When you’re just starting out on your journey to homeownership, saving up for a down payment can seem like a daunting task. While reaching your goal might not be easy, it isn’t impossible. By planning wisely, spending carefully, and finding new ways to maximize your income, you could be well on your way to having enough cash for a down payment.

Keep reading for tips on how to save money for a house.

1. Determine the Down Payment Needed

If you’re asking yourself, “How much should I save for a house?” then the first step to your savings plan is to determine how much down payment you need. This will help set a clear goal for your savings.

Exactly how much you’ll need for a down payment will depend on the loan, the lender, and other factors. Most loans require a minimum down payment. For conventional loans, which are the most common loan type and aren’t backed by a government institution, this ranges from 3% to 15%.

Government-backed loans may have a lower down payment minimum than a conventional loan. Federal Housing Administration loans require at least 3.5% down, while loans backed by the U.S. Department of Agriculture or Veterans Affairs may require no down payment at all. These types of loans can come with additional requirements, so make sure you’re qualified first.

Keep in mind that while saving for the minimum down payment may be faster, it won’t always save you money in the long run. If you put less than 20% down with a conventional loan, your lender will require you to pay for private mortgage insurance until you reach 20% equity, or ownership, in the home. Lenders may also charge you a higher interest rate in exchange for a low down payment.

2. Review Your Expenses and Create a Budget

Creating a budget is one of the best ways to start saving for a down payment on a house. By tracking your expenses and determining how much you save each month, you can map out how long it will take to reach your down payment goal.

As you review your expenses, it’s helpful to categorize your spending into needs and wants. Needs include expenses like rent, utilities, and debt payments. These are nonnegotiable and must be paid every month. Wants, on the other hand, include expenses that you can generally live without — entertainment, eating out, and so on. From there, figure out what spending you can temporarily cut to reach your goal sooner.

When it comes to budgeting, a common method is the 50/30/20 rule. According to this rule, 50% of your income should go to needs, 30% to wants, and 20% to savings. If you want to save faster, then you can dedicate less money to wants and funnel the rest into your savings.

Before you start saving for a down payment on a house, however, make sure that you have an emergency fund to cover three to six months’ worth of expenses. While saving for your down payment is important, being prepared to deal with a financial emergency should be a priority. Once you have an emergency fund, you can start saving for your down payment goal.

3. Consider Opening a High-Yield Savings Account

A high-yield savings account works like a traditional bank account in terms of deposits and withdrawals, but the key difference is that the interest rate is several times higher than that of a typical savings account — which means it’s a good place to hold your down payment.

A high-yield savings account from an accredited financial institution offers several advantages. Firstly, it can be less risky than investing in the stock market, and it offers greater accessibility to your savings. Also, you could earn interest on your savings over time, with a higher yield compared to a typical savings account. Finally, most banks will allow you to make automatic deposits, which simplifies the process of saving.

High-yield savings accounts are typically offered by online banks, though more brick-and-mortar institutions are starting to offer them. When you’re shopping for a high-yield savings account, make sure it’s from an institution insured by the Federal Deposit Insurance Corp. Additionally, find out if there are any fees, deposit minimums, and other potential charges associated with the account. 

4. Pay Down Your Existing Debts

If you’re wondering how to save for a down payment, one way to do so is by prioritizing the payoff of your debts. The sooner you eliminate your debt payments, the sooner you can redirect that money to your savings.

Additionally, your total debt matters because your debt-to-income ratio is one of the key factors that lenders will consider when deciding whether to approve your mortgage application. This figure is your monthly debt payments — such as car payments and student loans — divided by your monthly income. So, paying off your debts will help lower your DTI. Conventional loans typically require a DTI of 50% or lower, FHA loans require a DTI of 43% or lower, and VA and USDA loans require a DTI of 41% or lower.

