How To Save for a House: A Step-by-Step Guide (2024)

Although a lower down payment can help many people get into a home sooner than later, there’s also a strong case for putting more money down if possible. Dr. Ohan Kayikchyan, Ph., is a Certified Financial Planner (CFP) and founder of Ohan The Money Doctor.

He says, “The ideal scenario is to have at least 20% of your potential purchase price saved as a down payment, although there are other options and programs available to buy a house with a smaller down payment, starting from 3.5%.”

Dr. Kayikchyan adds, “Keep in mind that for lower down payments, you are [often] going to be required to maintain private mortgage insurance (PMI) and pay a mortgage insurance premium. Hence, with a lower down payment, your potential monthly housing expense usually is higher.”

Whether you choose to put more (or less) down on your home, you’ll still need a significant amount of money to get to the closing table. It may seem impossible to save so much in a short period of time, but it can be doable with a plan.

1. Assess Your Current Financial Situation

Figure out where you are financially. If you’re not managing your money well, adding a home to the mix could only end up in disaster.

Determine if there are some financial missteps, habits, or circ*mstances to address. This might include catching up on late payments, correcting your credit report, or paying down some debt to improve your financial situation.

In this exercise, you’ll also evaluate your income, expenses, and debt to determine how much house you can afford and what the down payment and closing costs expenses will be related to a house in that price range.

Of course, you’ll check with your lender for exact approval requirements, but here’s a high-level list of how to financially prepare for homeownership:

• Credit score: Get your credit report and find out your credit score. Most lenders require a minimum credit score of 620 or above for conventional mortgages.
• Debt-to-income ratio: Make sure your debt-to-income ratio (DTI) is in line with lender standards. DTI ratio measures the percentage of your gross income you pay out each month to satisfy debts. Most banks will set a DTI ratio upper limit of 43% and may prefer to lend to borrowers with a DTI ratio of less than 36%.
• Documentation: Gather pay stubs, tax returns, bank statements, and investment account statements.

2. Set a Clear Savings Goal

The 28/36 rule is one approach to determining the maximum amount of debt a household should carry. The rule states that an individual or household should spend no more than 28% of gross monthly income on total housing expenses and not more than 36% on servicing debt, which includes their mortgage plus other debt such as credit card payments.

For example, if you earn a gross income of $4,000 per month and follow the 28/36 rule, your maximum monthly mortgage payment should be no higher than $1,120 or 28% of your monthly income. Your total monthly debt payment shouldn’t exceed $1,440 per month or 36% of your monthly income, which means you can afford up to $320 in other debt. If you pay more than $320 monthly to service your debt, you need to lower your mortgage payment estimate accordingly.

Once you’ve calculated your maximum allowable monthly housing payment, it will be easier to come up with your total housing budget and determine the down payment required.

Remember Other Housing Costs

Consider the true cost of homeownership when you set your budget.

“Speak with a financial advisor and mortgage broker to understand what you can realistically afford without making yourself ‘house poor,’” says Jason Anbara, founder and president of NorthLend Financial, Inc. in Ottawa, Ontario. “The cost of your home is not just the monthly payment you make to the principal balance on your mortgage loan. There are also taxes, insurance, interest on the loan, and all the maintenance costs and bills associated with keeping the home in good condition.”

After careful consideration and consultation with all the appropriate professionals, you should have an actual number for your savings goal. From here, it’s time to adjust your financial habits and budget to accommodate a monthly savings amount.

Savings Goal Example

If your gross income is $5,000 each month, then you’d want your monthly mortgage payments, including taxes and insurance, to stay between $1,250 and $1,500. You should also account for expenses related to maintenance, repairs, and other miscellaneous costs associated with owning a home, which may lower your maximum allowable monthly payment.

The home price based on these payments will depend on many factors, including your creditworthiness, down payment amount, property taxes, homeowners insurance rates, and prevailing interest rates.

3. Develop a Savings Plan

If you aren't satisfied with how much money you can save based on your budget, it might be time to tweak your savings plan. This could include some creative strategies like:

Setting up a Separate Savings Account

Trying to save extra money in the same checking account you use for expenses means you could be mixing money and constantly dipping into your home down payment savings. Plus, checking accounts typically don’t pay very high interest. Separate your down payment funds into a savings account. Make sure it pays a decent interest rate to boost your savings.

