Money Management

How to Save For a House: A Step-by-Step Guide

house made of dollars on wooden table
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If you’re after the classic American dream of owning a home, you’ll need a down payment — money you bring to the table in order to qualify for a mortgage. Depending on the type of mortgage you go with, this can be quite a chunk of change.

In this article, we’ll go over exactly how much to save for a down payment and run through a few handy tricks for speeding up the process. 

5 Things to Know About Saving for a House

  • You’ll pay less in interest by putting 20% down. To qualify for a conventional mortgage, you’ll need 20% of the home’s purchase as a down payment. While this is quite a lot of money (even if you’re buying a modest home), you’ll qualify for the most favorable interest rates and pay less in interest over the life of your loan by making a large down payment.
  • 20% isn’t required, though. While it’s not optimal, there are options available when you can’t put 20% down. Most often, this means buying private mortgage insurance (PMI), which ranges in cost from .5% to 1.5% (of the loan amount) per year. 
  • You can get rid of private mortgage insurance when you have a 20% loan-to-value ratio in your home. So, if you can get to 20% equity rather quickly — in a year or two, for example — you can minimize the cost of putting less than 20% down. 
  • You still need an emergency fund. Your plan shouldn’t require depleting all your cash savings to pay for a down payment.
  • It’s OK to put other financial goals on hold. Don’t worry too much about temporarily pausing savings towards other financial goals, like retirement (for no more than two years max, and ideally just one year). 

How to Save for a House: Step-By-Step Guide

Step #1: Set a Specific Goal

Before you set a goal for how much to save for your down payment, you’ll need to do a little research and calculate how much you can afford to spend on housing based on your income.

A quick way to do this is to plug your projected mortgage payment into a hypothetical 50/30/20 budget

In this budget, 50% of your income goes to needs, 30% goes to wants, and 20% goes to savings

Personal finance is all about tradeoffs. If your monthly mortgage payment results in your needs exceeding 50% of your budget, you’ll have to accept the tradeoffs that come with that allocation. 

In other words, there will be less to spend on wants and savings. That decision is ultimately up to you, but it’s important to understand the tradeoffs upfront. 

Second to what you decide is the right mortgage payment is the fact that lenders have guidelines, too. 

The maximum payment — including principal, interest, tax and insurance — that most lenders allow is for 28% of your gross income. In addition, total debt (such as auto, home and student loans, plus housing), shouldn’t exceed 36% of your total take-home pay. This is known as the 28/36 rule. 

So, if your gross monthly income is $5,000 per month:

  • Your all-in housing costs shouldn’t exceed $1,400 a month.
  • Your all-in housing costs plus debt payments shouldn’t exceed $1,800 per month.

Once you’ve settled on an amount you’re willing to spend each month, you can work backward to determine how much house you’re willing to buy. From there, set your goal for a down payment. 

As noted, you’ll pay less in interest if you’re able to save 20% down. This is because you’ll avoid private mortgage insurance (PMI). While it’s not required to save 20% down to obtain a loan, it’s something I strongly recommend. 

PMI savings aside, saving 20% of the cost of your new home is a strong indicator that you have the financial discipline necessary to incur the costs of owning a home long-term. 

In addition to your down payment, there are other associated costs you need to account for. These include:

  • Closing costs, which average about 3-5% of the home’s purchase price. These costs are usually rolled into the loan, so you’re not paying them upfront. 
  • HOA fees.
  • Moving and relocation expenses.

The closer you are to your goal, the more important these expenses become. In other words, if you’re a few years away, just stick to aiming to save 20%. There’s no need to create an itemized list of associated costs years out. A lot can and will change. 

But once you’re closer to your goal, these costs need to come into clearer focus. Furthermore, it’s then that you’ll have a better idea of what these costs actually are.

Pro Tip: Give Your Goal a Name

Once you’ve done the legwork, create a specific account for your down payment savings and label it something like “Down Payment Account” or “Dream Home Purchase Fund.” Don’t just mash it in with your regular checking or savings account, as it’s more likely to get mixed up with regular spending that way. 

