How to Save for a House Down Payment

The end of May and throughout the month of June presented a lot of great changes for us. My wife started her new job, we decided that we were going to sell our first house, and we had an influx of cash that certainly helped out our budget! Considering that we’re attempting to sell our home and want to buy a new one, we immediately realized was that we were going to have to save a down payment.

I’d like to tell you that we just had a pile of cash laying around for this sort of occasion, but unfortunately we have trouble “making it rain” and any savings that we have is already ear-marked for things such as:

  • Emergency fund savings
  • Car repairs, car replacement, house maintenance, annual life insurance premium, car insurance premium, and Christmas gifts
  • Business marketing funds

So, after our monthly budget meeting in May we obviously determined that our primary financial focus was saving a down payment for a house.

For most people, saving a down payment can be rather difficult. Depending on which mortgage you go with, you could be expected to have a down payment between 0-20%! In some areas of the country that may not be a lot, but if you’re talking about buying real estate on one of the coasts then a down payment could amount to TENS OF THOUSANDS of dollars!

Fortunately for my wife and I, we live in the Midwest and are looking at buying a home somewhere in the $130-160k range (so saving a down payment won’t be extraordinarily difficult). After a few discussions with various lenders we discovered that we need to have a down payment of 5% considering the current environment we’re in.

While I acknowledge that having a 20% down payment is ideal (solely to avoid PMI), we’re nowhere near having the ability to do that as our primary focus over the last 5 years has been to get out of debt. Therefore the majority of our disposable income has gone to those efforts.

How to Save a Down Payment for a House

In our particular scenario there are only a few ways for us to go about saving a down payment, but for others reading this here are a few ways to go about it:

  1. Save up cash with any disposable income you have.
  2. Sell off non-qualified investments.
  3. If you’re a first-time home buyer you can cash out your Roth IRA contributions, and/or you can cash out up to $10,000 of your Roth IRA earnings (penalty-free) as long as your account has been open for 5 years.
  4. If you’re a first-time home buyer you can cash out 10% of your Traditional IRA without penalty. However, you will have to pay income taxes on that amount.
  5. Use the equity in your existing home to put towards the down payment of the new home.
  6. Take an extra job or sell things around the house

Some of these options may apply to you, some of them may not. For us particularly, we’re using a combination of a few options: (1) we’re taking all of our disposable income each month and setting it aside for the down payment, (2) we’re working overtime and generating some extra income, and (3) whatever we cannot save will come from the equity we have in the house we’re selling.

The Good & The Bad – Our Journey

So, if you’ve been following me for any length of time you’ve already witnessed the ups-and-downs that we’re apt to have. Fortunately for us, June was one of those UP months!

As my wife changed employers, she was able to cash out all of her PTO she had accumulated at the old job. Furthermore, she decided to stay on part-time at the previous job and work her regularly scheduled weekend shifts (she worked every 3rd weekend) on top of working the new, full-time gig!

To sweeten the pie even more, June was a month where she received an EXTRA paycheck! If you get paid every-other week then his happens to you too…twice a year.

It’s needless to say, we were pretty stoked with how things turned out for the month. When all was said and done, we were able to put over $3,000 towards saving a down payment for a house.

Despite all of the positives we did spend around $1,200 that wasn’t budgeted!! YIKES!

There was a lingering $250 medical bill that we finally received and we put quite a bit of money into getting our house ready to sell. We weren’t thrilled to spend the money, but we have done a poor job of decorating our house since we moved into it and it was in serious need of “homey” attributes.

Our house looks great now and we’re hoping the additions will help it sell a little faster and for a higher price than it would have otherwise.

About the Author

By , on Jul 9, 2012
Andy Tenton
Andy is a 30-something New Yorker who turned his financial life around. He took charge of his finances, got out of debt, and is now working his way toward financial success. He is the publisher of WorkSaveLive.com.

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{46 Comments}

  1. Kylie Ofiu says:

    Sounds like you are making great progress. Saving for a down payment can be hard, depending where you live. The prices where you are sound great!

    • Andy says:

      Kylie, the prices are really nice where we live. I’d really love to live in another city (primarily for the weather and outdoor activities) but I’m not sure I’m willing to leave the incredibly low cost of living.

  2. Amy Turner says:

    Selling those stored antiques and all gadgets/appliances lying around gathering dust will be a great help for saving that down payment. It will also be one big step to rid the house of clutter. So when you move out to a new home, it will be great to have space and minus all those stuff not worthy to have around anymore.

