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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 the money you need 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.

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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. For most people and families, the total house value should generally be no more than 3 to 5 times their total annual household income.

Read more: How much house can I afford?

This broad range should be suitable for most buyers’ situations. (Of course, some buyers may find they can afford more or less than that range.) Factors that could guide you lower or higher within that range include your household’s current debt situation, the general level of mortgage rates, and your household’s potential future earnings power. 

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 2022 was 14%, 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 might influence which savings tools to consider.

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 cash-like investments such as money market funds or certificates of deposit (CDs) that will mature before you anticipate needing the money. The upside of these relatively conservative options is that you'll have access to your funds when needed. The downside is that they may not grow as much as riskier investments with potentially higher returns.

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 $430,000 home—roughly the median price in the US as of the third quarter of 20234—you may want to have $86,000 as a down payment. If you hope to make a home purchase in 5 years, that would mean you'd want to set aside $1,433 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 22% of millennials between 24 and 32.5

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 may impact potential 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 savings, 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:

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.

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1. "2023 Home Buyer and Sellers Generational Trends Report," National Association of REALTORS® Research Group, March 28, 2023. 2. Emily Peck, “Why ‘zero-down' mortgages are gaining ground," Axios, September 8, 2022. 3. Jennifer Bradley Franklin, "FHA loan requirements 2023: what you need to qualify," Bankrate, August 10, 2023. 4. "Median Sales Price of Houses Sold for the United States," FRED Economic Data, St. Louis Federal Reserve, October 25, 2023. 5. "2023 Home Buyer and Sellers Generational Trends Report," National Association of REALTORS® Research Group, March 28, 2023.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Your ability to sell a CD on the secondary market is subject to market conditions. If your CD has a step rate, the interest rate may be higher or lower than prevailing market rates. The initial rate on a step-rate CD is not the yield to maturity. If your CD has a call provision, which many step-rate CDs do, the decision to call the CD is at the issuer's sole discretion. Also, if the issuer calls the CD, you may obtain a less favorable interest rate upon reinvestment of your funds. Fidelity makes no judgment as to the creditworthiness of the issuing institution.

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