If you're ready to buy a home, you'll need enough down payment money to qualify for a mortgage. Find out how much you need, six tips to save faster, and the best places to stash cash for your new home.
If your goal is to buy a home, you’ve probably been thinking about how and where to save money for a down payment. That’s exactly what Satta, a member of the Dominate Your Dollars Facebook group, recently asked.
Satta says, “My husband and I plan to buy a home in the next two years. But the interest rate on our bank accounts is not great, so I was considering opening an online savings account with a higher rate. What are the pros and cons of using an online bank for this?”
In this post, I’ll cover the best places to stash cash for your new home. Plus, I’ll tell you how much you should save and tips to accumulate a down payment faster.
Free Resource: Online Bank Comparison Chart (PDF) - compares top online accounts on a one-page guide.
What Is a Down Payment When Buying a Home?
For most people, buying a home is the largest purchase you’ll ever make. Becoming a homeowner isn’t for everyone—but if it is one of your financial goals, I recommend that you begin preparing as far in advance as possible.
In How to Prepare Your Credit for a Mortgage Approval, you can read or listen to six tips for building credit before you apply for a mortgage. That will help you get a loan that costs as little as possible.
But before you can even qualify for a mortgage, you’ll need to prove to a potential lender that you have enough in savings to fund a down payment. It’s a one-time cash payment you pay upfront at the closing.
The reason you have to make a down payment is because home lenders generally won’t finance 100% of the purchase price. The bigger the down payment you can make, the less risky the loan is for the lender.
The bigger the down payment you can make, the less risky the loan is for the lender.
Plus, there are closing costs on top of a home’s purchase price. They vary depending on where you buy a home, but often include:
- credit check
- loan origination or underwriting fee
- discount points, which allows you to get a lower interest rate
- title insurance, which protects the lender if the title isn’t clean
- recording the new deed
How Much Down Payment Money You Need When Buying a Home
So, exactly how much of a down payment do you need to buy a home? Depending on the lender, the kind of loan you get, and your financial situation, you'll typically have to pay a minimum of 5% to 20% of a home’s purchase price.