  3. Home prices and down payment in L.A. area is ridiculous. This is one reason that might cause us to move at some point. Great job on progress!

  4. I definitely agree with the rest of the readers, save for the 20%, even if it takes you another year. Doesn’t make sense why you would be paying for someone else’s salary and bonus when you are getting nothing in return. That’s basically PMI!

    • Andy says:

      You’re absolutely right SFL! The cost of PMI is something I would like to avoid at all costs but I can’t be perfect all of the time. :)

  5. $3000, awesome job guys! I just got an unexpected COLA so I was pleasantly surprised. As long as we can make two steps forward for every one step back, we will succeed. If I ever buy another house I will put 20% down.

    • Andy says:

      Thanks John! We spent a little more than we would have liked and the number could have been better. But as you suggested, two steps forward and one step back will always get you there!

  6. Adam Hathaway says:

    That was a nice healthy reduction in debt for this month. Another option that may or may not be available to you or your readers in the same situation is borrowing against your 401k. With some 401k plans you incur no penalties if you borrow for a home purchase. My particular 401k allows me to set the rate and all interest goes back to me anyway. A penalty is given if you do not pay it back within a certain time frame however.

    • Andy says:

      That’s a great point Adam! I’ll say that I’m not for 401k loans or for anybody taking money out of the Roths (or IRAs), but it certainly is an option if somebody is trying to save a down payment for a house.

  7. Eddie says:

    I can only dream about homes costing $130-$160k in my area. Triple that amount for a decent home (1,300sq ft) in a modest neighborhood. Ahhh, one can dream about it one day.

  8. Shilpan says:

    I believe that if you find a house at a bargain (let’s assume that you can get one at 20% below the appraisal) due to seller’s motivation, then even 5% down payment should be enough to avoid PMI.

    • Andy says:

      That’s a fantastic point Shilpan! That hadn’t dawned on me recently because we’re not really looking at homes that are too undervalued. I’d love to get into a foreclosure but I’m not sure that will be a possibility for us.

  9. AverageJoe says:

    Congrats to your wife on starting the new job! I think that for lots of people it’s important they focus on how they save. For them, having the money available isn’t enough, they’ll need direct deposit into a fund out of their hands to make sure it stays saved.

    • Andy says:

      That’s a good point, AJ! I just discussed the ways of actually getting money but not clever ways to save it so that you don’t blow it.

  10. I like seeing your charts-it gives you the “bigger” picture and keeps that long-term goal in mind. I imagine it is a great way to keep from getting discouraged!

    • Andy says:

      Well, the debt payoff progress over the past year has been relatively discouraging but the net worth chart does allow me to keep the overall picture in mind. However, it doesn’t work so well for my wife…she’s just concerned with the debt part.

  11. Jai Catalano says:

    I personally would leave the IRA alone. Sell what you can. Work work work but keep the IRA IRAING….

    • Andy says:

      I couldn’t agree more, Jai. The IRA stuff is an option for people, but that is not something we’d be doing. I think there are much better ways to go about saving a down payment for a house.

  12. Looks like you two are doing well! And congrats to the wife on the new job! One thing I’ve heard that helps people save for…really anything, not discluding a downpayment, is visualization. Like posting a picture of a dream house or a dream house that’s in your projected budget on the fridge. It makes it that much easier to save the money instead of letting it slip out.

    • Andy says:

      That’s a great idea. Although, if we posted a house in our projected budget I’m not sure that would motivate me much. :) I will just have to go with the dream house (that’s not in my budget).

  13. Congratulations to your wife for starting her new job. This is a great start to bringing in additional household income that will most definitely improve your net worth and your home buying situation. Also, you’re doing a lot of money management planning, and that’s such a beautiful thing to see. Obviously, you have sat down and crunched a lot of big numbers to help you determine how to effectively reach your goal, and this is so inspiring. Good luck, and bless you.

  14. I expect to see your savings skyrocket over the next few months. I know then when my wife and I had the prospect of buying a house on our plate, we saved fast and more than we’d ever done before, and sold EVERYTHING! Sounds like you’ll be there in no time!

    Bummer about the $1200 in extra spending, we find that happening a lot lately too, with so many house projects going on. But you still came out ahead! Also, definitely work on killing that mortgage down to 80% LTV to kick PMI to the curb. It’s so annoying to pay for someone else’s insurance policy against you. I know, because we’re there :(

    • Andy says:

      It’s quite shocking how quickly home projects and decorations can add up. It’s ridiculous how much stuff costs!

