How to Save for a Down Payment on a House

Q: "Can I use a gift for the down payment?"

"Yes. Most loan programs allow gifted funds from family members, though lenders require a signed gift letter confirming the money is not a loan. The gift must be sourced and seasoned, meaning the lender will trace where it came from."

Q: "Does putting more than 20 percent down make sense?"

"Sometimes. Beyond 20 percent, the marginal benefit is a smaller loan and lower monthly payment, but the opportunity cost is the foregone return on that cash invested elsewhere. With mortgage rates above 6 percent, larger down payments are more attractive than they were when rates were 3 percent."

Q: "Should I buy points to lower my rate?"

"Discount points cost roughly 1 percent of the loan per point and reduce the rate by approximately 0.25 percent. The break-even period typically runs five to seven years. Points only make sense if you are confident you will hold the loan well past that point."

Q: "What credit score do I need?"

"Conventional loans typically require a minimum 620 score; the best rates start around 740. FHA loans accept scores as low as 580 with 3.5 percent down, or 500 with 10 percent down. Improving a score from 680 to 740 can save tens of thousands over the life of a mortgage."

Q: "How much should I have left after closing?"

"A reasonable minimum is three months of total housing costs — mortgage, taxes, insurance, utilities — plus any other essential expenses. Lenders increasingly look at post-close reserves as part of the approval process."

Q: "Should I wait for home prices to drop?"

"Predicting real estate prices is unreliable. The more productive question is whether your finances are ready: stable income, healthy credit, sufficient reserves, and a payment that fits comfortably within your budget at current rates."

Q: "Can I tap my 401(k) for the down payment?"

"You can borrow up to $50,000 or 50 percent of the vested balance, whichever is less, but the loan typically must be repaid within five years and becomes due in full if you leave the employer. Hardship withdrawals trigger taxes and penalties. Most planners advise against both."

The median home price in the United States reached $420,400 in late 2024, according to the National Association of Realtors. A 20 percent down payment on that home is $84,080 — more than the median household’s annual pre-tax income. For most first-time buyers, this number triggers the natural reaction that homeownership is mathematically out of reach. It often isn’t, but the path to it has very little to do with the 20-percent figure that dominates the conversation.

Where does the “20 percent down” rule actually come from?

The 20-percent benchmark is not a regulatory requirement. It is the threshold at which conventional mortgage lenders waive private mortgage insurance, or PMI — a monthly premium that typically runs 0.3 to 1.5 percent of the loan amount annually. On a $340,000 loan, PMI can add $85 to $425 to the monthly payment. Avoiding it has historically been a major financial advantage, which is why the figure became culturally embedded.

The number is much less relevant in 2024 than it was a generation ago. The National Association of Realtors’ 2024 Profile of Home Buyers and Sellers found that the median down payment for first-time buyers was 8 percent, not 20. For repeat buyers, the median was 19 percent — closer to the traditional benchmark, but driven largely by equity rolled over from a previous home. FHA loans require as little as 3.5 percent down, conventional loans allow 3 to 5 percent, and VA and USDA loans permit zero-down purchases for eligible buyers.

What’s a realistic target for a first home?

Three numbers matter more than the down payment alone: total cash needed at closing, the monthly payment that results, and the lifestyle cost of carrying that payment. A useful working target for a first-time buyer in most markets is 10 percent of the purchase price in savings, plus closing costs of roughly 2 to 5 percent, plus a separate cash reserve of three to six months of housing payments after the move.

For a $400,000 home, that breaks down to approximately:

$40,000 down payment (10 percent)
$10,000 to $20,000 in closing costs
$10,000 to $15,000 in post-close cash reserves
Total: $60,000 to $75,000

This is a more realistic figure than the headline $80,000 down payment, and it builds in the cushion that prevents new homeowners from arriving at closing with empty accounts — a documented predictor of financial stress in the first two years of ownership.

How long does it take to save this?

Honestly assessed, two to seven years for most middle-income households, depending on income, existing savings, and local cost of living. A household saving $1,200 per month — roughly $14,400 annually — reaches a $60,000 target in just over four years, assuming a 4 percent return on the cash along the way. Doubling the monthly contribution roughly halves the timeline.

Three accelerants meaningfully compress the schedule: directing all windfall income (tax refunds, bonuses, gifts) to the down payment account, increasing the savings rate after every raise rather than absorbing it into lifestyle, and choosing the highest-yield safe vehicle for the funds. Our overview of high-yield savings accounts explains the trade-offs for cash that needs to remain liquid.

Where should the money sit while it grows?

