Do the Math: How much do you need to save for a down payment?

Blog posted On September 12, 2019

When you’re ready to buy a home, one of the first questions that will come to mind is naturally “how much do I need to save for a down payment?”  The amount needed for the down payment will vary depending on the type of loan you choose.  Many home buyers believe a 20% down payment is needed to buy a home, but that’s not always the case.  In 2018, the National Association of Realtors (NAR) found that 55% of all home buyers bought their home with a down payment of 6% or less, and 72% of first-time home buyers used a down payment of 6% or less.  To determine how much you will need to save for a down payment, start with these equations.

How much can you afford to pay for housing costs each month?

Real estate professionals recommend your housing costs should not exceed 28% of your total monthly income.  Housing costs include your mortgage payment or monthly rent, taxes, any mortgage insurance, and homeowner’s association fees.  For example, if you make $5,000 per month, your monthly housing costs should equal $1,400 or less.

Use this equation to determine what your monthly housing payment should be:

Monthly Income x 0.28 = Monthly Housing Payment

How much house can you afford?

Getting preapproved for mortgage financing will show you how much total mortgage you can get.  However, if you can avoid it, you should never take out a loan in the full amount.  Let’s say you can afford the $1,400 monthly payment and you’re taking out a 30-year fixed-rate loan with an interest rate of 5%, this would equal a loan amount of $260,794.46.  We’ll round down to $260,000 for the following scenarios.

Use this equation to determine how much loan you should take out:

(Monthly payment/(Annual interest rate/12)) x (1-(1/(annual interest rate/12)*number of monthly loan payments) = Loan Amount

Do you qualify for down payment assistance?

There are over 2,500 down payment assistance options available at the federal, state, and local levels.  Depending on where you live and work, your income level, whether or not you’re a first-time home buyer, your occupation, and other factors, you may qualify for one or more down payment assistance options.  Visit downpaymentresource.com to get a free summary of any down payment assistance programs you could qualify for.  

Compare down payment scenarios.

Once you’ve explored all of your down payment assistance options, you can start to compare down payment scenarios.  Some mortgage loans allow down payments as low as 3%.  When you get preapproved, your lender can help you find out what loan is right for you.  Using the $260,000 loan amount from above, a 6% down payment would be $15,600.

Use this equation to determine down payment amounts: 

Your Total Loan Amount x Down Payment Percentage = Down Payment Amount

A larger down payment doesn’t hurt, it can help you avoid mortgage insurance and you’ll have more equity in your home to start.  You don’t want to spend your entire savings on your down payment either.  You’ll need to be prepared to cover closing costs and any initial maintenance your home may need.  You’ll also want to save up to cover any emergency costs that come with owning a home, like a plumbing breakdown or an HVAC malfunction.   

When it comes to answering the question, “how much do I need to save for a down payment?” the best person to answer it is your mortgage lender.  It’s our job to find the most affordable, reasonable mortgage for your home purchase.  Let me know if you have any questions.

Sources: Forbes, Smart Asset