How to Save For a Down Payment on a House

The decision to buy your first house is a tremendous life moment. It may be a starter home, or it could be where you’ll raise your family and welcome the grandkids back for holidays. Either way, you’re going to make important memories.

But once you’ve made the decision to buy, there’s still one big financial hurdle to clear to get you into the home of your dreams: Saving for the down payment.

Common advice is that you need 20 percent of the purchase price for a down payment. While this isn’t always the case, it can still be a large chunk of money. So, it’s OK if saving for a down payment seems a bit overwhelming.

Here are some of the steps to take to get started — which will put you one step closer to moving in to your dream home.

How to Save Up for a Down Payment

1. Determine how much house you can afford

Before you begin to save up your down payment, you first need to figure out how much house you can realistically afford (based on your monthly mortgage payment), because that number will be used to calculate how large of a down payment you may need to save.

You’ll find a number of different general rules to determine the size of a home payment you’ll be able to make. Perhaps the most common is something known as the 28/36 rule. This refers to the fact that most lenders prefer that you spend 28 percent (or less) of your gross monthly income on your housing expenses, including your mortgage, and 36 percent (or less) of your gross monthly income to service all of your debt (including your mortgage).

A mortgage calculator can help you determine the monthly payment for different loan amounts and terms. Just remember, the cost of your mortgage, taxes, homeowner’s insurance and other fees like association dues are all added into the 28 percent.

2. Determine the size of your down payment

Once you know the size of the loan you can get, you need to determine how much home you can actually afford based on your loan and your down payment. While there may be ways to put down less than 20 percent, this is typically the minimum down payment people make as this amount lets you avoid paying private mortgage insurance (PMI), which adds to your monthly housing cost.

So for a $300,000 home, you would need to make a $60,000 down payment (20 percent), which would leave you with a $240,000 mortgage.

3. Don’t forget about home maintenance

The great news about owning a home is that it’s yours. That’s also the bad news. When something breaks and you want to call the landlord to fix it, you’re the landlord. The cost of home maintenance can vary widely depending on a number of factors including the age of the home and its parts.

Some financial professionals recommend that homebuyers should expect to spend roughly $1 per square foot of space per year. On a 2,500 square foot home, this means you should expect to spend an average of $2,500 each year to maintain the home. Others recommend budgeting 1 percent of the home’s purchase price for maintenance each year. Following this rule, if you buy a home for $300,000 you should budget roughly $3,000 per year for upkeep.

However you calculate it, plan to set aside some money in your budget so that you’re ready the first time your heat goes out.

4. Set a time frame and crunch the numbers

In order to determine how aggressively you must save to amass your down payment, you’ll also need to have a date in mind for when you’d like to buy your home. Once you know when you want to buy your home, you can do some simple math to determine how much you need to save each month to hit your goal.

For example, let’s say that you run through all of the steps above and determine that you’d like to purchase a home valued at $300,000 in five years, and you’d like to put 20 percent down. (You already have enough money set aside for the first year’s maintenance.) That means you’d need to save $60,000 over the course of about 60 months (five years), or roughly $1,000 per month, not factoring in any interest payments or investment growth on your savings.

On the other hand, let’s say that you have a three-year time frame. In this case, you’d need to save more than $1,600 each month in order to hit your goal.

One consideration here: Automation is a powerful tool. By automating your savings and adjusting your budget, the money you are saving will be gone before you knew it was there. Eventually, you won’t miss it and you’ll be well on your way to reaching your goal.

5. Consider your larger financial plan

If you don’t have a financial plan yet, buying a home is a good reason to start one. If you already have one, buying a home is a good time to revisit your plan.

A financial advisor can help you with questions you might have about the financial aspects of buying a home, including helping you set up a saving plan for your down payment. He or she can also show you how your home fits into your larger financial plan. Buying a home is also a good time to review things like whether you have enough life insurance as well as a plan to make up income if you’re ever sick or injured and can’t work.