Photo: Andy Dean Photography (Shutterstock)
You may have noticed that houses are hella expensive right now—according to the Zillow Home Value Index, a typical home in this fine capitalist paradise now costs nearly $350,000. There are obviously homes for sale for much less (and much, much more), but that may still seem like a disheartening statistic if you’re one of the many who dream of owning your first home. Because even if you have terrific credit and you can borrow a terrifying amount of money, you’re still expected to come up with a down payment.
While a house down payment can be as little as 3% of the home’s cost under certain circumstances, it’s more typical to put down 20%. Which means the “typical” home will cost you $70,000 just to start—not counting the fees and closing costs. And that doesn’t take into account what’s known as the “appraisal gap.” This is extra money—separate from a down payment—you commit to your offer just in case the house is overvalued and it won’t appraise for the full sale cost, meaning the bank won’t finance the full cost of the house.
For example, if I’m selling a house that’s appraised for $300K but you’re offering me $350K after a bidding war, your bank may not base a loan on the full $350K because it doesn’t think the house is actually worth that much. That means you’ll need to come up with that extra money—and increasingly you’re expected to tell the seller just how much of that gap you can cover. Suddenly that $350,000 house requires $120,000 just to get in the door.
How to save up for a house down payment
So how long can this all take to put together? It all depends on 1) how much you earn, 2) how much you can save, and 3) where you’re saving that money. It’s important to remember that you have to have the down payment in hand before applying for a mortgage. Banks don’t like to see folks who have $11 in their savings account on Monday and then $75,000 in there on Wednesday thanks to a personal loan or gift from a relative. If you’re going to get some financial help from parents or other parties, get that in place long before you start house hunting.
Now, let’s crunch some numbers—for our purposes we’ll assume you’re not getting a red cent from anyone.
Personal savings rate. This is how much of your income you’re saving. This isn’t retirement contributions like 401(k) plans—those are typically tax-advantaged and can’t be easily withdrawn without penalties. The average savings rate in the U.S. was just 4.4% in April 2022 (down from 6% in January). If you’re trying to put a down payment together, you want to beat that number by a lot—shoot for at least 10% savings, which is a challenge for most people.
Annual percentage rate. This is how much your money will earn in interest while it sits, taunting you, in a bank account. Rates on so-called “high-yield” savings accounts are ... not so high, actually, currently hovering at an uninspiring 1% or thereabouts. You could look for better returns through investments, but the big selling point of a federally insured savings account is stability. Sure, dumping your 10% savings into crypto might make you a millionaire. It might also make you flat broke.
So let’s crunch some numbers. The median household income in 2020 was $67,521. Let’s say you want to buy a house that costs $200,000, so you need a down payment of $40,000 (let’s not worry about an appraisal gap here). If you can manage to save 10% of your income, you’ll bank $6,750 each year. Assuming a 1.05% annual percentage rate on your savings, it will take you about six years to get there. If you only manage half of that, about 10 years. There are some online calculators that can help you figure out how much you need to sock away to reach your goals.
You can shorten that time, obviously, by planning to put down less money (through an FHA loan or a similar program):
FHA loans require just 3.5% down, which would be just $7,000. If you’re saving 10% of $67,521, that’s a little more than a year. Home Possible loans from Freddie Mac can sometimes require zero down payment (for the math challenged, that means zero time to save up) but can require up to 5%, which would take you about two years to put together on that income. HomeReady loans from Fannie Mae require 3% down, which would take about a year.Of course, if you need much less for the down payment, you can save less every year for a more comfortable day-to-day life and take a few extra years to put the cash together. You could also save more (no one needs to eat every day, right?), earn more, or buy a cheaper house. But if you’re starting from zero, better assume the full six to ten years. The housing market may decide to play dirty (the national average appreciation rate is between 3.5 and 3.8% annually) and push house prices up faster than you can save, so you might need to overestimate how much down payment you’ll need in order to compensate for that property inflation.
Bottom line: There are a lot of factors that affect the time it will take for you to save your down payment, but best to assume it will be a minimum of 5 years if you’re starting with close to nothing.
