a higher salary. To increase his income even more, he’d likely have to transition out of his current role and into a management role, which he’d rather not do. If Brian becomes eligible for any cost of living or merit raises in the next few years, he can put the extra each month toward the down payment.

But what about Janna? She’s currently finishing up her clinical hours as a licensed marriage and family therapist. If she accelerates her clinical hours and starts making more money ($2K a month!), she’ll be able to contribute more toward the down payment. 

The good news for you is that even if your situation looks nothing like Brian and Janna’s, there are still ways you can increase your income, even temporarily, to help save for a downpayment even faster. 

Some ideas include:

  • Negotiate a raise: One of the most obvious ways to make more money is to ask for a higher wage at your current job. Sit down with your supervisor and ask for a raise — just be sure to come prepared with evidence of why you’ve earned it and leave out the fact that you want to buy a house. That bit is nice, but it’s not the reason an employer would give you a raise.
  • Pick up a side hustle: If you can’t increase your income at your current job, you can temporarily pick up another. You can look for a part-time job at a local business, or consider a side hustle through an app like Uber, Instacart, or Rover.

Brian and Janna save $12,000/year by increasing income.

9. Save Your Windfalls

Throughout the year, people often find themselves taking in small cash windfalls that they haven’t accounted for in their budget. These windfalls could include tax returns and gifts.

Brian, like many other people, gets paid every other week. As a result, there are two months throughout the year where Brian gets three paychecks instead of two. He can put those extra paychecks toward their down payment (+$3,400/year). They may only come around a couple times per year, but these extra paychecks can add up to the difference of thousands of dollars in your savings.

And then there’s the tax return: they frequently get about $2,400 back.

Brian and Janna save $5,800/year through windfalls.

10. Treat Your Savings Like Any Other Expense

It’s easy to get discouraged when you’re saving money for years at a time. Your dream of homeownership can feel awfully far away, and you may feel tempted to give up.

For that reason, it’s important to treat your savings as a non-negotiable expense, just like any other bill. Add it as a line item in your budget. You can even set up an automatic transfer to a high-yield account so you don’t have the chance to talk yourself out of saving (while protecting a bit against inflation at the same time).

Brian and Janna have a line in their budget for their down payment. It’s the last one they pull money from when they overspend elsewhere. With all those savings listed above, after just one year they have $21,400 (!!): exceeding their goal and pushing their timeline for house buying up by six months.

11. Buy Your House!

Brian and Janna pulled the trigger on a charming mid-century ranch for $175,000 just over a year after they started saving. The boxes are already packed.

Good luck on your own home ownership journey! Follow this approach and not only will you be financially fitter than ever, but you might hit your down payment goals even sooner than you think! Even though it might be a long process and hard at times, stick to your plan and you’ll see your dream come to life.

Want to track your progress and turbocharge your down payment savings? Start a free trial of the YNAB money management method and app to easily see how much you need each month and your progress toward your savings (no credit card required).

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How to Save for a Down Payment