# How to save for a down payment on a house

> Save the down payment plus closing costs in an insured account, on autopilot, with your emergency fund kept separate.

Source: https://www.walletprep.com/learn/save-for-a-down-payment/ · Updated 2026-10-04 · Housing

Set a target of your down payment plus 2% to 5% of the price for closing costs, then save it automatically in an insured savings account, not in stocks. On a $300,000 home with 10% down, that is about $39,000 of cash to close.

## Key facts
- **How much down you need.** Conventional loans with 20% down avoid private mortgage insurance. FHA loans allow 3.5% down, some conventional loans 3%, and VA and USDA loans offer zero down for eligible buyers.
- **Closing costs come on top.** Budget 2% to 5% of the price for closing costs, as the CFPB suggests. On a $300,000 home, that is $6,000 to $15,000 beyond the down payment.
- **Keep an emergency fund after closing.** The CFPB suggests keeping at least three months of living expenses in savings after you buy. Do not count that money toward the down payment.
- **Retirement money has limits.** The IRS lets qualified first-time homebuyers take up to $10,000 from an IRA without the 10% early withdrawal penalty, though income tax may still apply. That exception does not cover 401(k) plans.

## Pick your target
Start with a realistic price from your budget, then choose a down payment share. Twenty percent down on a conventional loan avoids mortgage insurance and usually gets the best rates. A smaller down payment gets you in sooner but costs more each month and over the life of the loan.
Add closing costs of 2% to 5% of the price, plus a few thousand for moving and the first repairs. That total, not the down payment alone, is your savings goal.

## Weigh a smaller down payment
The CFPB says you can choose how much to put down based on what works for you. Putting less down means paying mortgage insurance or a higher rate, but waiting years to reach 20% has a cost too if rents and prices rise in the meantime.
One middle path is 10% down, with a plan to remove PMI later. On a conventional loan, you can ask to cancel PMI once the balance is scheduled to reach 80% of the home's original value.

## Where to keep the money
Down payment money needs to be there, in full, on the day you close. That rules out stocks for anything you need within a few years, since stock prices can fall sharply in a short time.
A high-yield savings account at an insured bank or credit union is the simplest home for it. Deposits are insured up to $250,000 per depositor, per bank, per ownership category. CDs and Treasury bills can work for money with a known date.

## Find the money to save
Set a fixed automatic transfer the day after payday, then look for extra. Cutting rent with a roommate, selling a second car or redirecting a paid-off debt payment can add hundreds a month.
Windfalls help the most. A tax refund, bonus or gift sent straight to the house account can shave months off the timeline. If family helps, ask your lender early how they need gifts documented.

## Look for down payment assistance
HUD notes that many state and local programs help with down payments and closing costs, often for first-time buyers or people under an income limit. Rules differ by program and place.
A HUD-approved housing counselor can walk you through the options in your area. Call HUD's counselor line at (800) 569-4287 or use its online counselor finder.

## A worked example: Taylor's cash to close
Taylor plans to buy a $300,000 home with 10% down and has $6,000 saved, separate from her emergency fund. She can save $800 a month at an assumed 4% a year.

- Down payment, 10%: $30,000
- Closing costs, 3%: $9,000
- Cash to close: = $39,000
- Already saved: −$6,000
- Still to save: = $33,000
- Saved each month: $800
- Time to goal at 4%: 38

1. Down payment: $300,000 × 10% = $30,000. Closing costs at 3%: $300,000 × 3% = $9,000. Together, $39,000.
2. Minus the $6,000 she has, Taylor needs $33,000 more.
3. Saving $800 a month at an assumed 4% a year, she reaches $39,000 in 38 months. With no interest it would take 42 months.

### Time to save $33,000 from zero at an assumed 4% a year

| Saved per month | Time to reach $33,000 |
| --- | --- |
| $500 | 5 yr |
| $800 | 3 yr 3 mo |
| $1,000 | 2 yr 8 mo |
| $1,500 | 1 yr 10 mo |

## Common mistakes
- **Investing the down payment in stocks.** A market drop the year you plan to buy can push your purchase back years. Keep money you need soon in insured savings or Treasury bills.
- **Forgetting closing costs.** Buyers who save only the down payment can come up thousands short at closing. Build 2% to 5% of the price into the goal from the start.
- **Draining the emergency fund.** The first year in a home often brings repairs. Keep at least three months of expenses saved after closing.

## Questions people ask
### How much should I save for a down payment?
Pick a price and a down payment share, then add 2% to 5% for closing costs. For a $300,000 home, that is $16,500 to $25,500 at 3.5% down, or $66,000 to $75,000 at 20% down.

### Can I use my 401(k) for a down payment?
Some plans allow loans or hardship withdrawals, but the IRS's $10,000 first-time homebuyer penalty exception applies to IRAs, not 401(k)s. Ask your plan about its rules and weigh what the money would have earned.

### Should I pay off debt or save for a down payment first?
Pay off high-interest credit card debt first, since its rate is usually far higher than anything savings earn. A lower debt-to-income ratio also helps you qualify for a mortgage.

### Can someone gift me money for a down payment?
Many loan programs allow gifts from family. Lenders usually want the gift documented, so ask your lender what paperwork they need before the money moves.

## Do this today
Open a separate savings account named for the house. Work out your cash to close with the example as a template, then set an automatic transfer for the day after your next payday.

## Sources
- [CFPB: How to decide how much to spend on your down payment](https://www.consumerfinance.gov/archive/blog/how-decide-how-much-spend-your-down-payment/)
- [CFPB: Your home loan toolkit](https://files.consumerfinance.gov/f/documents/cfpb_your-home-loan-toolkit_print_2026-08.pdf)
- [CFPB: What is private mortgage insurance?](https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-122/)
- [HUD: Loans (FHA, down payment help and housing counselors)](https://www.hud.gov/helping-americans/loans)
- [IRS: Exceptions to tax on early distributions](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions)
- [FDIC: Understanding deposit insurance](https://www.fdic.gov/resources/deposit-insurance/understanding-deposit-insurance)

_General education, not personalized financial, tax or legal advice. Figures are examples. Check current rates and limits before you act._