  15. You mean you don’t just have gold bars lying around to use a down payment on the day you decide to move? Ha. Good advice on saving for the payment. We struggled hard to come up with the money when my wife and I first got our house. Knowing what I know now about using your retirement savings and all the exceptions to those rules makes it a little more convenient for those with established jobs.

    • Andy says:

      I probably wouldn’t suggest that people actually take money from their retirement accounts…I was merely throwing that out as an option.

      Really it’s up to that person though. If it were me, I wouldn’t touch my retirement accounts when thinking of how to save a down payment for a house.

  16. You make a good point I think about the extra expenses on getting the house ready to sell. That should pay off, not only in a higher sales value, but how quickly it sells. We put a lot of money into our house when we put it on the market three years ago. The realtor held open houses on Saturday and Sunday to kick-off the listing. We had two offers by Sunday eve, one at the list price. Miraculous!

    Longer term, you could make a goal saving additional money to put toward your new mortgage to get below that PMI threshold, if that makes sense among all of your other goals. With rates so low, putting extra money toward a mortgage feels a bit tough to justify, but in today’s environment I’ll still take the guaranteed, risk-free 3.5% after tax return, plus in your case the ‘kicker’ of getting rid of the PMI premium one day.

    Good luck!

    • Andy says:

      Thanks for the idea, Kurt! I’m with you on wanting to put more down on the house but anything we have above the 5% mark will be going to paying down student loans which carry a rate higher than the mortgage would.

      I’m kind of viewing the PMI as a debt….for instance it would take me $32,000 to get PMI knocked out ($65/month), or I could pay off our smaller student loans and get $80/month back into my budget by paying off $4,800 in student loan debt.

  17. Good work so far! And good luck to you. I will have to save many thousands of dollars to get to 20% since I’m one of those coasters. Won’t selling your current house help you with a down payment?

    • Andy says:

      Absolutely! It depends on how much we sell the house for bit the equity we’ve built will help go towards the down payment on the next house.

  18. Love the charts! It looks like you guys are well on your way to financial freedom. I find that creating charts like this helps you focus on the end goal and gives a little moral boost, when you’re in the thick of it.

    • Andy says:

      I’m a visual person so I do enjoy the charts. We’ve been going at this for a long time now so I’m not sure how much motivation that it provides. I’d say we’re nowhere near as motivated as we were 5 years ago…we’ve gotten a little lazy. :)

  19. Daisy says:

    You guys are doing great. I love those three paycheque months – they are wonderful. Especially if you don’t budget biweekly, but monthly! Good luck saving for a down payment. We’re currently doing that as well, but our payment will have to be closer to $50K to make it anywhere near the 10% mark (Vancouver.)

    • Andy says:

      It’s so fascinating to see how much real estate costs in other parts of the US and world. It’s so expensive!

      $50,000 is a lot of money to save for a down payment for a house. It would take years to get there! Are you allowed to put less than that down or are there any minimums that are standard in Canada?

  20. Jefferson says:

    you guys are doing great at raising cash.. i am very impressed.

    i actually didn’t know about the Roth IRA cash-out options for home ownership.. good to know.

    • Andy says:

      Remember, that’s only if you’re a first-time home buying and trying to save up a down payment for a house.

      Hopefully the rain keeps coming because it’s been a little dry/hot around here.

  21. Saving up for a down payment is definitely a challenge. When I was renting I was spending less than 30% of my income on housing so I saved the difference for a down payment even though I wasn’t planning on buying in the near future. I’m glad I saved though because when a great opportunity came along I had my 20% down payment waiting in the bank.

    • Andy says:

      That’s a great concept Lance! If people would start doing that then there is no doubt they’d be able to put 20% down when they go to buy!

  22. Progress looks good! A nice steady upwards climb in cash. If you don’t mind me being nosy, approximately how big of a house can you get for $130k?

    • Andy says:

      Not as big of one as we’d like (thus the reason we’ll probably go with a $60,000 place and try to save a down payment for that). For $130k you can get a split level that is about 1400 sq ft. For $160k we’ve seen a few houses in the 2300-2500 sq ft area.

  23. Michelle says:

    Love all the detail for your down payment! I wish we would’ve saved more when we bought our house, I hate PMI.

    • Andy says:

      Have you been able to build any equity in the house? Hopefully you’re fairly close to the 20% mark and can get it taken off soon!

  24. You guys are making great progress! I like the ideas you have about being creative in coming up with additional means to save.

    • Andy says:

      Thanks, Thad! I’m sure there are some other ways to save, but these are the ones that I could come up with!

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