The right answer depends on the timeline. Money needed within two years should stay in cash equivalents — high-yield savings, money market accounts, or short-term Treasury bills — where the principal cannot lose value. Money needed in three to five years can tolerate a small allocation to short-term bond funds, though most financial planners still recommend keeping the bulk in cash given the catastrophic cost of a market drawdown right before a planned purchase.

Stock market exposure is almost never appropriate for a down payment fund unless the time horizon exceeds seven to ten years. The historical risk of being down 30 percent at any given moment in equity markets is too high relative to the cost of delaying a home purchase by a year.

What about first-time buyer programs?

These are widely underused. Every state operates a housing finance agency, and most offer down payment assistance programs that range from low-interest second mortgages to outright grants. The Mortgage Reports tracks more than 2,000 active programs nationally. Eligibility usually depends on income (often up to 80 to 120 percent of area median income), purchase price limits, and completion of a homebuyer education course.

Federal options layer on top. The FHA loan program, administered by HUD, accepts 3.5 percent down with credit scores as low as 580. VA loans, available to veterans and active-duty service members, require no down payment. USDA loans cover designated rural areas with zero down. None of these are obscure; together they account for nearly a third of all first-time home purchases.

How should you balance saving for a down payment with retirement?

This is the question where many savers make the costliest mistake. Pausing 401(k) contributions to accelerate a down payment fund is rarely worth it, because matching contributions are a guaranteed 50 to 100 percent return that no savings account can match. The standard guidance: contribute at least enough to capture the full employer match, then direct additional savings to the down payment.

For Roth IRA holders, the rules allow up to $10,000 of earnings to be withdrawn penalty-free for a first-time home purchase, in addition to all contributions being withdrawable at any time. This makes a Roth IRA a reasonable dual-purpose account for savers who can afford to fund both goals.

For broader budget structure, the 50/30/20 budget rule provides a framework for allocating the savings bucket between retirement, down payment, and emergency fund without abandoning any one goal.

What hidden costs do most savers miss?

Five categories tend to be underbudgeted by first-time buyers.

Closing costs average 2 to 5 percent of the loan amount and include origination fees, title insurance, appraisal, inspections, and prepaid escrow for taxes and insurance.

Moving expenses for a long-distance move can run $5,000 to $10,000; local moves are cheaper but still meaningful.

Immediate repairs and updates. Inspections frequently surface issues — roof age, HVAC condition, water heater — that buyers want to address in the first year. Industry estimates suggest first-year repair and improvement spending averages 1 to 2 percent of purchase price.

Furnishings and appliances. Many first homes need a refrigerator, washer-dryer, or basic furniture for rooms that were unused in a prior rental.

Property tax and insurance escrow. Lenders typically require two to four months of prepaid taxes and insurance at closing, often $3,000 to $8,000 depending on the jurisdiction.

Frequently Asked Questions

Can I use a gift for the down payment?

Yes. Most loan programs allow gifted funds from family members, though lenders require a signed gift letter confirming the money is not a loan. The gift must be sourced and seasoned, meaning the lender will trace where it came from.

Does putting more than 20 percent down make sense?

Sometimes. Beyond 20 percent, the marginal benefit is a smaller loan and lower monthly payment, but the opportunity cost is the foregone return on that cash invested elsewhere. With mortgage rates above 6 percent, larger down payments are more attractive than they were when rates were 3 percent.

Should I buy points to lower my rate?

Discount points cost roughly 1 percent of the loan per point and reduce the rate by approximately 0.25 percent. The break-even period typically runs five to seven years. Points only make sense if you are confident you will hold the loan well past that point.

What credit score do I need?

Conventional loans typically require a minimum 620 score; the best rates start around 740. FHA loans accept scores as low as 580 with 3.5 percent down, or 500 with 10 percent down. Improving a score from 680 to 740 can save tens of thousands over the life of a mortgage.

How much should I have left after closing?

A reasonable minimum is three months of total housing costs — mortgage, taxes, insurance, utilities — plus any other essential expenses. Lenders increasingly look at post-close reserves as part of the approval process.

Should I wait for home prices to drop?

Predicting real estate prices is unreliable. The more productive question is whether your finances are ready: stable income, healthy credit, sufficient reserves, and a payment that fits comfortably within your budget at current rates.

Can I tap my 401(k) for the down payment?

You can borrow up to $50,000 or 50 percent of the vested balance, whichever is less, but the loan typically must be repaid within five years and becomes due in full if you leave the employer. Hardship withdrawals trigger taxes and penalties. Most planners advise against both.