How to save for a down payment on a house

Q: Where should I keep my down payment savings?

Use a separate high-yield savings account or money market account, liquid, federally insured, and earning meaningful interest. Avoid investing near-term down payment money in stocks, where a market dip could shrink your fund right when you need it. Keeping the account separate from everyday checking also creates a mental barrier against dipping into it.

Q: Can I get help with my down payment as a first-time buyer?

Yes. State housing agencies, counties, and nonprofits offer down payment assistance as grants, forgivable loans, or low-interest second loans. In Michigan, MSHDA's MI Home Loan pairs with up to $10,000 in down payment assistance for eligible buyers who meet income and purchase price limits and complete a homebuyer education class. Gift funds from family are another lender-accepted source.

Written by Samantha SheltonNMLS 1647301Updated October 2026

Young couple adding savings to a house-shaped bank while working to save for a down payment

To save for a down payment, set your target from your loan type first, not from the 20% rule, then automate a fixed transfer into a dedicated savings account every payday. Conventional loans allow as little as 3% down and FHA loans 3.5%, so a $250,000 home can take $7,500 – $8,750 in down payment rather than the $50,000 most savers assume they need.

Budget for closing costs on top of that. Freddie Mac puts closing costs at 2% – 5% of the purchase price, which is another $5,000 – $12,500 on that same $250,000 home. Pair automated saving with a few expense cuts, your next windfall, and a down payment assistance program, and the number arrives months or years sooner than a savings account alone would deliver it.

Learn how to save for a down payment on a house, including how to set your target number, where to keep the money, and which assistance programs close the gap. If you’re at the very beginning, our Home Buying guide maps the full process.

Key takeaways:

Your real target is 3% – 3.5%, not 20%: Conventional loans go as low as 3% down and FHA loans 3.5%, so the down payment on a $250,000 home is roughly $7,500 – $8,750 instead of $50,000.
Automation beats willpower: A fixed transfer into a separate high-yield savings account every payday is the single most effective habit, $625 a month reaches $7,500 in 12 months without a decision to make.
Assistance can cover a large share of it: State and local programs contribute thousands toward down payment and closing costs, and Michigan’s MI 10K DPA loan provides up to $10,000 to eligible buyers who meet income and purchase price limits.

How much do you actually need for a down payment?

Most buyers need 3% – 3.5% of the purchase price, and some qualified buyers need nothing at all. The 20% figure isn’t a lending requirement, it’s the point above which a conventional loan stops requiring private mortgage insurance (PMI). Below it you still get the loan; you just carry PMI until you build enough equity to drop it.

Here’s what each program’s minimum translates to in cash on a $250,000 home.¹

Loan type	Minimum down payment	Cash down on a $250,000 home
VA loan (eligible veterans and service members)	0%	$0
USDA guaranteed loan (eligible rural area and income)	0%	$0
Conventional 97, HomeReady, Home Possible, HomeOne	3%	$7,500
FHA loan, credit score 580 or higher	3.5%	$8,750
FHA loan, credit score 500 – 579	10%	$25,000
Conventional loan with no PMI	20%	$50,000

Check the zero-down column first. VA-backed purchase loans require no down payment as long as the sales price isn’t above the appraised value, and they carry no monthly mortgage insurance.² USDA’s Section 502 Guaranteed Loan Program offers 100% financing to low- and moderate-income households in eligible rural areas, which covers much of Michigan outside the metro cores. Because Align is a broker, we place both through partner lenders even where a retail bank wouldn’t.

At the 3% tier, four programs anchor the low end. Fannie Mae’s HomeReady and Freddie Mac’s Home Possible allow 3% down when qualifying income is at or below 80% of the area median income. Freddie Mac’s HomeOne and Fannie Mae’s standard 97% option carry no income limit but require at least one first-time buyer on the loan. Our guides to low-down-payment mortgages and the Conventional 97 loan cover which fits whom.

The mortgage insurance you take on by putting less down is temporary on a conventional loan. Under the Homeowners Protection Act you can request PMI cancellation once your principal balance reaches 80% of the home’s original value, and your servicer must terminate it automatically at 78%. FHA works differently: put less than 10% down and the annual premium runs for the loan term, while 10% or more ends it after 11 years.³ That’s a reason to save more where you can, not to wait years to buy, our guide to buying a home with a low down payment runs the trade-off both ways.

