Buying a house is part of a lot of people’s long-term dreams — but for many of us, saving enough to buy a home can feel intimidating.
This is especially true for those of us who earn an average salary. How do you save money for a house if you don’t earn a lot of money?
Fortunately, with a solid savings plan, anyone can start building up their savings to make progress toward their financial goals. These days, qualified borrowers can buy a home with as little as 3% down — meaning just $9,000 down for a $300,000 house.
With the right knowledge, anyone can start saving for a home — here’s how.
The first step is to figure out how much cash you need to save to buy a house.
The answer to this question will depend on several factors, including:
You’ll need to consider each of these factors to determine the target savings goal for your situation. But don’t worry, we’ve covered each factor in detail below.
The prices of real estate vary significantly depending on where you live and what type of home you want to buy.
For this reason, it’s very important to start by researching house prices in the area(s) you would like to live in.
You can use real estate search sites such as Zillow or Trulia to help.
Start by looking for homes similar to the house you’d eventually like to buy. For example, if you want a two-bedroom house with 1,500 to 2,000 square feet, start looking at comparable homes of this size.
If you’re not exactly sure what you want to buy, don’t worry — just getting a general feel for the price range is enough at this point.
Then, use a calculator to determine how much you can afford to spend on a house.
Your credit score and overall creditworthiness will affect your ability to qualify for a mortgage. Existing debt can also affect mortgage eligibility.
But what does this have to do with a down payment?
Well, the better your credit, the larger the mortgage you may qualify for. In many cases, this means that borrowers with better credit can afford to buy more expensive homes, often with less money down.
Conversely, borrowers with poor credit may need to put up larger down payments in order to purchase the homes they want.
Check your credit using a free tool like Credit Karma or Credit Sesame. If necessary, take steps to improve your credit now so that you’ll be better off when it comes time to apply for a mortgage.
Lower existing debt whenever possible. This could be credit card debt, student loan debt, auto loans, or any other type of consumer debt. Lowering existing debt is important because mortgage lenders look at your debt-to-income ratio (DTI) when considering you for a mortgage. If you have existing debt, you’ll have a higher DTI, which means you may not qualify for a large mortgage.
The bottom line is this: Having lower debt will help you qualify for a larger mortgage, while having better credit helps you qualify for lower mortgage rates. Both of these factors can potentially mean that you’ll need to save less for a down payment.
Next, you’ll need to figure out your down payment percentage, which is expressed as a percentage of the total cost of the home. For instance, a 20% down payment on a $500,000 home would be $100,000.
Putting 20% down is a common recommendation for a number of reasons:
While 20% is a good target to aim for, it’s out of reach for many people. Fortunately, you don’t need to put this much down in many cases.
Some types of mortgages allow you to put as little as 3% down. On that same $500,000 house, that’s a down payment of just $15,000.
While there are substantial perks to putting more money down, don’t be discouraged if you don’t have a large chunk of cash savings. A 2021 report found that 12% was the average down payment percentage for a home purchase — and the figure was just 6% for buyers under age 30.
Keep in mind that your monthly mortgage payment will be lower if you have a higher down payment. A smaller down payment usually means higher monthly payments.
In addition to your home loan down payment, you’ll also need to pay for various “closing costs” at the time that you buy a house.
These are significant costs that can include:
And much more.
All-in, closing costs typically add up to around 3% to 6% of the home’s value. On a $300,000 home, that’s $9,000 to $18,000 in closing costs.
In most cases, you must pay the closing costs upfront. Some lenders allow you to “roll” closing costs into your mortgage (increasing the size of your mortgage loan), but many don’t allow this.
Because these costs are mandatory and typically due upfront, you’ll need to budget for them ahead of time.
Finally, consider that there are certain ways that you can get assistance with your down payment.
Many states have “first-time homebuyer programs.” The aim of these programs is to provide financial assistance to help people buy their first home.
Some programs provide interest-free loans to help you build up a down payment. Other programs offer generous tax credits for homebuyers. Details vary by state — check here for an overview of programs in your area.
Before you determine how much you need to save, it’s worthwhile to see if you may qualify for any of these programs.
Taking into account all the information from above, consider these two examples.
