Do You Need to Save 20% for a Down Payment on a Home?

Buying a home is a big financial endeavor that takes planning and saving. Aside from a down payment, hopeful homeowners will also need to save for closing costs and moving expenses.

When it comes to the down payment amount you’ll need to save, many of us have often heard 20%, the magic number. However, there are a number of different types of mortgages that have different down payment requirements.

To complicate matters, mortgages vary somewhat between lenders and can change over time, with the ebb and flow of the housing market.

So, the best way to approach the process of saving for a down payment is to think about your needs in a home, and reach out to lenders to start comparing rates.

However, there are a few constants when it comes to down payments that are worth considering when shopping for a mortgage.

In today’s post, we’re going to talk about some characteristics of down payments, discuss where the 20% number comes from, and give you some tips on finding the best mortgage for you.

Do I need 20% saved for a down payment?

With the median home prices in America sitting around $200,000 and many areas averaging much higher, it may seem like 20% is an unattainable savings goal.

The good news is that many Americans hoping to buy their first home have several options that don’t involve savings $40,000 or more.

So, where does that number come from?

Most mortgage lenders will want to be sure that lending to would be a smart investment. In other words, they want to know that they’ll earn back the amount they lend you plus interest. They determine how risky it is to lend to you by considering a number of factors.

First and foremost is your credit score. Lenders want to see that you’re paying your bills on time and aren’t overwhelmed by debt. Second, they will ask you for verification of your income to determine how much you can realistically hope to pay each month. And, finally, they’ll consider the amount you’re putting down.

If you have less than 20% of the mortgage amount saved for your down payment, you’ll have to pay for private mortgage insurance (PMI). This is an extra fee must be paid in addition to your interest each month.

First-time buyers rarely put 20% or more down

Thanks to FHA loans guaranteed by the federal government, as well as other loan assistance programs like USDA loans and mortgages insured by the Department of Veterans Affairs, buying a home is usually within reach even if you don’t have several thousands saved.

On average, first-time buyers put closer to 6% down on their mortgage. However, they will have to pay PMI until they’ve paid off 20% of their home.

So, if you’re hoping to buy a home in the near future, saving should be a priority. But, don’t worry too much if you don’t think you can save the full 20% in advance.

How to Organize Your Bill Payments

Staying organized an on top of your bills is important to not only maintaining your lifestyle but to reducing your stress and working toward your savings goals. There are many ways to get yourself organized and plenty of digital tools to assist you along the way. For those just wrapping their heads around payment organization here are a few basics to get you started.

Know what you owe; know whom you owe.

The first step to managing your bills is knowing what you owe. It’s easy to forget about one of your credit cards or how much your car insurance payment is each month. Start setting yourself up for success by laying out all of your bills and what each monthly payment will be. For credit cards make sure to note your current minimum payments and your goal payment or each month. You can create a basic spreadsheet or use one of the many free or paid online services and phone apps to account for all of your bills.

Know your payment due dates. 

The second step you’ll need to take is knowing your due dates. Take a thorough look at each of your bills and note what dates they are currently due. Do a little more digging to learn if you have any bills that you can control the due date for, just in case the current due date doesn’t work for you when you’re trying to determine a payment plan (more below). It helps to take a look at these dates on a current calendar to see where they fall in relation to your paycheck delivery dates.

Determine payment plans. 

When you know how much you owe, and when your payments are due you can start creating a payment plan. Take a look at your current income sources and the dates you get paid. Are you a single income household? Do you and your partner contribute to your monthly income? Do you get paid the same times or on an opposite schedule? Note all of the income you’ll receive in a given month and the dates each check comes in. Compare your check dates to the bill due dates you noted before and tally up how much you can pay from each check while continuing to buy groceries and other daily necessities. You may realize that you need to rearrange some of the due dates to better balance more substantial payments across multiple checks. Go online or get in touch with your payees and set up your due dates the way you need them. 

You can take further steps and set up automatic billing if you like. Automation may not work for all your bills or be the preference for everyone. Think about how you prefer to make payments and set up a plan that works for you. Maybe you only set up bills you tend to forget for automatic debit or those that are the same amount each month, but you continue to pay variable bills like utilities manually.

Track your payments. 

Tracking your payments will help you catch any bills you haven’t paid before they fall through the cracks. It will help you save on late fees or expedited payment fees. Payment tracking will also help you discover any adjustments you need to make to your payment plan, so you can best rearrange payments and due dates for future months when you see a glitch in your system. If you aren’t the best at spreadsheets or prefer a simple user interface, you can access on your phone investigate the budget tracking applications out there and find the right one to help keep you on top of all your payments and manage each bill. 

Being able to manage your debt and monthly outgo is the first step in managing your finances to build toward your savings goals. Start here, and you’ll be on your way to saving for your home down payment, remodel, vacation or whatever it is you’re dreaming of doing.

Understanding Down Payments and How to Save for Them

Buying a home is one of the biggest financial milestones you’ll reach in your life. If you’re a first-time homebuyer, it can be scary to take the plunge and make a down payment on your first home.

Down payments are one element that makes up the factors which determine your monthly mortgage payments, and in turn, how much you’ll be paying toward your home in total. So, it’s important to understand just how much to save for a down payment.

In this article, we’ll talk about down payments, why they matter, and your options for saving up for a down payment.

Why down payments matter

A down payment is simply the amount of money a buyer pays at the time of closing on the house. Down payments help assure lenders that you will make your monthly mortgage payments because you have invested a substantial amount of money into the house and therefore risk losing your down payment if you fail to pay the mortgage and your house is foreclosed on.

If you’re eager to buy your first home, you may want to make the smallest down payment possible so you can move in sooner. However, a smaller down payment typically means a larger monthly mortgage payment. That’s because your mortgage payment depends on several factors.

When a lender determines how much they will lend you towards your home and how much your monthly mortgage payments will be, their formula takes into account your down payment, your credit score, and the value of the property. The higher your credit score and the higher your down payment is, the less your monthly payments will be.

Mortgage types and down payments

Many first time home buyers cannot afford large down payments on their first home (20% or more). As a result, there are loan types insured by the Federal Housing Administration that are offered for as low as 3.5% of the mortgage amount.

If you aren’t approved for an FHA loan but plan on making a down payment of less than 20%, you can still buy a home with private mortgage insurance (PMI). With PMI you pay a monthly premium for your insurance in addition to your monthly mortgage payments.

How long and how much to save

So, how much should you save? The short answer is as much as possible. However, if you need to move soon because of life circumstances, it isn’t always an option to hold off on moving for long periods of time.

If you’re currently renting each month at high prices, it might make more sense to put that money towards your first home, an asset which will likely increase in value, rather than spend it on rent which you get no return on.  

One of the best ways to save for a down payment is to set up a new cash savings account that will automatically deposit a portion of your paycheck each week. Having an off-limits account is a great way to save without the temptation of spending it on luxuries if the money would normally be sitting in your checking account.

Another option is to start investing. If you’re in no rush to buy a home and have the financial resources, investing pays off much more than a savings account does when it comes to increasing assets.

Regardless of how you choose to save, the most important takeaway is that you take action now to start saving and you don’t deviate from your savings plan for any reason.