For context, the median first-time buyer put down 10% in the National Association of REALTORS 2025 Profile of Home Buyers and Sellers, the highest since 1989, and still half of what most savers picture. Now that you know the target, here’s how to hit it.

How to save for a down payment in 4 steps

Four steps do almost all the work: fix a number, automate the deposit, cut two or three recurring costs, and route every windfall in.

1. Set your target number and your deadline

Your target is three numbers added together, not one. On a $250,000 purchase with 3.5% down, that’s $8,750 in down payment plus $5,000 – $12,500 in closing costs at Freddie Mac’s 2% – 5% range. $13,750 – $21,250 before the cash cushion you don’t spend at closing. The down payment is only part of the number.

Then divide by your deadline. A $16,000 goal in 24 months is $667 a month; in 36 months it’s $444. If neither number survives contact with your budget, stretch the timeline or lower the price range. Don’t skip the emergency fund. Use budgeting for your first home to set a range you can carry, plus the CFPB tools for planning your home purchase budget for a spending tracker and credit checklist.

2. Open a separate high-yield savings account and automate the transfer

Keep down payment money in one dedicated, federally insured, liquid account, high-yield savings or a money market deposit account, and have your payroll or bank move a fixed amount in the day you get paid. FDIC deposit insurance covers $250,000 per depositor, per insured bank, per ownership category.

The separate account matters more than the interest rate, for two reasons. Money you never see in checking is money you don’t spend: $312 per paycheck biweekly is $8,112 a year with no monthly decision. And underwriting will read this account, lenders evaluate any single deposit larger than 50% of your total monthly qualifying income and ask you to document its source, so steady payroll transfers verify far more easily than cash moving among four accounts.

3. Find the money already in your budget

Two or three large recurring cuts beat twenty small ones, and $300 – $500 a month freed up is $3,600 – $6,000 over a year. Track where the money actually goes for 30 days first; almost nobody guesses their own discretionary spending correctly.

Housing: A lease renewal is a negotiation. Holding your current rent instead of absorbing a $75 increase, or taking a roommate for the final year, is usually the biggest single line available.
Transportation: Shopping insurance, raising your deductible, and dropping to one car in a two-car household often free $100 – $250 a month combined.
Subscriptions and delivery: Small per line, meaningful in aggregate. $200 a month here is $2,400 a year in the account.
Debt: Paying off a card charging 22% is a guaranteed 22% return and lowers the debt-to-income (DTI) ratio you’ll be underwritten on. It’s the rare move that helps twice.

4. Accelerate with windfalls, extra income, and (carefully) retirement funds

Windfalls move the needle fastest because they sit outside your monthly budget. A $3,000 tax refund, a $2,000 bonus, and a raise routed to savings instead of lifestyle add $6,000 in one year, the entire 3% down payment on a $200,000 home. Set the transfer up the day it lands.

Retirement accounts are a last resort with real rules attached. The IRS caps a 401(k) participant loan at the lesser of $50,000 or 50% of your vested balance, and while plan loans generally must be repaid within five years, that rule has an exception when the loan buys a primary residence. IRAs are a separate path: up to $10,000 in qualified first-time homebuyer distributions escapes the 10% additional tax on early distributions, and that $10,000 is a lifetime limit. Both carry tax and retirement consequences, talk with a tax professional before you touch either one.⁴

Gift funds are the underused option. Fannie Mae allows a personal gift from a relative or someone with a familial relationship to fund all or part of the down payment and closing costs on a principal residence, and on a one-unit principal residence no minimum contribution from your own funds is required. The entire down payment can be gifted if the donor signs a gift letter stating no repayment is expected. Our guide to financing a home purchase with gift funds covers the documentation lenders ask for.

Down payment assistance: grants, forgivable loans, and second mortgages

Down payment assistance, the most valuable of the first-time home buyer programs people skip. Can cover thousands you’d otherwise spend years saving. It arrives in three structures worth telling apart.

Grants: Money that never has to be repaid. Fannie Mae accepts grants from government entities, housing finance agencies, 501(c)(3) nonprofits, Federal Home Loan Bank affordable housing programs, federally recognized tribes, and an employer where the borrower is an employee, and the documentation must state that repayment is not expected.
Forgivable second loans: A silent second mortgage forgiven over a set occupancy period, often 5 – 10 years. Sell or refinance early and you repay a prorated share, so match the forgiveness clock to how long you’ll stay.
Deferred or low-interest second loans: Real money you repay, usually at 0% with no monthly payment, due when you sell, refinance, or pay off the first mortgage. Michigan’s MI 10K DPA loan works this way.