Aisha plans to buy a $500,000 home. She has a good credit score, and she will be using a conventional loan from her credit union. She has substantial cash savings and decides to put 20% down to avoid paying for private mortgage insurance (PMI).
Aisha will need to put $100,000 down (20% of $500,000). Additionally, she expects to pay around 3% in closing costs, for an additional $15,000. Her total down payment + closing costs will be $115,000, and her mortgage loan will be for $400,000. Aisha will not need to pay PMI.
Samantha plans to buy a $300,000 home. She has an average credit score but can qualify for an FHA loan. FHA loans require as little as 3.5% down, which fits well with Samantha’s budget.
Samantha will need to put $10,500 down (3.5% of $300,000). Additionally, she expects to pay around 3% in closing costs for an additional $9,000. Her total down payment + closing costs will be $19,500, and her mortgage will be $289,500. Samantha will need to pay PMI.
Once you’ve calculated how much you need to save, it’s time to take action! Follow these ten steps to help you save up for your down payment.
When do you plan to buy? The strategy will be quite different if you want to buy in six months than it would be if you plan to buy in five years.
If you have a short time frame, you’ll need to save aggressively — which may mean cutting back on optional expenses. And because the time frame is short, you should typically avoid investing the money you’ll be using for the down payment.
If you have a longer time frame, you may have more wiggle room in your budget — and you may be able to benefit from some investment profits while you save (see step #8 for details).
Once you have the total amount needed (down payment + closing costs) and a rough estimate of when you want to buy, you can start building a savings plan.
The math is simple:
To illustrate, let’s look at an example.
Now you know how much you need to save to reach your goal. The next step is to adjust your budget to make that monthly savings goal achievable.
If you are currently using a budget, consider cutting back on optional spending. Or, if you’re investing for retirement or other goals, you could consider shifting some of those savings toward your down payment fund.
If you aren’t actively budgeting your money, now may be a good time to start. This guide covers the basics of how to start budgeting.
When you’re saving money for a house, you’ll likely need to shift your financial priorities.
For instance, maybe you’ve been saving for a dream vacation or a new car. If buying a house is a bigger priority in your life, then you should shift those savings toward your down payment fund.
Or maybe you’re not actively saving much, but you spend a lot of money on restaurants and entertainment. By reducing your discretionary spending, you can save more money each month, getting you closer to your goal of becoming a homeowner.
“Discretionary spending” is essentially optional spending. It can include entertainment, dining out, clothing, streaming services, subscriptions, and more.
You don’t have to stop all discretionary spending, of course, but you can make progress more rapidly if you can cut back here and there.
In addition to cutting back on optional spending, you can also get creative in how you save some extra cash. Here are some ideas:
Lower your grocery bill: Groceries aren’t optional, but that doesn’t mean you can’t save money on food! By learning about budget nutrition, you can focus on nutritious, inexpensive foods. By cooking from home, you can save a small fortune compared to restaurant bills. You can even use free food coupons to score some free eats!
Lower your housing costs: Until you buy your first home, you’ll likely need to continue renting. There are a few ways to lower your rent cost. You could consider getting a roommate or downsizing to a smaller dwelling.
Use coupons: Utilizing coupons and promo codes can help you save extra money on almost all of your purchases. Don’t want to bother with finding the right coupons? Use Cently to automatically apply coupons at checkout whenever you shop online.
Use your tax refund: If you get a tax refund, consider saving the entire amount toward your down payment. This can give you a big boost come April!
Now, where do you put all this money you’re saving?
It’s very helpful to open a new, separate savings account, specifically for your down payment savings. If possible, use this account only for your down payment.
You can open the account at your existing bank or opt for a high-yield savings account from an online bank. Either way, it’s helpful to consider this money “off-limits” for everything except for your future down payment.
Automating your savings can help ensure you stay on track.
Most banks allow you to set up automatic transfers to different accounts. Once your dedicated down payment savings account is open, set up an automatic transfer (weekly or monthly) to that new account.
If you plan to buy a home very soon, it’s best to keep your money in a savings account.
But if you have a longer timeline, it can sometimes make financial sense to invest part of your down payment savings.
This comes with more risk, as there’s always the chance of losing money. But it also has the potential for more reward, as your money can potentially grow faster if you invest.