Note that where you put your money matters. Because you’ll likely need this money in less than five years, you should avoid putting it in any type of investment account, like a brokerage account or mutual fund. Instead, put it in a high-yield savings account or money market account.

If you want to be extra disciplined, you can put your money in a certificate of deposit (CD,) but you need to be mindful of early withdrawal penalties should you need your money sooner than the maturity date.

Automate Your Savings

Another strategy is to have money automatically deducted from your paycheck. Most employers will allow you to split your paycheck into separate accounts for direct deposit. Use this feature to make sure you are saving a certain amount of money every single paycheck. Send it directly to your down payment savings account so that you aren’t tempted to withdraw money frequently from the funds earmarked for your down payment fund.

Lifestyle Changes

If you’re looking to accelerate your savings rate, it might be time to do a lifestyle overhaul. This may include moving in with relatives to save on rent costs, taking on side gigs, aggressively paying down debt, or other drastic measures.

Use Your 401(k)

Though generally not the preferred way to save for a home, there are IRS rules that allow employees to borrow money from their employer-sponsored 401(k) retirement account for the purpose of purchasing a primary residence.

You must repay the loan within five years. If you are separated from your job, e.g., you are fired or quit, then you will have to repay the loan much quicker or face penalties and fees on what the IRS would consider an early withdrawal—which can make this move risky for some people.

4. Cut Back on Expenses

Cutting or eliminating expenses can be a great way to free up money for your savings goal. Here are a few expenses you can reduce or eliminate:

• Cable and streaming
• Dining out, entertainment, and travel
• Call to get customer retention discounts from providers for services like insurance, cable, cellphone, internet, security monitoring, pest control, and lawn care
• Recurring subscriptions

5. Increase Your Income

Adding more income to your budget can also accelerate your savings progress. Some ideas to increase your income include:

• Getting a promotion at your job
• Changing jobs for a higher-paying position
• Take on side hustles
• Start a small business
• Sell items around the house for extra money
• Look for passive income opportunities
• Adjusting your income tax withholding

6. Explore Down Payment Assistance Programs

Getting down payment assistance can potentially reduce the amount of money you’ll need to save for your home purchase. There are many ways to purchase a home with little to no money down—ranging from 0% down loans to government and bank-sponsored assistance. Depending on where you’re buying, there could be funds available at the city, county, state, and federal levels.

There are also lender-specific programs that may offer down payment assistance. The assistance may come in the form of a forgivable or deferred payment loan or grant. There are also rent-to-own and new construction developers that offer incentives, which often include covering a portion of closing costs.

These programs tend to have strict requirements, such as being a first-time homeowner, working in a certain profession, buying in an eligible area, and meeting other lending criteria like a minimum credit score.

Finally, you can also ask for seller concessions, which may include the seller paying a portion of your closing costs. However, the maximum limits depend on the type of loan you have. Speak with your mortgage loan officer to understand the financial assistance options and strategies to reduce closing costs you may qualify for.

In the meantime, here are some options to explore:

• FHA loans
• VA loans
• USDA loans
• HUD Good Neighbor Next Door Program
• NACA housing program
• Local homebuying programs (based on city, state, and county)

7. Save Windfalls and Extra Income

Getting a large influx of cash can help you reach your savings goals even faster. Some cash windfalls are expected, like a tax refund or a holiday bonus. Others may be unexpected, like a legal settlement or an inheritance.

Either way, make up your mind ahead of time that you’ll use all or a portion of any windfall or extra income that comes your way. Avoid temptation by earmarking these funds in your monthly budget and sending them directly to your savings account once you get them.

8. Monitor and Adjust Your Savings Plan

As you’re saving up for your home, you should regularly revisit your spending plan and your progress toward your goal. That way, if you get off track, you can make more adjustments along the way.

Stay motivated by posting a graphical representation of your savings progress somewhere visible. Every time you reach a milestone, you can celebrate by updating your savings tracker—think a debt thermometer or a pie chart printable.

Finding motivation can be hard when you experience setbacks like unexpected expenses, job loss, or medical emergencies. The key is staying on track as much as possible and celebrating your savings progress, even if it’s not perfect.

The Bottom Line

When home prices soar, saving for a house can feel like an impossible goal. But with the right information and savings plan, you can develop a strategy to put together a down payment. Take an honest look at your finances, set a budget, and consider using windfalls and down payment assistance plans to your advantage. The sooner you start saving, the sooner you can make your dream of homeownership into a reality.