Then tell everyone you know that you’re saving for a home.

This step might sound cheesy or unnecessary, but it has a major psychological impact.

Research shows that setting a specific goal and then naming that goal — as well as having other people help you stay accountable to it — can be a key aspect of successfully achieving it.

Define what you want to do as concretely as possible. By determining how much you want to save, for what, and how soon, you give yourself a yardstick to measure your progress.

Key Steps:

  • Determine your optimal monthly payment using the 50/30/20 budget method.
  • Calculate how much house you can afford based on that calculation.
  • Aim to save 20% of your future home’s cost.
  • Give your goal a name and tell someone about it!

Step #2: Choose a Budgeting Method and Make a Budget

A budget is a plan for how to spend and save your money. 

When you have a big, hairy, audacious goal — like saving for a down payment on a house, for example — a budget will help you mindfully choose how to allocate your resources to provide for all your needs while ensuring you’re making steady progress toward your goal.

When it comes to achieving financial goals, my preference is the pay yourself first method. This is where you automatically pay your goals first, and then spend what’s left over. 

For example, if your goal is to save $1,000 a month over a set timeline, that $1,000 should come out of your account first before it can be allocated to any other expenses.

Ideally, you’ll automate this process by having an automatic transfer that moves the funds from your checking account to your preferred savings account almost immediately when the money hits. 

Of course, this is easier said than done. Paying yourself $1,000 off the top every month only makes sense when there’s enough money left over to take care of your needs and wants. 

That’s why it’s important to maintain a system that tracks where your money is going.

Here are a few options:

Online/App-Based Budgeting

There are many good online and mobile budgeting apps that allow you to connect your bank accounts, loans, credit cards, and retirement accounts to a central dashboard, helping you to get a comprehensive view of your finances. Mint, YNAB, EveryDollar and Personal Capital are some of the most popular ones. 

If you’re really trying to cut expenses, I’d recommend YNAB (short for You Need a Budget). If you’re looking for a simple way to track your finances, I like Truebill.

See also: Our in-depth Truebill review.

Envelope Method

Popularized by Dave Ramsey, the envelope budgeting method involves withdrawing your paycheck in cash and distributing it to physical envelopes labeled with each budget category. 

When you need to spend money for an item in a given category, you withdraw the cash to pay for it. When you run out of cash in an envelope, you’re done spending money in that category for the month.

Similar to YNAB, this method is best for someone who needs to drastically cut their expenses. 

Common Budgeting Mistakes

If you’re new to budgeting, it can seem overwhelming in the beginning. After all, how do you determine how much to spend on groceries if this is your first time tracking your money? Accept that your first few budgets won’t be perfect, but keep working to polish your budgeting system. 

Here are some common newbie budgeting mistakes to avoid:

Mistake #1: Setting Unrealistic expectations

In your bright-eyed, bushy-tailed, first-of-the-month enthusiasm, you might try to boost your savings too high and ratchet down your spending too low. This is an age-old recipe for quick budget burnout. 

To counter this, spend a month just tracking your spending or take a look over the last few months of checking account ledgers or credit card statements to give yourself a good idea of where to start. You’ll have to make some sacrifices to save for a house, but don’t create a spending plan that’s impossible to stick to or that has no room for error.

Mistake #2: Forgetting to Account for Occasional Expenses

You won’t pay for an oil change, a doctor’s visit or your mom’s birthday present every month, but you know each of these items will eventually happen. Build sinking funds into your budget — categories you put some money into each month but you only withdraw from occasionally. A few common sinking fund categories are car repairs, gifts, medical expenses, school supplies and holidays.

Mistake #3: Not Padding the Numbers

Unless you have a crystal ball, you won’t be able to anticipate every expense that your budget needs to cover. 

After creating some sinking funds to cover your known but unpredictable expenses, establish a “miscellaneous” fund. This will catch the out-of-the-blue expenses and prevent them from messing up your budget.