There’s a lot to learn about investing and a lot of different options when it comes to what you
can invest in.
Let’s go through some investment options that may make sense for saving for a down payment. The options are arranged in order of safest to most risky.
In general, the longer your timeframe for buying a home, the more risk you can afford to take with your savings.
Certificates of Deposit (CDs): Certificates of Deposit are financial products available from most banks. CDs are like a savings account, but they lock up your money for a certain period of time. They tend to offer somewhat higher interest rates than savings accounts in exchange for less flexibility. CDs are safe and available in terms ranging from three months to five years.
Bonds: Bonds are a financial product that you can buy from governments, municipalities, and companies. When you buy a bond, you are essentially loaning out your money in exchange for interest payments. Bonds can range from very safe (US government bonds) to very risky (corporate junk bonds).
Series I-Bonds (I-Bonds): I-Bonds are a type of bond available for purchase from the US government. When you buy them, you earn interest based on the current inflation rate. Because inflation is currently high, I-Bonds pay far more in interest than savings accounts or CDs. They’re very safe, but you can’t redeem them for the first 12 months (and there’s a small penalty if you redeem before five years).
Real Estate Investment Trusts (REITs): Real Estate Investment Trusts are a type of investment fund that you can purchase in most brokerage accounts or investing apps. REITs are essentially large companies that buy lots of commercial or residential real estate and allow individual investors to buy into the company itself. By investing in a REIT, you can get some exposure to the real estate market — meaning if real estate gets more expensive, your investment should grow. REITs are very risky, however, and they tend to lose value when the stock market goes down.
Stocks: Stocks are a way to buy very small pieces of big companies, like Apple or Ford. You can buy stocks in a brokerage account or with a trading app. You can also buy stock ETFs and mutual funds, which allow you to own hundreds of different companies all at once. Stocks are very risky.
Note: Investing in REITs or stocks is generally not advised unless you have a long timeline for buying a home. If you invest, and then the market goes down, you could be forced to sell at a loss, which could delay buying a home. Most savers should stick to less-risky options like savings accounts, CDs, bonds, or I-Bonds.
There are two ways to accelerate your savings: Save more money, or make more money.
Once you’ve maximized the savings side of the equation, it’s time to focus on increasing your income.
And if your current income is enough to support your lifestyle, that means that 100% of any “extra” income you earn can be saved towards your down payment!
There are many ways to boost your income. Here are some ideas:
Start a side hustle: It could be driving for Uber or Lyft, starting a business, selling items on eBay, delivering for Doordash, shopping for Instacart, or any other worthy side hustle. Many of these opportunities are flexible in their time commitment.
Start freelancing: If you have a marketable digital skill, you could consider freelancing on a platform like Fiverr or Upwork. You could become a virtual assistant, try your hand at freelance writing, become a graphic designer, learn social media marketing, or pursue any number of other freelance opportunities.
Ask for a raise: If you have been in your position for a good amount of time, politely asking for a raise may be in order. Check out this guide on how to ask for a raise for some inspiration.
Switch jobs: Sometimes, switching to a new position at a different company can help boost your salary. This doesn’t necessarily mean switching careers, but rather, switching to a similar job at a new company.
Finally, you’ll want to monitor your savings to make sure you’re on track. If you need to save $25,000 in five years, that means $5,000 after one year, $15,000 after three years, etc.
And remember that house prices may change before you buy. If prices increase, you may need to adjust your savings target to maintain the same buying power.
For example, if you make a plan to save 20% down on a $300,000 home, that’s $60,000.
But if that home appreciates to $350,000 before you buy, you’ll now need to save $70,000 to maintain the 20% down payment goal.
By checking in on your plans regularly, you can stay on track. And if you are falling behind, you can make adjustments to your savings strategy.
Saving money for your dream home takes time, but it doesn’t need to be complicated.
Figure out how much you need to save, break that down into a monthly amount, and then adjust your spending to make progress toward your goal.
Every dollar counts, so aim to maximize your savings by utilizing all the tips above. And whenever you make a purchase online, be sure to use Cently — a free browser extension that automatically applies coupons at checkout at thousands of retailers.