How To Save for a House: A Step-by-Step Guide

For many people, a house is their largest and most important investment. A house is not just a place to live and raise a family but also an asset with a fairly stable growth rate. Homeownership can unlock financial security, especially as you reach milestones like starting a family or retirement.

However, housing has become increasingly expensive in recent years. The median sales price for a house in the U.S. was $419,200 in the fourth quarter of 2024, but it was almost double that in places like New York and nearly triple in San Francisco.

To make the goal of homeownership more attainable, you need to start saving money as soon as you can. That’s because there’s more to the cost of buying a home than the monthly mortgage payment—consider upfront costs like the down payment, which typically must be at least 20% of the purchase price if you want to avoid paying private mortgage insurance (PMI).

To save 20% for a $419,200 home, you will need $83,840. If you earn the median national income of $80,610 for households and set aside as much as $0.25 for every $1 you make, you must save for more than four years to afford the down payment.

Saving for a house may seem daunting, but with careful planning, you can make that dream more realistic. We’ve compiled a step-by-step guide of the most crucial steps you need to take to accelerate your home-buying goals.

1. Do Your Housing Research

 Before you even move $1 into your housing fund, the first step you need to take is to research properties. For one, if you’re just getting started on your home-buying quest, you might not even know what you want. Where can you afford to live? How many bedrooms do you need? Do you require a Whole Foods within driving distance or are you fine with shopping at your local farmer’s market for groceries?

 All of these factors can affect the price of housing–even the proximity to grocery stores. 

Once you’ve settled on your baseline needs for your home, you can plug ZIP codes into housing search apps like Zillow to see what it’ll cost you for a home that meets all or most of your needs. You can also contact a trusted local real estate agent who can help you understand market trends and potential ways to save money. They may have access to other pricing data than what you’re seeing online.

After you have a good idea of housing prices, it’s time to start saving.

2. Set a Clear Savings Goal

A savings goal can ensure you’re putting away enough money to afford a home within your desired moving time frame. To get a rough estimate, set a target purchase date and work backward over the months it’ll take you to afford a down payment at your current saving rate.

However, there are several points to consider when turning that rough estimate into something more exact.

What Size Down Payment Can You Make?

You don’t always need to make a 20% down payment. A lower down payment may be easier to afford in the immediate future and get you into a home sooner, which could help you build equity faster. But, unless you qualify for special down payment programs offered by your lender, you’ll need to pay private mortgage insurance, a separate fee assessed by your mortgage lender until your home equity is greater than 20% of the home value, which could take years.

You also could consider paying even more than 20%. Doing so could improve the long-term affordability of your home by taking out a larger chunk of your mortgage principal. You may be offered lower interest rates if you pay a higher down payment (i.e., you’ll start with a lower loan-to-value ratio, which lenders look upon favorably) and potentially save tens of thousands of dollars over the life of the loan. 

Where Are You Saving for Your Down Payment?

Different types of savings vehicles offer benefits and trade-offs. A savings account offers the most ready access to your cash and could pay interest as high as 4.75% APY or more as of February 2025. Your bank may allow you to create saving buckets for your account to categorize deposits as intended for the home purchase.

Another option is a certificate of deposit (CD). While CDs require you to commit your cash to a specific term to earn the full value of interest, you may find slightly higher rates of return on CDs than savings accounts. If you’re willing to wait out the term, that could get you closer to homeownership.

A third option is a taxable brokerage account. While investing in stocks and funds is riskier—in an economic downturn, your losses could be severe—your rate of return could outpace returns with savings accounts and CDs over a comparable length of time. Remember that you’ll need to pay capital gains tax on realized earnings.

3. Assess Your Current Financial Situation

Circumstances change, often dramatically. Economies go boom, and economies go bust. When deciding how much you need to save for a house, you need to plan for both good times and bad. Ask yourself whether you have enough savings to work towards homeownership and to cushion yourself and your family from job loss, an expensive medical bill, or other unexpected expenditures.

“Buying a home is emotional, but making decisions based on affordability—not excitement—is key,” said Thao Truong, CFP, CDFA, a wealth advisor at Morton Wealth. “Sit down and assess your income, expenses, and savings potential. Identify areas to cut back to accelerate savings. You will know how much time you have to save for your down payment once you have clarity of your numbers.”

Take stock of your household income, current investments, liquid cash funds, and any debt you owe. Lay out your current expenses in a budget, including day-to-day spending and long-term costs like loan payments, future vacations and leisure activities, and major purchases. Given those financial constraints, this will help you visualize how much of your income goes toward these spending categories and whether buying a house is realistic.

In addition, your budget will show you where you can reduce spending. Keep in mind, however, that saving a few hundred bucks here or there likely won’t speed up your housing savings by any material degree since smaller savings would represent only a fraction of the down payment amount and could be offset by the increase in housing prices over time. 

Finally, if you expect your parents or other family members to help, start having those conversations now. Factor in gift money that covers part of the mortgage or down payment.

Once you have done your high-level financial assessment, here is a list of how to financially prepare for homeownership:

• Credit score: Obtain your current credit report to determine your credit score. Most lenders require a minimum credit score of 620 or above for conventional mortgages. 
• Debt-to-income ratio: Ensure your debt-to-income ratio (DTI), i.e. what you owe to lenders divided by your household income, aligns with lender standards. DTI ratio measures the percentage of your gross income you pay out each month to satisfy debts. Banks generally set a DTI ratio maximum limit of 43% but prefer to lend to borrowers with a DTI ratio of less than 36%. 
• Documentation: Collect past pay stubs, tax returns, bank statements, and investment account statements to document your employment and revenue sources before applying for a mortgage or getting prequalified for a loan.