If you have multiple debts or just feel overwhelmed, here are a few techniques to get started on tackling what you owe:

  • Snowball method: With this method, you address different debts starting with the smallest one. As you pay off each debt, you roll its payment amount into the next-smallest loan until you’re debt-free.
  • Avalanche method: You pay off the debts with the highest interest rates first, working your way down and rolling previous payment amounts into subsequent loans until they’re all paid down. This way, you save money by preventing interest from accumulating on the fastest-growing debts.
  • Debt consolidation: If you have different forms of debt, you could have them packaged into a single loan with a lower interest rate. While this simplifies your payments and may help you save on interest, be wary of debt consolidation — you might be tempted to make more purchases using credit, and your DTI won’t change until you pay down the new loan.

5. Negotiate a Raise at Work

Increasing your income can also help lower your DTI and bolster your savings. One way to increase your income is to ask for a raise at work.

While some companies may tie raises to regularly scheduled performance reviews, you could still approach your manager outside of those reviews — especially if you’ve contributed a great deal to your company’s bottom line or have picked up new skills, certifications, or degrees since your salary was last reviewed. In general, if a year or more has passed since your last raise, it might be a good time to negotiate a raise.

Before asking for a raise, it’s helpful to research the current market salary for a job like yours. This can give you a benchmark as to what other companies are paying employees with similar experience.

6. Search For a Side Hustle

An extra income stream could help you save for a down payment on a house fast. It’s not always feasible to ask for a raise or find a better-paying job, so taking up these side hustles can bring in extra cash:

  • Pet sitting: There are several apps and booking services that can introduce you to new clients, or you can ask your family and friends if they need help watching their pets.
  • Rideshare services: If your car is on the newer side and in good shape, working for Uber or Lyft could bring in additional income — especially during high-traffic times on the evenings and weekends.
  • Monetizing a hobby: Your passion can make a profit. If you’re involved in a certain sport, many parents will hire tutors and coaches to help their kids learn. Or, if you enjoy creating things such as knitted scarves or jewelry, you can sell your projects online or at local marketplaces.

7. Sell What You Don’t Need

If your living space is getting cluttered, then parting ways with some of your possessions could both free up your space and fill up your bank account. Items such as gently used clothing, toys, CDs and DVDs, and furniture have a decent resale value online. Old books can be resold to used bookstores, and some jewelers will buy gold or silver jewelry for cash.

If there are items that you can’t sell, you might be able to donate them and claim a deduction on your taxes, so be sure to keep notes about what you donate.

8. Ask For Monetary Gifts

If you’re getting married, or if a birthday or holiday is coming up, you could consider asking your loved ones for a cash gift. If you tell them upfront that that you’re saving for a down payment on a house, then they will know where their money is going and may be happy to help you achieve your goal.

Keep in mind that if you receive a large cash gift, your mortgage lender will need to know where it came from. In this case, you should ask the gift giver to write a gift letter certifying the amount of money and that they gave it to you freely.

9. Get Creative To Stick To Your Budget

Saving money doesn’t have to mean subsisting on rice and beans and never going out. Here are a few ways to shave more off your spending:

  • Make gifts instead of buying them: Rather than purchasing the latest gizmo, consider making personalized gifts for your family and friends. You can put together a photo album of your favorite memories, bake treats, or even offer to run errands for them.
  • Learn to do it yourself: While certain tasks such as installing electrical wiring and replacing garage door springs are best left to the professionals, simple household repairs — like fixing leaky faucets, unclogging toilets, and replacing old taps — can be done on your own.
  • Save on grocery shopping: Planning out your weekly meals can help cut down on waste and prevent unnecessary purchases. Cooking with seasonal ingredients also tends to cost less and can make you be more creative with your meals.

10. Look For Down Payment Assistance

Down payment assistance is a loan or grant provided by nonprofits, the government, or other organizations. These programs vary in terms of requirements, the amount they may offer, and whether the money will need to be repaid. Once approved, borrowers can apply the funds to their down payment.

Many down payment assistance programs operate on a local scale, so be sure to check with your local government or your lender and see if they offer them. Additionally, you’ll need to make sure that your lender accepts these types of programs.

The Bottom Line on Saving for a Down Payment

There are plenty of tips and strategies you could use when it comes to figuring out how to save for a house. By setting a down payment goal, reviewing your finances and budget, paying off your existing debts, and maximizing your savings through additional income, you’ll be many steps closer to achieving your goal of becoming a homeowner.

Marlese Lessing contributed to the reporting of this article.