5 Sensible Ways to Save For a Home Down Payment

In 2017, an Australian millionaire caused an uproar by suggesting to millennials they should stop buying over-priced avocado toast if they ever wanted to save money to own property.

The myth that millennials prefer to spend their money on IG-ready hipster brunches and just want to order burritos while they Netflix-and-chill is just that, a myth.

Millennials made up 38% of all homebuyers in 2019, according to a 2020 report from the National Association of Realtors, and are expected to take out more than half of all mortgages in 2020.

Still, for many buyers, saving enough for a home down payment can be a big obstacle. Americans tend not to be savers, said Dan Kern, business development and training manager for Virginia Housing. Saving enough money for a down payment is a big hurdle for many first-time homebuyers.

So how to move away from that mentality and get some actual dollars ready for that down payment on a house or condo? Experts had several strategies to recommend.

Analyze your spending

There’s really no way to cold-foam-with-sugar-coat it, experts said: If you’re going to save money for a home down payment, you need to understand where you’re currently spending.

Nikki Merkerson, a wealth-building advocate and founder of PairGap, a platform for matching potential homebuyers, recommends using an app to track where your money goes.

“You have to understand your money habits,” Merkerson said. She speaks from experience: Analyzing her spending one year showed her that 70% of her spending in August had been for food.

“The first step is admitting where you have a spending problem,” she said.

Learn to economize

Once you know where you’re spending, figure out where you can save, experts said.

Yes, it’s a bit overplayed, and walking past instead of into your favorite coffee shop each day might not seem like a big deal, said Kern. But in some less expensive markets, even that small change could make a big difference.

Whether its lattes or impulse buys at the register, small purchases over time will add up.

Keep in mind that these savings habits will remain important even after you’ve purchased your home, the experts said.

“Once you own a home — guess what? When the boiler breaks, you no longer have the luxury of calling the landlord,” Merkerson said. “You are the landlord.”

Reduce or set aside debt

Buyers also might consider doing what they can to reduce existing debt, Kern said.

Student loans are often one of the biggest burdens facing first-time homebuyers, who might owe as much as $1,000 per month for their college educations, he said.

Merkerson, however, said it’s a “misconception” that buyers need to be debt-free before buying a home, noting that buyers might accumulate even more debts while waiting to clear out existing ones.

Instead of working both to eliminate debt and to save for a down payment, California-based personal finance expert Alexis Howard recommends buyers prioritize one or the other to maximize the impact.

“When it comes to rapidly saving for any goal, the key is to be very aggressive in your approach,” she said.

Consider alternatives

While 20% of the purchase price remains the standard down payment for a home, it’s not necessary to aim that high, Kern said.

Some loans allow borrowers to put down as little as 3 percent — and others, such as those available to military veterans, offer financing for 100 percent of a home’s price, he said.

Buyers meeting certain criteria might also be able to apply for downpayment assistance, Kern said. For example, Virginia Housing’s programs cover a max of 2.5% of a home’s purchase. (For information about programs in your own state, check out the list here)

Don’t shortchange your savings

While experts often recommend against borrowing or withdrawing from retirement accounts, such as a 401(k), for a home downpayment, Merkerson said “not being afraid to touch my retirement” helped her to purchase her own first home.

“I didn’t save. I leveraged,” she said.

If that's too scary for you, Kern recommends stashing a portion of cash in something other than a retirement account and targeting something more liquid or easy to access, when you need it.

For an option that could provide some return along with easier access on a shorter timeline — if you plan to buy within the next few years, for instance — consider putting your money in a high-yield savings account, Howard said.

“These accounts typically offer higher returns than traditional brick-and-mortar banks but also offer security on capital,” she said.

In short, these sensible money moves are great first steps to help you get closer to your goal of owning a home and saying goodbye to paying rent to your landlord.