A down payment is typically the largest savings goal most people ever work towards. The old rule of 20% down is not a legal requirement — it is the point at which most conventional loans no longer require private mortgage insurance (PMI). Plenty of buyers put down considerably less, and several loan programs are built around that.
How much do you actually need?
- Conventional loans: some programs allow as little as 3% down for qualifying buyers, but below 20% you will normally pay private mortgage insurance until you build sufficient equity
- FHA loans: insured by the Federal Housing Administration, with a minimum down payment of 3.5% for borrowers meeting the credit score requirement, and mortgage insurance premiums that apply for the life of most loans
- VA loans: available to eligible veterans, service members and some surviving spouses, often with no down payment required and no monthly mortgage insurance
- USDA loans: for eligible buyers in designated rural areas, often with no down payment required
Down payment is not the only upfront cost. Closing costs typically add several percent of the purchase price, and lenders will also want to see reserves. Budget for both when setting your target.
Calculating your target
Start from actual prices where you want to buy — check recent sold prices, not asking prices. Then work backwards. A 10% down payment on a $300,000 home is $30,000, plus closing costs. Saving $600 per month, $30,000 takes 50 months. Saving $900 per month, it takes about 34 months. Adjusting the target percentage, the price range, or the monthly amount are the three levers you control.
Down payment assistance programs
Most states, and many cities and counties, run down payment assistance programs for first-time buyers, moderate-income households or buyers in specific areas. These take the form of grants, forgivable loans or deferred second mortgages. They are widely underused because buyers do not know they exist. Start with your state housing finance agency and HUD's list of state and local homebuying programs at hud.gov. Some employers and unions also offer homebuyer assistance.
Where to keep down payment savings
Money you expect to use within the next few years generally belongs somewhere safe and liquid — a high-yield savings account, money market account or short-term CD at an FDIC-insured bank or NCUA-insured credit union. Investing a short-term down payment fund in the stock market exposes it to the risk of a fall right when you need it. Lenders will also want to see a clear paper trail for your down payment funds, so avoid moving money around repeatedly in the months before applying.
- Set up an automatic transfer to a dedicated down payment account on every payday
- Direct windfalls — tax refunds, bonuses, gifts — straight to the account
- Keep the money in an insured, liquid account rather than investing it if you plan to buy within a few years
- Check your state housing finance agency for down payment assistance before you assume you need 20%
- Speak to a HUD-approved housing counselor — the service is free or low cost and they are not selling you a loan
Retirement accounts and down payments
It is possible to take money from retirement accounts for a first home in certain circumstances — the IRS allows a limited first-time homebuyer exception to the early withdrawal penalty on IRAs, and many 401(k) plans allow loans. Both reduce the money working for your retirement, and a 401(k) loan can become repayable quickly if you leave the job. This is a decision with long-term consequences. Check irs.gov for the current rules and talk to a CPA or licensed financial advisor before doing it.
General guidance only — not regulated financial advice.