Most assistance flows through state housing finance agencies and local governments, funded largely by HUD’s HOME Investment Partnerships Program. Employers are the overlooked source, since employer-assisted housing grants are eligible under agency rules. Our roundup of first-time home buyer grants and programs maps what’s available by category.

Assistance almost always pairs with a specific loan product, which is where a broker matters: the program has to be one your lender is approved to deliver. The Fannie Mae HomeReady low down payment program is a common pairing, since gifts and grants can cover its entire 3% down payment.

Common pitfalls to avoid while you save

Four mistakes cost buyers more than a slow savings rate does, and three show up only at underwriting.

Draining the emergency fund: Closing with zero reserves is how a new homeowner finances the first furnace repair on a credit card. Keep the two funds separate and build both.
Forgetting closing costs: At 2% – 5% of the purchase price, closing costs frequently exceed the down payment on a 3% loan. Seller-paid closing costs help, but Fannie Mae caps interested party contributions at 3% of value above 90% LTV and doesn’t permit them toward the down payment at all.
Borrowing the down payment: A new personal loan or cash advance raises your DTI and can sink the file. Fannie Mae’s automated underwriting allows DTI up to 50%, and new debt eats that headroom.
Moving money at the last minute: Unexplained deposits above 50% of your monthly qualifying income trigger sourcing requests. Park the money and leave it alone through the two months of statements underwriting reviews.

Getting preapproved before you shop surfaces all four early. A preapproval is issued after a lender checks your credit and reviews verified information, and lenders in Align’s network typically issue letters good for 30 – 60 days, so time it to your search. Our preparing to buy guide sequences the credit and documentation work in order.

What Michigan buyers should know

Michigan buyers have a statewide down payment assistance program worth up to $10,000, enough to cover an entire 3.5% FHA down payment on a home priced up to roughly $285,000.

MI 10K DPA loan: The Michigan State Housing Development Authority offers up to $10,000 toward down payment, closing costs, and prepaid expenses as a 0% non-amortizing second mortgage with no monthly payment, repaid when you sell, refinance, pay off the first mortgage or stop living in the home. It’s available statewide.
Eligibility limits: Borrowers must complete a homebuyer education class from a HUD-approved housing counseling agency. Household income limits and a statewide sales price limit of $566,355 apply as of June 1, 2026.
It pairs with a MI Home Loan: The assistance rides on a MSHDA first mortgage, so your lender has to be an MSHDA participating lender. Not every bank is. Layer it with a 3.5% FHA loan and your out-of-pocket down payment can reach $0.

Program terms change, confirm current details at MSHDA homeownership and down payment assistance programs before you plan around them.

How Align helps you get ready

There is no such thing as calling too early. Samantha would rather see your numbers months before you shop than the week you find a house, because that is when there is still time to fix what matters.

When you are ready, one application goes to multiple wholesale lenders. A 2024 Polygon Research analysis of federal mortgage data found broker borrowers paid about $10,662 less over the life of a $400,000 loan than borrowers at nonbank retail lenders.

Take a mortgage readiness review

Sources: Polygon Research, Loan Costs Channel Study 2024 (2023 federal HMDA data, 30-year fixed purchase loans; commissioned by United Wholesale Mortgage and Willow Canyon Advisors).

FAQ: Saving for a down payment

Here are answers to common questions about saving for a down payment.

How much should I save for a down payment on a house?

Start from your loan type, not a rule of thumb. Conventional loans allow 3% down, FHA requires 3.5% with a 580 credit score, and VA and USDA loans can be zero down for eligible buyers. On a $250,000 home that’s roughly $7,500 to $8,750, plus 2% to 5% of the purchase price for closing costs. Putting 20% down avoids PMI but is optional, see how the Conventional 97 loan works at the low end.

What is the fastest way to save for a down payment?

Combine automation with acceleration. Automate a fixed transfer into a dedicated high-yield savings account each payday, then route windfalls, tax refunds, bonuses, raises, straight into it. Cut one or two large recurring costs, such as renegotiating insurance or dropping unused subscriptions. Most buyers reach a 3% to 5% goal faster than they expect once the transfer is automatic, and budgeting for your first home shows where the room usually hides.

Where should I keep my down payment savings?

