Homeowner Help: How to Save Money for a Down Payment

Picture this: You've just found your dream home. The white picket fence, the perfect backyard, that spacious kitchen you've always wanted. But then reality strikes - the down payment. How will you ever afford it?

According to the Federal Reserve Bank of St. Louis, the median U.S. home price has climbed all the way to $431,000, which means you'll need a cool $86,200 to make a 20% down payment.

For many, owning a home is a major life milestone. But with sky-high property prices, the initial step of gathering enough capital for a down payment can feel daunting. However, with a disciplined approach, diligent saving, and a well-laid-out plan, even your dream home can become a reality.

Here are some effective strategies to help you save for that crucial down payment:

1. Determine How Much You Need + Set a Timeline

Start with the end game in mind. Before you can set a savings goal, you need to know how much you'll need. Typically, lenders expect a down payment of 20% of the home's price, but it's become much more common to put down less, and some mortgages have smaller minimum down payment requirements.

For example, some conventional loans will accept down payments of just 3% of the purchase price. For that $431,000 home, that comes out to a much more achievable $12,930. However, with these types of loans, you’ll be required to pay additional private mortgage insurance until you've accrued 20% of the equity in your home.

There are also certain federal loans that can help you minimize your down payment — or even avoid it altogether — if you qualify. Several programs, often offered by government agencies or nonprofits, offer grants or low-interest loans to potential homeowners.

For example, FHA loans (or loans insured by the Federal Housing Administration) only require buyers to put down 3.5% of the purchase price. These loans are specifically for first-time homebuyers, and you'll need a credit score of 580+ to qualify for the lowest down payment. (There are additional requirements you'll need to meet, as well as additional loan options for first-time homebuyers who don't meet the credit score criteria, so be sure to check the U.S. Department of Housing and Urban Development website to see if you qualify.)

There are a variety of loans for members of certain groups - like veterans and residents or rural areas - that require a low down payment, or even no down payment at all! Be sure to check federal and local home buyer assistance programs to see what might be available.

Before you put away your calculator, don't forget to add in other upfront costs you'll need to pay, like closing costs, home inspections, and possible renovations.

If you've done the math and the amount you need to save still seems out of reach, don't forget that home prices can vary dramatically from city to city. There are a handful of beautiful cities with low housing prices and thriving job markets.

Once you know how much you need to save, determine when you'd like to buy your home. Whether it's in two years or five, having a deadline helps to break down your savings goal into concrete monthly or yearly targets.

2. Create a Separate, High-Yield Savings Account

Want to make sure you're keeping those down payment savings sacred? Open a separate account solely for your home-related savings. This will prevent you from accidentally spending your down payment money on other expenses. Ideally, this should be an account that provides a decent return, so you can grow your savings even more - no extra work required!

Bonus tip: Set up automatic transfers to this account immediately after your paycheck is deposited. This "pay yourself first" strategy ensures you prioritize your dreams of homeownership.

3. Trim Your Expenses

One of the best ways to hit your down payment goals is to save more of what you already make. To analyze your spending, you can use budgeting apps or simply go through your bank statements to see where your money goes.

Once you understand your spending habits, identify areas where you can cut back. This could mean dining out less, eliminating subscription services you barely use, or switching to a cheaper phone plan. Or, if you want to make some big changes (and net some big savings), you could look for a roommate, relocate to a less expensive part of town, or even move back home — temporarily! Remember, a big sacrifice can help you take big strides toward meeting your goal quicker.

4. Increase Your Income

While cutting expenses is vital, increasing your income can also accelerate your savings. There are a number of ways to add to your income, but here are some of the basics:

Ask for a Raise: One of the most direct ways to boost your income is to request a raise at your current job. Before approaching your employer, gather evidence of your accomplishments, market salary data for your role, and reasons why you believe a raise is warranted. A well-prepared case not only demonstrates your value, but also your commitment and professionalism.
Start a Side Hustle: Freelancing, pet sitting, babysitting, or working in the gig economy are all great ways to bring in some extra money. Even a few hours a week can add a significant amount to your savings over time.
Sell Unwanted Items: Declutter your home and sell items you no longer need. Think of it as a win-win — you make some money now, and you'll have less to pack later when you move into your new home.

5. Explore Investment Opportunities

Consider investing a portion of your savings. Platforms like robo-advisors, traditional stock investments, or even CDs can offer returns that outpace high-yield savings accounts. However, remember that all investments come with varying levels of risks. Ensure you're comfortable with the risk level and understand potential returns.

6. Save Windfalls

Whenever you receive unexpected money, like tax refunds, bonuses, or gifts, consider saving a significant portion or all of it. This can give a substantial boost to your down payment fund.

7. Reduce or Eliminate High-Interest Debt

High-interest debt, such as credit card debt, can be a drain on your resources. By paying it off or transferring it to a lower-interest loan, you can free up more money for savings. Struggling with heavy credit card debt? Here's a step-by-step guide to paying it off.

8. Consider a Lower-Priced Home or Different Location

Look, saving up enough money for the down payment on your dream house can be a challenge. If you're not able to hit your monthly savings goals, it may be time to reevaluate your home-buying aspirations. Perhaps a smaller home or one in a more affordable location can still meet your needs. This would mean a smaller down payment and faster realization of your homeownership dream.

Saving for a down payment on a home requires discipline, determination, and a clear strategy. By following the steps outlined above, you'll be well on your way to homeownership. Remember, the sacrifices made during this period are temporary, but the joy of owning your dream home can last a lifetime.