How Much to Save for a Down Payment on a First House

How much should you save for a down payment?

Before you start setting savings goals, you’ll need to have a good idea of how much you’ll need for a down payment. The amount you’ll need to save will depend on a few important factors, like the price of homes in your area and the type of loan you’re eligible for.

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It’s a common misconception that you’ll need to make a 20% down payment on a mortgage, but loan options exist to allow you to purchase a home with a smaller amount. If you have a solid credit score and manageable debt, there’s a good chance a lender will allow you to borrow more and put down less overall.

If you’re a first-time home buyer, you may be able to put down 5% to 10% and some loan options even allow for as low as 3%. However, when putting down less than 20%, you’ll most likely need to pay private mortgage insurance (PMI) or mortgage insurance premiums (MIP), which should be factored into budgeting how much house you can afford. If you plan on paying your mortgage off early, aim to save at least 20% even if your loan allows less. Let’s break down the down payment requirements by loan:

• Conventional loan. Most mortgages are conventional loans and may have a fixed-rate or variable rate. These loans adhere to conforming loan standards, which can make qualifying harder than other loans. Depending on your financial situation, you may be able to make a down payment as low as 3% but putting at least 20% down will make your monthly payments more manageable.
• FHA loan. Backed by the Federal Housing Administration, FHA loans are a popular choice for first-time home buyers or buyers who may have a hard time qualifying for other loans. FHA loans allow for lower credit scores than conventional loans and down payments may be as low as 3.5%. However, if you put down less than 20%, you’ll need to pay MIP each month.
• VA loan. Current and former U.S. service members and their spouses can apply for loans backed by the U.S. Department of Veteran affairs. VA loans can be obtained with as little as 0% down.
• USDA loan. USDA loans from the U.S. Department of Agriculture aid low-income applicants in eligible rural areas. By requiring no down payment, these loans make purchasing a home more achievable for low-income individuals.

Can you buy a house with no down payment?

Most people will need to put money down on a house before purchasing their first home. However, in some situations, it’s possible to buy a home without any initial down payment. USDA and VA loans both have options for qualifying individuals to purchase a home with no down payment.

How much can I afford to buy?

Before you start saving for a down payment, you’ll need to decide your budget for your first home purchase. Location and your required size, among other factors, will affect the overall price. When calculating how much you can afford, you’ll want to think beyond the down payment. Avoid purchasing a home with a monthly payment that’s more than 25% of your monthly take-home pay. While loan options like FHA, VA, and USDA loans require a smaller down payment, you’ll end up paying more each month toward the overall cost of your home. Factor in the additional cost of mortgage insurance when calculating how much you can afford to pay each month.

To calculate how much you’ll need to save for a down payment, start by looking at the average cost of homes in the area you’d like to buy. Consider which loan option is best for you and find the average required down payment for that type of loan. Multiply the expected down payment percentage by the total cost of the home to estimate how much you’ll need to save. For example, if you expect your lender will require 20% and you’re looking at homes around $350,000, you’ll need to save $70,000 for your down payment. If you’re able to obtain a loan with a small down payment requirement, like 3.5%, you may be able to save as little as $12,250.

Regardless of the type of loan you choose, you’ll also need to save enough to cover closing costs after purchasing a home. Closing costs typically range from 3% to 6% of the loan amount. Some loans that require mortgage insurance may require you to pay an upfront insurance premium at closing time.

Tips for saving for a house down payment

Depending on how much you’re able to save each month, you’ll likely need to save for at least a few years before being able to buy a home. Although saving to buy a home often requires sacrificing other areas of your budget, becoming financially savvy can help you save in unexpected ways.

Follow a monthly budget

If you don’t already follow a monthly budget, you’ll want to make one while saving for a down payment. Otherwise, you might not be able to save enough money each month to reach your goals on time.

To make a monthly budget, start by looking at your overall take-home pay, which may include your spouse’s salary, and subtract necessary spending. Rent, healthcare, student loan payments, and childcare should be accounted for before you allocate to other areas. Based on your current spending, estimate how much you’ll realistically be able to save towards a down payment.

Cut unnecessary spending

Once you’ve figured out how much you spend on essentials, figure out what most of the rest of your monthly income goes towards. Cutting back across several categories like eating out, entertainment, and clothing can help you save a good sum each month towards your first down payment. People have different priorities for cutting back, but these areas are a good place to start:

• Take-out and fast food
• Expensive vacations
• Trending clothing items
• Pricey car leases

Keep your savings accessible

Unlike retirement savings, money saved for a home down payment should be kept in an account that you’ll be able to access in the short term. Avoid investing your down payment savings, as the unpredictable market could keep you from being able to purchase when you plan to. A high-yield savings account pays above-average rates without risking losing money.

Automate savings

Once your paycheck hits your bank account, it’s tempting to go against your carefully planned budget. If you have trouble with impulse spending, try automating a certain amount of your paycheck to immediately be transferred into your saving account each month. You’ll be less likely to spend on unnecessary expenses if the money never reaches your checking account.

Pay off your debt

While it might seem counterintuitive to put extra money towards your debt while you’re saving for a down payment, reducing your debt makes a big impact on your home purchase. Lenders consider your debt carefully before offering you a loan; a high debt-to-income ratio makes you less favorable and can lead to higher interest rates and large down payment requirements.

Saving for a down payment on your first home takes time and commitment, but it might be easier than you think. By finding a loan appropriate for your financial situation and creating a savings plan, you’ll be one step closer to throwing your first housewarming party.