Use a separate high-yield savings account or money market deposit account, liquid, federally insured up to $250,000 per depositor per bank per ownership category, and earning interest. Avoid investing near-term down payment money in stocks, where a dip could shrink your fund exactly when you need it. Keeping the account apart from everyday checking matters more than the yield does, and our preparing to buy guide covers the rest of the checklist.

Can I get help with my down payment as a first-time buyer?

Yes. State housing agencies, counties, employers, and nonprofits offer assistance as grants, forgivable loans, or low-interest second loans. In Michigan, MSHDA’s MI 10K DPA loan pairs with a MI Home Loan and provides up to $10,000 for eligible buyers who meet income and purchase price limits and complete a homebuyer education class. Gift funds from a relative are another accepted source, our list of first-time home buyer grants and programs covers what to look for.

The bottom line on saving for a down payment

Saving for a down payment gets easier the moment you stop aiming at 20%. Conventional loans allow as little as 3% down and FHA loans 3.5%, so a $250,000 home takes roughly $7,500 to $8,750 in down payment, plus closing costs at Freddie Mac’s 2% to 5% of the purchase price, another $5,000 to $12,500. Set that combined target, automate a transfer into a separate high-yield savings account every payday, cut two or three recurring costs, route your windfalls in, and check whether assistance closes part of the gap. In Michigan, up to $10,000 of it may not be yours to save at all.

If you’re ready to find out what your real entry cost is, talk to Align Lending, we’ll shop your scenario across our lender network, check which assistance programs you qualify for, and show you the cash-to-close numbers side by side. Call 248-506-5727 or start online today.

Footnotes:

1. Example figures are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. Your down payment, closing costs, and cash to close will depend on your application, the property, the loan program, and market conditions. Return to text.

2. Align Lending works with VA-approved lenders and is not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency. VA down payment, entitlement, and funding fee requirements are set by the Department of Veterans Affairs and are subject to change. Return to text.

3. Align Lending is not acting on behalf of or at the direction of FHA or HUD. FHA down payment, credit score, and mortgage insurance premium requirements are set by HUD and are subject to change. Return to text.

4. This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Retirement plan loan and early distribution rules are set by the IRS and by your plan document, and plan sponsors are not required to offer participant loans. Consult a qualified tax professional and your plan administrator before withdrawing or borrowing retirement funds. Return to text.

Sources: FHA 3.5% minimum down payment, 96.5% maximum LTV at a decision credit score of 580 and above, 90% LTV at 500 – 579, and annual mortgage insurance premium duration (11 years at 90% LTV or less; the mortgage term above 90% LTV), U.S. Department of Housing and Urban Development, FHA Single Family Housing Policy Handbook 4000.1 and HUD Mortgagee Letters; HOME Investment Partnerships Program, HUD. Closing costs of 2% – 5% of the purchase price, and Home Possible and HomeOne 3% down terms, Freddie Mac. Conventional 97% LTV eligibility and first-time buyer requirement, maximum 50% DTI in Desktop Underwriter, and HomeReady 3% down and 80% AMI income limit, Fannie Mae; personal gifts and gift letters, Selling Guide B3-4.3-04; grants, B3-4.3-06; interested party contribution caps and the prohibition on applying them to the down payment, B3-4.1-02; large deposits exceeding 50% of monthly qualifying income, B3-4.2-02. VA purchase loans with no down payment and no mortgage insurance, U.S. Department of Veterans Affairs. Section 502 Guaranteed Loan Program 100% financing, USDA Rural Development. PMI cancellation at 80% of original value and automatic termination at 78%, Consumer Financial Protection Bureau and the Homeowners Protection Act; preapproval issued after a lender checks credit and reviews verified information, CFPB; 30 – 60 day preapproval letter validity, Align Lending broker-network observation. 401(k) participant loan limits, the primary-residence exception to the five-year repayment rule, and the $10,000 lifetime IRA first-time homebuyer exception, Internal Revenue Service. Deposit insurance of $250,000 per depositor, per insured bank, per ownership category, FDIC. MI 10K DPA loan terms, the homebuyer education requirement, and the $566,355 statewide sales price limit effective June 1, 2026, Michigan State Housing Development Authority. Median first-time buyer down payment of 10%, National Association of REALTORS 2025 Profile of Home Buyers and Sellers.

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Program terms, income limits, purchase price limits, and assistance amounts change and should be confirmed with the administering agency. Consult a qualified professional about your situation. Figures shown are illustrative, are not a rate quote or an offer of credit, and are subject to change. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.