Keep in mind, budgeting is a skill. It will take some practice to find a system that works for you. But, once you do, that system becomes easier and easier over time and you get to reap the rewards. In other words, don’t give up after the first month because things will not go as planned!

Key Steps:

  1. Determine how much you can save each month towards your down payment.
  2. Pay yourself first by setting up an automatic transfer from a checking account to a savings account.
  3. Have a plan for managing your income and expenses.

Step #3: Focus on Cutting Your Big Three Expenses

The internet is rife with personal finance articles telling you to cut out lattes or cable to save money. While it seems to make sense to focus on everyday expenses to save for a house, the reality is that you’ll likely need to think much bigger to make serious traction toward a down payment.

To illustrate the point, say you want to save $1,000 per month toward your housing fund. To accomplish this, you can make one huge $1,000 cut or ten $100 cuts. One big cut will likely cause you some discomfort, but sapping every small luxury and pleasure out of your life is a surefire way to make you give up on your savings goals. 

Plus, chances are you just don’t have that many small expenditures to cut. If you spend $5 on a coffee three times per week, that amounts to $60 per month. You’d need to make around 16 such cuts in order to reach your $1,000 goal.

To get the most mileage out of your spending cuts, focus on “the big three” expenses: housing, transportation and food. 

These three items encompass 70% of the average American budget, so look to reduce these big-ticket items before clipping coupons or culling your trip to the coffee shop. 

Making a deep (albeit temporary) cut to your spending can involve some creativity. Some obvious suggestions (like moving to a lower-cost area of town or ditching your car in favor of public transit) may not be possible in your situation, but keep searching for ways to reduce your large expenses. 

If cutting the big three doesn’t produce the savings you need, then you can look at temporarily cutting some other types of expenditures out of your budget. You may end up doing a blend of both big and small spending reductions. Focus on eliminating, replacing or reducing the things you won’t miss rather than those you don’t want to live without. 

Remember, it’s all about priorities and being intentional with your spending.

To learn more, check out our frugal living guide, which explains in detail why giving up your morning coffee is almost never the best way to save money.

Step #4: Take Advantage of Windfalls

So often, when unexpected bonus money comes our way, we spend it differently than we do our everyday income because it feels “extra.” 

This concept is known as mental accounting. The dollars aren’t any different, but we treat them differently if they aren’t earned in the typical way. 

If you have the discipline to sock this money away instead of spending it, windfalls can boost your down payment fund quickly and significantly. 

The most common windfall is your annual tax refund. Plan to dump as much of it as you can into your house savings fund. Transfer it as soon as it hits your account and make sure your budget is in good shape so you don’t need to use it to fill budget gaps when it arrives. 

If you’re lucky enough to get child tax credit checks, plan to do the same with those as well.

Other common windfalls to have on your radar are sign-on or annual bonuses from your employer, unexpected refunds or winnings, inheritances and legal settlements.

Step #5: Make More Money (The Right Way)

If you’re already living frugally, it may be easier to earn more than to save more. After all, there’s only so much you can cut, but there’s no limit to how much money you can earn. Once you’ve cut your spending, taking on a side hustle can boost your down payment fund fast. 

If you’re happy with your career, try to take on a gig that uses your current skills and expands your knowledge in your current field. It will not only be easier to find and qualify for this kind of work, but you’ll be a more valuable, experienced employee for your current job when all is said and done. 

If working more in your field isn’t reasonable for you, don’t discount the potential of on-demand gig economy jobs like freelance writing, dog sitting, Uber, DoorDash and so on. These have super flexible hours, you can take on as much work (or as little work) as you want, and they can pay $15 to $25 per hour. 

Even if you work just five hours per week delivering DoorDash orders at $20 per hour, that’s $400 per month. And that’s just one hour per day after work! Expand that to five more hours on a Saturday, and that’s $800 per month. Couple that with your regular savings, and you’ll have a substantial down payment in no time. 

