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Strategies to Reach Your Down Payment Goal Faster
A down payment could make your home ownership dreams a reality.
Rental rates are on the rise. As of April 2024, the average monthly price of a two-bedroom apartment came to $1,765.1 But in areas with higher costs like New York or Chicago, prices may be substantially more.
With rents like these, you may be considering buying your own home. That said, buying a home requires some saving—maybe not for the entire purchase price, but at least for the down payment. Note, a bigger down payment could help you get a better deal on a mortgage.
Here are a few tips to help you save for a down payment.
Key Takeaways
Lenders tend to prefer down payments between 10% and 20% of a home’s purchase price.
Taking advantage of high-yield savings accounts, certificates of deposit (CDs), and money market accounts may help you build your savings faster.
By making saving part of your monthly budget, you may find it easier to build your down payment without straining your finances.
What is a Down Payment?
A down payment is the initial amount you pay directly towards purchasing a home. This is separate from the amount you finance through a mortgage lender. The amount you need to save depends on the home’s purchase price, the type of mortgage you’re using, and your personal preference.
The down payment amount effectively reduces the amount you borrow from your lender, which may also lower your monthly payments and could help you get a better rate on the loan.
How Much Do You Need for a Down Payment?
As we mentioned, the exact amount of your down payment depends on a few factors. The median down payment for homebuyers in 2023 was 14%, but buyers between ages 24-32 made down payments as low as 8% of the purchase price.2
While some mortgages allow down payments as low as 3%,3most lenders want you to have between 10% and 20% of the home’s purchase price saved up. This means if you’re buying a $400,000 home, you want to have between $40,000 and $80,000 saved before you start shopping for a mortgage.
Why Would I Want to Have a Larger Down Payment?
The money you use in your down payment becomes equity in your home at the outset of the mortgage. As the value of your home changes, your equity may change too, but on day one, your equity is essentially the money you put down. Keep closing costs in mind when determining how much you’re able to put down, as you need to have funds on hand to cover these expenses.
Should you put more down than your mortgage requires? That depends on what is right for you.
Some people prefer to have more equity in their home.
From a practical perspective, the more money in the down payment, the lower the mortgage (and monthly payment, as mentioned).
Also, having a larger down payment may make your offer more attractive to sellers, which could be advantageous in a competitive market.
There’s a psychological factor too, as some people feel more secure having less mortgage debt.
On the flip side, others are comfortable with having a larger mortgage. In that case, they could choose to have their extra savings in an asset separate from their home, such as a high-yield savings account.
We all have different financial values, and the most important thing is for you to follow what is right for you.
How to Save for Your Down Payment
If the thought of coming up with thousands of dollars to use as a down payment feels overwhelming, don’t panic. There are a few strategies you could use to boost your savings and set money aside to help you on your home buying journey.
Create Your Down Payment Goal and Timeline
Before you start setting money aside, figure out how much you need to save for your target home price and the timeframe of when you want to buy a home.
Setting a target date and down payment amount could help you track your progress. Keep in mind that these goals may change based on your financial situation and the housing market.
Working with a mortgage lender could help you decide how much you should save. Many lenders let you request a mortgage pre-qualification which gives you an estimate of how big of a loan you may qualify for. Even better, pre-qualifications trigger a soft credit inquiry which means your credit score won’t take a hit.
Establish or Update Your Budget
Once you have an idea of what you need to save and how fast you need to save it, update your budget. If you haven’t already, track your expenses and see how much you could set aside each month and make saving for a down payment part of your budget. This may make it easier to set that money aside without giving into temptation to use your savings on other purchases.
If your budget is already tight, consider reprioritizing your saving goals while building your down payment.
For example, if you’re currently saving for a major vacation, temporarily reducing your contributions may help you reach your down payment goal sooner. Once you hit your target savings goal, you could adjust those vacation contributions back to what they were. Of course, making these types of tradeoffs would fully depend on what aligns with your goals and needs.
Automate Your Savings
Once you have a goal in mind, try automating your savings to make sure you’re setting the money aside regularly.
There are several ways to do this, such as scheduling regular transfers from your checking account to a dedicated savings account or requesting that a set amount of your paycheck be deposited into your savings account.
Leverage High-Yield Accounts
High-yield accounts could help you grow your down payment fund faster since they earn a higher rate. There are several types of high yield accounts you could use.
