Buying a home is one of the single biggest purchases that many adults will ever make. And with median home prices across the country rising faster than ever —reaching an all-time high of $408,000 in 2021—this investment is becoming even more significant. 

Although many homebuyers will use a mortgage loan to purchase their new property, there is still a hefty upfront cost that most will need to consider: the down payment. 

A buyer’s down payment is their initial contribution to a home purchase and is typically made in cash (or equivalents). The remainder of the purchase price can then be financed with the help of a home loan, ensuring that even if a lender fronts the majority of the purchase, the buyer still has a great deal of money at stake and a strong incentive not to default on the loan.

Saving money for a down payment is a financial goal that can take years to accomplish. Here’s how to save for a down payment, where to put that money while saving, and how much to consider putting aside before preparing to buy a home.

How much to save for a down payment

Before tackling a big personal finance goal, such as saving for a down payment, it’s helpful to identify the target. This savings goal will be a bit different from one homebuyer to the next, depending on individual budgets, the type of mortgage loan they’ll take out, and even personal factors like credit score. 

How much will you put down? 

The average homebuyer today pays a down payment of just under 12%, according to recent data from the National Association of Realtors. When buying a $325,000 home, this 12% average translates to a down payment of $39,000. 

Homebuyers who plan to take out a conventional loan should note that most lenders will require a down payment ranging from 5% to 20% of the home’s purchase price. Buyers with a higher credit score may qualify for a down payment requirement on the lower end of that range, meaning that they won’t need to save as much money before shopping for a home, but there is no guarantee. 

In more competitive markets like San Francisco and New York, a 20% down payment is often considered to be a minimum, not a maximum. Investors can independently research or enlist the help of a real estate agent to understand the particularities of their housing market in order to plan for a down payment necessary for a winning offer. 

Are you eligible for mortgages with reduced down payments?

Certain mortgage loan options and government programs, as well as federally insured loans, offer lower down payment requirements. For this reason, these types of loans may make it easier for many buyers to purchase a home.

• FHA loans.

  Eligible buyers can take out a Federal Housing Administration loan with a down payment as low as 3.5%. Buyers will need a credit score of at least 580 if they want a 3.5% down payment, but they can still qualify for a 10%-down FHA loan with a credit score as low as 500.

• USDA loans.USDA loans

  may be available with no down payment. There are no USDA requirements in terms of credit score, though each lender will have its own limits (often 640 or higher). To get automatically approved through USDA’s underwriting system, a credit score of at least 640 is required.  

• VA loan.

  Eligible active and retired service members may qualify for a zero-down VA loan, as long as the home’s sales price does not exceed its appraised value. While the VA does not set a minimum credit score requirement, each lender may have its own limits (620 is typical).

Putting down less than 20% on a conventional loan will typically trigger a private mortgage insurance (PMI) requirement. This monthly fee protects the mortgage lender if the buyer defaults on the loan, but can add hundreds (or even thousands) of dollars onto the annual cost of the home. Buyers who want to avoid paying PMI for the first few years of their mortgage should plan to put at least 20% down when they buy a house.

Preparing for closing costs

The down payment isn’t the only big check that homebuyers write when they buy. There are other important expenses to keep in mind when working toward your home-buying savings goal. 

Closing costs are fees that involve the actual transaction of buying and selling a property. Some are paid by the seller, while others are paid by the buyer. Some mortgage lenders let a buyer “roll” those fees into their mortgage loan, and others expect buyers to pay these closing costs upfront. 

Closing costs average around 2% to 5% of the total loan amount and commonly include:

• Prepaid mortgage interest.

  This covers interest that accrues on the loan between closing and the first mortgage payment.

• Property appraisal.

  This determines the current market value of the home.

• Inspection fees.

  This assesses the state of the property and identifies issues.

• Owner’s title search and insurance.

  This provides an extensive search of the property’s public records to determine and guarantee legal ownership.

• Prepaid property taxes.

  These cover the first six to 12 months of the home’s expected property taxes.

• Homeowner’s insurance.

  This covers the first six to 12 months of policy premiums.

• Points.

  These refer to a fee for reducing the loan’s interest rate.

• Attorney fee.

  This pays an attorney to facilitate the closing process.

• Credit report fee.

  This covers the lender’s cost of obtaining a borrower’s credit reports from the three bureaus: Experian, TransUnion, and Equifax. 

Buyers may also want to consider other costs their new home may require, such as big repairs, updates, or renovations, when planning their down payment fund.

Ways to save for a down payment

There are many ways to save for a down payment, including:  

• Automate the process.

  For many buyers, this can make it easier to meet their goal without thinking about it each and every month. This could be as simple as establishing an auto-draft from a checking account into a savings account once or twice a month. 

• Put a windfall to use.

  Some buyers could put their annual tax return and/or holiday bonus directly into a down payment savings account, boosting one’s savings efforts, since that money is not part of a monthly budget.

• Pay off other debt.

  Paying off student loans or clearing credit card debt can be an opportunity to redirect extra funds into savings. This may make it easier (and faster) to save for a house without feeling the added pinch.

Where to save the money 

There are many different places to save money for a future down payment, depending on the buyer’s timeline and other financial goals.

• High-yield savings account.

  This is one popular option offering savers a small return on their funds along with high liquidity. With a federally insured bank, there is also low risk: The funds are federally insured up to qualifying maximums, usually $250,000. 

• Certificate of deposit (CD).

  These accounts offer a low-risk savings vehicle and guaranteed return on the balance. However, the funds are “locked” away for an agreed period of time and withdrawing those funds early typically results in a penalty fee.

• Brokerage account

  . Here the money can be invested in any number of stocks, bonds, mutual funds, or other securities, which may result in greater returns than a savings account or CD, depending on market performance. However, while invested funds have the potential to grow in value, they are also at risk of loss.

• Retirement savings.

  Certain retirement savings can be used to buy a home. For example, the IRS allows eligible first-time homebuyers to withdraw up to $10,000 from their traditional or individual retirement account (IRA) to purchase a home without penalty. The IRS also allows plan participants to take out a loan (of up to 50% or $50,000) from their 401(k) retirement savings—if allowed by the plan—to purchase a primary home without requiring that loan be repaid. For many homebuyers, however, pulling money from retirement savings to pay for a home may not be the wisest financial decision, between the loss of potential retirement savings growth and the effects of income taxes on those withdrawals.

The bottom line

Planning to buy a home involves more than simply budgeting for a monthly mortgage payment. There are big upfront expenses to consider, such as a down payment and how saving up for that expense might impact other financial goals today. 

With the median cost of a home at an all-time high and rising annually, many potential buyers find it challenging to save for their down payment. But through a combination of federally backed mortgage loans, first-time buyer programs, and planning ahead, buyers may be able to circumvent some of these obstacles.