Be mindful about what extra work you take on, however, as not all money-making opportunities are created equal. Some gig economy jobs don’t even make minimum wage, so keep track of the hours you spend (as well as gas and other resources you’re using) to make sure your side hustle is worth your time.

Life isn’t supposed to be a constant slog, so make sure not to let your side hustles get away from you. Create realistic goals and limits about how much time you will spend doing extra work to save for a house so that you can maintain life balance and have time for rest and relaxation.

Pro Tip: Focus on Building Your Credit as Part of the Process

In your home buying calculations and plans, take a look at your credit score and do all you can to raise it as you save for your down payment. While your credit score doesn’t have a direct impact on your home savings fund, it will seriously affect your housing costs once you’ve saved enough for a house and are moving forward with a mortgage. 

When you apply for a mortgage loan, one of the major determining factors of the interest rate you’re offered is your credit score. The difference in the interest rate between someone with a mediocre score and someone with a high score may only be a percent or two, but this equates to tens of thousands of dollars over the life of the loan. 

To illustrate, say you’re able to get a 3.5% interest rate on a conventional mortgage for a $250,000 home. When you pay the house off in 30 years, you’ll have paid over $123,000 in interest. Raise the interest rate just 1% and that number jumps to over $164,000. Just by establishing good credit and paying your bills on time, you can save $40,000 or more in interest.

Free Resource: Get free recommendations for improving your credit score from Credit Sesame, which provides personalized, actionable insights that can help you optimize your credit profile.

FAQs About Saving for a House

Should you pay off debt before saving for a house?

That depends on how much and what kind of debt you have, and how much debt you’re in. High-interest consumer debt should definitely be eradicated before you buy a home because those payments will inflate your debt-to-income ratio, will likely bring down your credit score, and will make you much less financially able to handle the additional costs of home ownership. 

If you have low-interest debt, such as a student loan, it may make more sense to save for a house before completely knocking out your debt. This is particularly true if buying is substantially cheaper than renting in your area.

Should you pause your retirement savings to save for a house?

While a few popular money gurus recommend this, the opportunity cost here is extremely high. You’re forgoing your company match, as well as all the compound interest you’ll earn while you’re saving for your house. If you want to pause your retirement savings to accelerate your down payment savings, do it for no more than two years. 

Should you borrow from your retirement accounts or tap your IRA?

No. Though some retirement accounts allow you to do this without penalty, by raiding your retirement accounts, you’re borrowing from your future needs to pay for your present ones. Leave your nest egg alone and save up using other means. 

Where should you keep the money you’re saving for your house?

While savings accounts are paying abysmal interest rates these days, they’re the safest place to park your down payment savings. If you have less than a year towards your goal, sticking with a high-interest account is your best bet. 

The further your goal is away, the more risk you can accept. I personally like Betterment’s Goal Based Portfolios for major purchases. These portfolios allow you to set a goal and choose a time frame; Betterment then chooses the ideal mix of investments. If your goal is less than five years away, you still won’t be taking much risk, but this strategy can out-gain what a high-interest savings account pays.

What is laddering CDs, and is it a good strategy?

Laddering CDs is using multiple CD accounts that mature on different dates, enabling you to get a CD interest rate but not lock up all your money for a long time. The only problem with this strategy is that in 2021, top CDs are only paying 0.70% —  just a smidge better than you’d get in a high-interest savings account. You’re better off spending your time making extra money than opening and keeping track of laddered CDs.

How to Save For a House: Closing Thoughts

Saving up for a house generally takes a substantial amount of time. You can knock down that time by honing your budget and staying focused on your goal of home ownership. 

The best strategy is to stack several of these methods to supercharge your savings. If you automate your savings from your everyday budget and augment this by stashing money from any windfalls and side hustles you have, you’ll be in your own home much sooner than you think.

R.J. Weiss
R.J. Weiss is the founder and editor of The Ways To Wealth, a Certified Financial Planner™, husband and father of three. He's spent the last 10+ years writing about personal finance and has been featured in Forbes, Bloomberg, MSN Money, and other publications.

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