How to Plan (and Save) for a Home Down Payment


Buying your first home is not only a major life milestone, but it’s also a big financial goal to meet (one that comes with commitment and responsibility). While many consider a home an asset, this investment of your money is a decision to carefully consider before making.

Determine If Buying is Right For You

Look ahead to the next 3-5 years. Where do you see yourself? Do you see yourself getting married, changing careers or moving out of state in the next few years? What about incurring large expenses such as having children or buying a new car? Consider your current job and the stability associated with it. Can you expect to be there for the next few years?

Although you may feel the need to purchase a home now, if you’re facing any big transitions in the 2-3 years ahead, consider renting until the dust settles and you have more stability. While you may be able to sell a home that you purchased just a few years ago, being faced with having to make a quick decision or sale could hurt you financially. Additionally, basing your home buying decision on whether or not you can afford the home on your current salary if you don’t have job security could be problematic.

Finally, if you don’t have a 20% down payment saved up – wait to buy. I know, it’s really tempting to go for it anyways, but getting trapped with Private Mortgage Insurance (PMI) could require a notably higher payment each month than what you have budgeted for. PMI is private mortgage insurance, and it’s designed to protect the lender in case the borrower defaults on their loan. If you show up to the table with less than 20% of the purchase price to put down in cash, the lender will see you as riskier and place PMI on your loan. This is an additional monthly fee on top of everything else that makes up your mortgage payment.

How Do Your Student Loans Impact Your Home Buying Decision?

Buying a home is all about the numbers. One of the biggest numbers your lender will look for is your debt-to-income ratio, which should be 28% or less. In other words, the amount of your income that you spend on debt payments every month should be no more than 28% of your monthly budget.

The more you spend on debt, the more susceptible you are to default on those loans if you lose your job or have an emergency. If you have a lot of student loans, your ratio may be too high to qualify.

The second number is a down payment. Most lenders require some down payment when you buy a home – the traditional number being 20%.

If you’re buying a $600,000 home, saving a $120,000 down payment can seem impossible when you have student loans. Fortunately, there are other options. The Federal Housing Authority has a 3.5% down payment program that’s much easier for borrowers. If you’re a veteran or buying a house in a rural area, you may be able to find 0% down payment loans, but be aware of funding fees and ending up upside down on your home before you even close (i.e. owing more than the home is worth). Plus, keep in mind that the less you put down on a home, the higher your monthly mortgage payment will be and the less you’ll have in cash flow to fund other goals like retirement, travel, entertainment, and college funding.

Know Your Credit Score

Your credit score is an important factor in your ability to qualify for a mortgage and a great interest rate. The higher your credit score, the lower interest rate you’ll qualify for and the more attractive you’ll be to lenders. Making timely payments on your loans and debts can raise your credit score and help you to qualify you for a mortgage. Minimizing consumer debt such as car loans and credit cards can also help in this area.

You can check your credit report through the three major credit bureaus at or your score through a website like Some banks and credit card companies also give you access to your credit report for free on your monthly statement.

How Much Home Can You Really Afford?

When narrowing down on a purchase price for your future home, don’t just look at your current budget to determine if your new mortgage amount will work. Also factor in additional home maintenance, HOA and utility costs. If there are plans for growing your family, determine if you can afford child care AND your new mortgage payment. Also evaluate if you’re saving enough for retirement or if you’ll be able to steadily increase the amount you’re setting aside when you make your purchase. Oftentimes people over-commit to the amount they can afford based on what an online calculator tells them, but those calculators don’t factor in real-life situations.

Estimate Costs

Can you afford to both purchase your home and maintain the property? Whether you’re using a gift, loan from parents or savings to cover the down payment on a home, it’s important to maintain an adequate emergency fund for repairs and to factor items such as monthly maintenance, homeowner’s association dues, property taxes and insurance into your budget. Also be sure to consider if you need to do repairs, paint, purchase furniture, appliances or fixtures, and factor in closing and moving costs into your expenses.

A good rule of thumb to consider is that no more than 28% of your gross monthly income should be used to pay for PITI (principal, interest, taxes and insurance). The good news with a home purchase is that you’ll be locking in a consistent payment each month that won’t be subject to ongoing increases you may have faced with rent.

Saving for a Down Payment

Even a 3.5% down payment on a $200,000 home requires you to save $7,000 – not including any closing costs and fees. And ideally, you’ll be saving at least a 20% down payment to have more manageable monthly payments.

Go through your budget and see where you can cut to save for a down payment. Can you lose the gym membership you’re barely using or the subscription boxes that pile up each month? Can you cut back on eating out until you’ve bought your home? Cutting large expenses can be effective, but sometimes it’s better to make small changes in several areas at once.

Some people also pick up side gigs to pay for their down payment faster. One way to ensure success is to decide how much you need to save every month and then set up automatic transfers into an account established specifically for your down payment at your bank. You can continue doing this after you save your down payment to create a special emergency fund for your new home.

The bottom line is that you can effectively save enough money to purchase a home. However, it’s important to consider factors like your income, the cost of homes in your area, your current life stage, if there are any transitions on the horizon, and where owning a home fits into your overall financial picture. You don’t want to have so much home that you’re not able to save for other important financial goals in your life.

Mary Beth Storjohann, CFP® is an author, speaker, and financial coach who takes a fun, no-nonsense approach in working with individuals and couples across the country, helping them make smart choices with their money.

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