How to save for a house down payment

Key takeaways

• Homeownership is an important personal and financial milestone for many but can seem out of reach.
• Down payments, the first step toward homeownership, generally range from 0% to upwards of 20% of the purchase price.
• Consider these 7 steps to help save money for a house down payment.

Homeownership has been a cornerstone of the American Dream for many people for generations. But today's cost of real estate and increasing mortgage interest rates could be making it harder to reach that dream.

Putting a clear plan in place could help you save enough money for a house down payment. Whether you're buying your first home or looking to upgrade to a new property, these tips can help you get there.

1. Figure out how much house you can afford

Before you start any savings goal, it's helpful to visualize where you want to end up. One guideline is to look for homes that cost between 3 and 5 times your annual income. Those with more existing debt would ideally take on smaller mortgages.

Read more: How much house can I afford?

Once you have an idea of how much you might spend on a home, you can start to work backwards to figure out how much you need to save for a down payment.

2. Set a down payment percentage

You may have heard that you need a 20% down payment in order to buy a house, but that's not always true. The exact percentage depends on your lender and credit. The median down payment in 2021 was 13%, according to the National Association of Realtors.¹

Some lenders may allow you to put down as little as 0% to 3.5%, depending on your financial situation and other characteristics.² For example, anyone buying a primary residence with a credit score above 580 may qualify for a 3.5% down mortgage through a Federal Housing Administration (FHA) loan; those with credit scores as low as 500 may qualify for the same type of loan with a 10% down payment.³

Be aware that, generally, the lower your down payment, the more you may owe in mortgage payments each month—and the more you may end up paying in interest over time. That's why some people who can afford it may opt to put down even more than 20% as a down payment.

Another consideration: If you don't put down 20% or more, you may have to take on private mortgage insurance (PMI). This is a special insurance that typically covers any missed mortgage payments until you have paid off at least 20% of the amount you borrowed. PMI tacks on an additional fee, so your monthly payment is higher.

If you want to keep your costs as low as possible, aim to save as large a down payment as you can and look for homes on the lower end of your price range. And remember to keep your credit score in as good shape as possible to qualify for the best interest rates.

3. Determine how long you have to save for a down payment

Do you plan to purchase a home in a year—or 10? Your timeline will influence the savings tools at your disposal.

For those planning to purchase a home within the next 3 years, Fidelity suggests holding down payment cash in checking, regular savings, or high-yield savings accounts—or in near-cash accounts and investments, like certificates of deposit (CDs) or money market funds. This guarantees that you'll have access to your funds when you need them and protects them from the ups and downs of the markets. One downside is that you likely won't see very high interest rates that might help your money grow.

You could lose money by investing in a money market fund. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Before investing, always read a money market fund's prospectus for policies specific to that fund.

Those with longer timelines could consider investing some of their home down payment funds, which could potentially provide higher returns. The exact split of cash, stocks, and bonds should be determined by your individual willingness to take on risk and the number of years until the ideal purchase date.

In general, the longer until a purchase date, the more risk you may feel comfortable taking on, as you have more time for investments to potentially recover from losses. To help you figure out an asset allocation to fit with this goal consider contacting a financial professional.

4. Set your savings strategy

Once you know how much you'll need to save and where you'll park it, you can set a monthly savings goal. Take the total you're aiming to have for a down payment and divide it by the number of months you plan to take to get there. If you're eyeing a $450,000 home—roughly the median price in the US as of the third quarter of 2022⁴—you may want to have $90,000 as a down payment. If you hope to make a home purchase in 5 years, that would mean you'd want to set aside $1,500 a month if you were starting from $0, assuming no returns.

Do some back-of-the-envelope math to come up with your goal. Be sure to account for any existing funds you have earmarked for a down payment. And keep in mind you may benefit from interest payments or investment returns, depending on where you keep your money, though the latter are not guaranteed.

5. Take stock of your resources

Get a sense of the full extent of your financial resources by considering less traditional sources of funding. For instance, you might see if friends or family were planning to help you financially when the time comes to purchase a home, as is the case for 29% of millennials between 23 and 31.⁵

Some people may choose to tap their retirement balances for down payment money through a 401(k) loan or early withdrawal. This isn't a decision to consider lightly, as it can hinder your ability to save enough for retirement. Selling investments means you're missing out on potential compounding returns.

As for early withdrawals, the IRS may allow you to take out $10,000 of tax-advantaged dollars from a individual retirement account (IRA) penalty-free if you are using that money for a first-time home purchase. Any amount exceeding that may incur additional taxes and penalties.

When deciding whether to save for retirement or save for a house, be sure to carefully consider your whole financial picture, and investigate which strategy could help you prioritize your needs today and tomorrow. It could be helpful to meet with a financial professional to talk through your options and build a plan. 

6. Audit your financial life

If you haven't already, sit down with your bank and credit card statements to figure out exactly how much you're earning, spending, and saving each month.

Do you already have extra cash you're saving—or can use to save—for a house down payment? Be sure to consider if you've made progress toward other important financial goals, like building up at least $1,000 in an emergency fund, getting any 401(k) match, and paying down debt.

After that, you can funnel at least some of what you have left over each month toward saving for a down payment. If you aren't quite there yet with your budgeting, consider the next few tips to get you there.

7. Look for ways to save more

When it comes time to cut costs, it can be hard to figure out where to start—or how you can save for a big goal without making yourself miserable. Check out these tips on how to save more money:

• Ways to spend less money
• How to spend less on gas
• How to save money on travel
• How to lower your utility bills
• Tips to spend less on groceries
• How to spend less on online shopping

Of course, you can only snip away so much. If you've already whittled your spending to the essentials, you may need to look for ways to raise your income if you want to meet your savings goal. Consider starting a side gig.

And remember: Saving enough for a house down payment won't happen overnight. But careful planning and saving may help you get there.