4. Explore Eligibility for Low Down Payment Mortgages

Many lenders offer home buyers more favorable down payment requirements. This means you can take out a mortgage with roughly the same interest rate as a comparable mortgage without paying a 20% down payment. In many cases, the down payment is just 3%. Other programs offer a grant toward paying your interest rate if you qualify, which could be worth thousands of dollars and save you money on your monthly mortgage payments.

You’ll need to meet the lender’s requirements to qualify for these loans. These may include limits on the price of the home, minimum income thresholds, and minimum credit scores.

You could also consider an FHA loan, said Christian Maldonado, co-founder of TaxAdvisor365, an accounting and bookkeeping services firm. “This is a very popular mortgage loan option for first-time homebuyers due to its lower cost, especially when it comes to the down payment of your first home,” he said. “The minimum down payment in most cases if you meet the minimum requirements such as a 570ish credit score is about 3.5%.”

Your state may also offer down payment assistance that could cover a significant portion of the down payment. Usually, this assistance comes in the form of a low-interest loan, but you may need to meet strict income requirements and home purchase price limits. The down payment assistance loan is forgivable in some states after a set period.

Down payment assistance can reduce the money you’ll need to save for your home purchase. There are many ways to purchase a home with little to no money down—from 0% down loans to government and bank-sponsored assistance. Depending on where you’re buying, funds could be available at the city, county, state, and federal levels. 

In the meantime, here are some options to explore:

• FHA loans
• VA loans 
• USDA loans
• HUD Good Neighbor Next Door Program
• NACA housing program
• Local homebuying programs (based on city, state, and county)

5. Develop a Savings Plan

Your savings plan comprises the actions you must take to achieve your savings goal. It’s a series of strategies, including increasing your income, reducing spending where needed, and forcing yourself to save money.

“Writing down your plan—including how much you need for a down payment, estimated closing costs, and a timeline—can help you understand how hard the path is and what might delay a successful outcome,” said Heather Winston, chief product officer, Principal Advised Services at Principal Financial Group.

Automate Your Savings

You may be able to set up your direct deposit to automatically split your earnings between your checking account and savings account. Your banking app may also allow you to set up automatic recurring transfers.

Setting Up a Separate Savings Account

Attempting to save money in the same transaction account you use for daily expenses can complicate things by mixing discretionary funds with non-discretionary home down payment savings. Also, most checking accounts typically offer little or no interest unless it is a high-yield checking account. It's better to separate your down payment funds into a dedicated savings account. Make sure it pays a decent interest rate to boost your savings. 

Increase Your Income

You may have untapped sources of income you hadn’t considered. Some people take on a side hustle, which could mean everything from gig work to contacting your network about freelancing. You may also consider starting your own online business, which might be a store or a creative endeavor, like blogging, vlogging, podcasting, or selling arts and crafts on Etsy. Consider asking your boss for a raise, or even a promotion, at your next performance review.

Save Every Windfall

If you receive a lot of money unexpectedly, be sure to save as much as you can in your housing fund. You may get windfalls in the form of tax refunds, insurance payouts, inheritances, and so on, which could put you significantly closer to your goal.

Cut Back on Big Expenses

Rather than solely focusing on small expenses like your morning latte or an online news subscription, look for ways to cut back on expenses that could have a more material impact on your savings. If you like to travel, consider flying to more domestic destinations, and opt for the two-star hotel instead of the three- or four-star one. Or, if you enjoy dining out, you might save a few hundred bucks per month by learning to cook similar dishes at home. However, the cumulative effect of cutting streaming and subscription services can add up to substantial savings, even though each one is a relatively small expense.

Tap Your 401 (K)

While it is not an advisable way to save for a home down payment, there are IRS rules that allow employees to borrow money from their employer-sponsored 401(k) retirement account to purchase a primary residence. 

It's important to note that you must repay the loan from a 401(k) within five years. If you quit or are fired from your job, you will have to repay the loan much quicker or face penalties and fees for what the IRS would consider an early withdrawal, which can make this move risky for some people.

Regularly Adjust Your Savings Plan

By closely monitoring the progress of your savings plan, you can make regular changes to it. Track how major life changes affect your finances, such as getting a new job, losing a job, starting a family, moving, or losing a loved one, and adjust your savings to make sure you’re still on target or that you have enough liquid cash to cover unexpected costs.

Additionally, broader economic shifts could impact your savings plans, such as if mortgage rates increase or if the housing market continues to be affected by low supply and high housing prices. You may need to save more than you had budgeted for.

How Long Does It Take To Save a Down Payment?

Although the median price for a newly built home in the U.S. was $419,200 in Q1 2024. average home prices vary depending on the region of the country you live in:

• Northeast: $798,800
• Midwest: $368,400
• South: $377,200
• West: $560,900

Regardless of housing prices in your city, you shouldn't assume your only option is to save the full 20% of the cost of a home before buying. According to a National Association of Realtors (NAR) report, most first-time homeowners will put between 6% and 7% down on home purchases. In addition, you can expect to pay another 3%-6% of the home’s purchase price in closing costs. 

As an example, let’s assume you're a first-time homebuyer. After getting some help from family, you’ll need an extra $40,000 to cover the down payment and closing costs on your home. If you could manage to save $1,000 a month, it would take 40 months (a bit over 3 years) to reach your goal. If you're able to live with family or friends without paying rent, you might be able to save more aggressively and cut that time in half or more, however.

The Bottom Line

It can take years to pull together enough cash to buy a house, even with careful savings. You should start saving as early as possible and proactively review your financial plan regularly to ensure you’re maximizing your savings. A robust system for growing your housing fund can help ensure that you’re not buying more than you can afford. Educate yourself on what’s available in your local housing market and what it costs to buy the home that fits your needs.