High-yield savings accounts (HYSAs): High-yield savings accounts typically have higher Annual Percentage Yield (APY) rates than traditional savings accounts. These higher rates help boost the compound interest your savings earn. HYSAs usually let you make withdrawals as needed, but some accounts have caps on the number of withdrawals you’re able to make each month.
Money market accounts: Money market accounts also tend to have higher rates than traditional savings accounts and often have limits on the number of withdrawals you can make. This could be inconvenient, but it could also help you avoid using your savings for other purchases.
Certificates of deposit (CDs): Certificates of deposit typically have rates that are the same or higher than what may be available with a high-yield savings account. But, with a CD, you must leave your money in the account for a set length of time, often ranging from six months to five years. This may be a good choice if you aren’t looking to purchase a home in the near term.
Keep in mind that you may want to open more than one type of savings account based on savings goals and/or to maximize your potential returns.
Reduce Your Debt
The more debt you have, the harder it may be to set money aside. If you’re carrying a balance on a high-rate credit card, you may want to focus on paying off that balance first. Once the balance is paid, you could redirect your monthly payoff budget to your down payment savings.
As an added benefit, when you reduce your debt, you also improve your debt-to-income ratio (DTI). Lenders consider your DTI when calculating what to lend you and what rates you may qualify for. The higher your DTI, the riskier you appear to lenders as they assume it would be harder for you to also make payments on your new mortgage.
By lowering your DTI, your financial situation appears stronger, and you may qualify for a larger loan.
Explore Alternative Down Payment Options
In addition to saving on your own, there are programs that may help you increase your down payment. Here are a few options to consider.
First-time home buyer programs: For first-time home buyers, many states and cities offer down payment assistance programs to help you afford a home. Some of these programs may give you the money as a grant that doesn’t need to be repaid, while others offer low-rate down payment assistance loans to help you make a qualified offer on a home.4
Gift funds: If you have a close friend or family member willing to help, they may give money to use toward a down payment. This method requires that you submit a gift letter to your lender which effectively shows that the money is a gift, not a loan. As of 2024, a single person may give up to $18,000 toward your down payment without declaring it to the IRS.5
Borrow from your retirement account: You may be able to borrow from your retirement account to help you cover your down payment. If you have an IRA, you could withdraw up to $10,000 without a penalty if you’re using the funds for a down payment.6 You may also use funds from your 401(k) to help with your down payment, but there are several restrictions. Speak with a financial advisor before you borrow against your retirement funds.7
Bottom line, you may be able to combine your savings with these alternatives to further increase the size of your down payment.
Other Home Buying Costs to Consider
Keep in mind that your down payment isn’t the only expense you have to cover out of pocket when buying a house. Here are some of the most common expenses.
Closing costs: Closing costs are the expenses you pay in exchange for the lender processing and generating your loan. The exact amount depends on your lender, but most charge between 2% - 6% of the mortgage principal amount. You may be able to roll these costs into your loan, but it may result in a higher rate.8
Mortgage reserves: Lenders want to work with borrowers that are low-risk, and many require you to have a certain amount of money saved beyond your down payment. These reserves give lenders peace of mind knowing that you have enough in savings to cover payments if you’re in between jobs or experience other financial strain.9
Moving costs: Moving costs could sneak up on you and if you’re moving across the state or to a new state entirely, you may need thousands of dollars to cover the cost. Get estimates from movers ahead of time to compare services and choose a company that won’t hurt your budget.10
Earnest money: When you make an offer on a home, it’s customary to submit an earnest money deposit or good faith deposit of 1% to 3% of the home’s purchase price at the time that you make the offer. The money shows the seller that you’re serious about buying the home and is held in an escrow account with the title company until closing. At closing, the earnest money goes toward your closing costs or your down payment, so technically it’s not an additional cost. That said, since it’s due right when you make the offer, it’s good to be aware.11
Overall, homebuying is filled with surprises, so be sure to be prepared for these expenses so you’re not caught off guard.
Final Thoughts
Building a down payment fund is possible when you set money aside regularly. You may find it best to open a dedicated savings account to help you keep track of your progress and reduce the temptation to use your down payment savings for other expenses.
A good savings account helps put your money to work, and having a budget in place could help automate your savings and help you set aside enough for your down payment. Check out our tips for building a budget that helps you reach your goals.