How to Save for a Down Payment on a Home

How to Save for a Down Payment on a Home

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru
Edited by Harry Jensen

Saving for a down payment is usually one of the most challenging steps to buying a home. Although you can buy a home with a smaller down payment, you are typically required to put down at least 20% of the property purchase price to receive a lender’s lowest mortgage rate and to avoid paying private mortgage insurance (PMI)). In many situations prospective home buyers have good jobs and credit scores and can afford the monthly loan payment but they do not have enough money for a down payment. With rising rents plus credit card, auto and student loans as well as other financial obligations many people struggle to save money.  When you add in closing costs and potential borrower reserves, saving for a down payment may seem like an insurmountable obstacle to owning a home.

The good news is there are several things you can do to start building up your down payment funds.  You can certainly make financial sacrifices like reducing your costs and avoiding extravagant expenses and directing those savings toward a down payment.  Paying down your credit card debt may also enable you to save more, especially if your credit card has a high interest rate.  You can also set up a separate bank account and make these funds off limits for other expenses.  Even small steps like setting up an automatic deposit can accelerate your savings.  Working part-time or getting a second job are other ways to boost your down payment funds.

In addition to saving money on your own, there are other approaches to paying for a down payment such as using a gift or tapping your retirement account.  Plus, borrowers should explore no or low down payment mortgage programs which limit how much you need to put down to buy a home.  In short, there are a lot of ways to approach the challenge of paying for the down payment on  a home.  

Below, we outline how to save money for a down payment on a home and also review ideas that require less money down, which may make your home buying funds go farther. By applying these recommendations, even budget-conscious borrowers can save enough money to buy a home.


Sacrifice for Savings

It is not easy to save money for a down payment on a home. It requires sacrifice and financial discipline. In many cases you can kick start the saving process by sacrificing something you spend money on regularly and saving that money instead. For example, instead of going out to dinner twice a week only go once. Or if you buy a cup of coffee every day brew your own at home. Maybe adjust the way you shop.

There are many different approaches and you will find the one that works for you but the idea is that you take money you are already spending and start saving it for your down payment. In the beginning you may only save a small amount of money but it adds up over time and even a symbolic sacrifice can start you on the right path.


Open a Separate Bank Account

It is a lot easier to save and not spend money if you limit your access to it. Setting up a separate bank account for your down payment savings can help you save money faster and limits your temptation to spend that money on something else. Having a separate down payment bank account also enables you to set saving goals and track your progress over time. If your down payment savings is held within your regular savings or checking accounts it can be more challenging to track or you may be more likely to spend it because the money is more accessible.

When you set up your separate account you may want to make those funds more challenging to withdraw by not carrying the ATM card or by requiring a signature from a spouse, partner or relative in addition to your own signature to take out money. Additionally, check with the bank to see what interest rate you can earn on your account so that your money grows over time. Finally, make sure the account does not charge any fees -- the last thing you want to do is pay bank charges for saving money.


Set Up Automatic Deposit

Setting up an automatic deposit into a separate down payment account makes saving money easier for prospective home buyers. Automating the savings process reduces the discipline and daily financial decisions required to set aside money. Instead of deciding what to cut back on to save money, your saving grows with every automatic deposit. By automating the savings process you may feel less burdened by financial juggling which can take some of the stress out of saving money.

There are several ways to set up automatic deposit. You can have funds deducted from your paycheck or you can set-up regular transfers from one account into your down payment account. When you arrange the automatic deposit with your bank make sure you maintain sufficient funds for your regular living expenses. Although it requires some financial planning, setting up automatic deposit is one of the most effortless ways to save for your down payment.


Pay Off Credit Card Debt

Paying off credit card debt is an indirect way to help you save for a down payment. Paying high interest credit card debt on a monthly basis makes it harder to save money. If you can afford to pay off all or part of your credit card debt you can take the money you had been paying to the credit card company and contribute it to your savings. Instead of paying the credit card company a high interest rate, you pay yourself instead which greatly accelerates the savings process. As an added bonus, lowering your monthly debt expense enables you to qualify for a larger mortgage amount.


Consider a Part-Time or Second Job

Taking on a part-time or second job is not feasible for many people but can really boost your down payment savings. Even part-time work for a couple hours a week can enable you to earn and save hundreds of dollars a month which can really add up over time. If you have flexibility in your schedule to do a part-time or second job saving enough money to buy a home may come sooner than you think.


Use a Down Payment Gift

Similar to using retirement funds, using a gift for your down payment is less about saving money and more about using creative solutions to buy a home. You can use a gift from a relative or domestic partner to pay for all or part of your down payment to buy a home. Lenders typically have guidelines and rules that apply to borrowers using gifts for a down payment so be sure you understand these policies before applying for a mortgage.

Understand What Size Down Payment Do I Need to Buy a Home?


Learn About Low Down Payment Mortgage Programs

One of the best ways to shorten the time it takes to save for your down payment is to reduce how much you have to put down to buy a home. There are multiple mortgage programs that require a low or no down payment. With some programs the borrower is only required to make a 3% down payment and with other programs such as the VA and USDA mortgage programs  you are not required to put any money down.

Review Best Low Down Payment Mortgage Programs

Please note that most low or no down payment mortgage programs require borrowers to pay extra fees such as private mortgage insurance (PMI). Additionally, these programs may limit the size of loan you can obtain or income you can earn among other eligibility requirements so they may not apply to all borrowers. These programs, however, can be a highly attractive option for prospective home buyers that are struggling to save for a down payment.  Use the FREEandCLEAR Lender Directory to find lenders that offer low down payment mortgage programs.



Consider a Down Payment Assistance Program

You can use a down payment assistance program to pay for all or part of your down payment.  These programs are usually structured as grants or subordinated second loan that you do not need to repay until you sell your home or refinance your mortgage.  Down payment assistance programs are usually provided by state or local housing agencies or departments although some lenders offer their own programs.

Review How Down Payment Assistance Programs Work


Lender Down Payment Programs

Some lenders offer their own low down payment programs or grants to pay for all or part of your down payment.  We recommend that you contact multiple lenders to understand the programs they offer.

Current Mortgage Rates in Ashburn, Virginia as of May 18, 2024
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Consider Using Funds Your Retirement Account

Using retirement funds for your down payment is less about saving money and more about using funds you already have. If you have been disciplined enough to save money in your retirement account you can use some of your savings to buy a home. First-time home buyers can withdraw $10,000 ($20,000 if you are married) from a retirement account penalty-free for the purchase or renovation of a home. Please note that the definition of first-time home buyer in this case is relatively broad and applies to anyone who has not owned their primary residence in the past two years.

Learn How to Use Money from a Retirement Account to Buy a Home

Using money from a retirement account for a down payment is not ideal because you likely want that money available to you when you retire. But if buying a home is your financial priority then using part of your retirement funds to realize that goal may make financial sense.


"Ways to Save for a Down Payment."  My Home by Freddie Mac.  Freddie Mac, October 9 2018.  Web.

About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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