Buying a home — what you need to know about your down payment

Buying a house in a competitive housing market with high mortgage rates and low inventory can be challenging. While finding the rough house may seem daunting, saving up for a down payment and planning the purchase is where the bulk of work comes into play.

Zillow has recently found that the average buyer would need a 35.4% down payment — $127,000 on average — to afford monthly mortgage payments. In a market where the recommended down payment is nearly double the standard 20%, it’s more important than ever for prospective homeowners to have a substantial amount of cash up front.

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Depending on location and savings rate, it would take a household making the median income up to 24 years to save for Zillow’s suggested down payment. With such a heightened cost of living, it has become increasingly difficult for young buyers to build a nest egg without outside support.

What’s more, sometimes having a down payment isn’t enough to secure a mortgage loan; lenders like to see additional cash reserves beyond the down payment amount to ensure buyers can handle closing costs and house maintenance.

However, focusing on building up the largest down payment they can will help buyers borrow less with a mortgage loan and save more in the long run.

How to plan for buying a home

Seventy-eight percent of adults in the U.S. cite the lack of affordability as a key obstacle keeping them from buying a home. Here’s how to plan financially for such a significant life milestone:

Calculate the home price you can afford based on income and location. The average cost of a home in the U.S. in 2024 is $420,800, but the area where you shop for houses will greatly impact the price. For example, houses in the Northeast cost an average of $785,3000 , while homes on the West Coast average $548,400, and those in the South and the Midwest hover around $375,000. Research the type of home you can afford in your area and potentially adjust your location to stretch your savings even further.

Create a savings goal and develop a plan. Anticipate putting a certain percentage of your monthly income towards your down payment — most buyers target 10% of their income, but the actual number may vary based on expenses and the cost of the home.

Ensure your credit score is in good shape. Your credit score will impact your loan amount and interest rate– buyers with higher credit scores often receive lower interest rates. Make sure your credit score is in good standing before applying for mortgages.

Take advantage of government programs. The federal government offers homeownership vouchers and government-backed loan assistance for eligible and low-income first-time buyers. Most states provide localized, state-specific assistance programs as well.

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Consider your mortgage loan options. Your savings will impact the amount of money you need in a loan and the types of loans you are eligible for. The average American buyer will likely need a conventional mortgage loan. Conventional loans are offered by private financial lenders and are not insured. However, government agencies provide alternative affordable loans to eligible buyers.

The Federal Housing Authority, U.S. The Department of Agriculture offers borrowers a loan with a 0% down payment if they meet the criteria of purchasing a home in eligible rural areas, and the Department of Veteran Affairs provides financing for 0% down to active military members and veterans.

Compare mortgage rates and fees. Shop around for loans offered by different lenders– the Consumer Financial Protection Bureau recommends researching multiple lenders and requesting loan estimates to compare costs, interest rates, and origination fees to get the best loan for your situation.

Budget for closing costs and moving expenses. Closing costs typically comprise 3-6% of the total loan amount , and moving costs can surpass $10,0000 depending on the distance. Make sure you’ve accounted for costs beyond the down payment and mortgage.

How to calculate a down payment savings plan

The down payment savings goal will likely be determined by the loan amount and mortgage payment you can afford. Before creating a savings plan, buyers must first determine what kind of mortgage payment they can afford.

Related: Dave Ramsey explains how your mortgage is key to early retirement

Most lenders recommend that buyers follow a few well-known methods to ensure they choose a manageable and affordable mortgage. The 28% Rule , for example, suggests that buyers spend a maximum of 28% of their monthly gross income on their mortgage payments.

However, the 35/45% Model focuses on debt ratios. It recommends that a buyer’s total monthly debt not exceed 35% of their pre-tax income or 45% of their after-tax income.

To create a savings plan that works for their finances, prospective buyers should target a set percentage of their monthly income. For example, reaching a modest $40,000 down payment would take someone who saves $1,000 per month almost three and a half years to achieve that goal.

If the down payment savings are increased to $3,500 per month, however, the savings goals of $40,000 can be met in under a year.

Financial goals are unique to each individual. However, experts agree that getting started on savings sooner rather than later can help buyers meet milestones faster. High-yield savings accounts can help buyers earn interest on their savings and reach their down payment goal faster.

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