How much you actually need, the best accounts to use, and a savings timeline for first-time homebuyers.
The required down payment depends on the loan type and your credit profile. The old idea that you must put 20% down is a myth for most buyers — though it has real financial benefits.
| Loan Type | Minimum Down | Credit Score Required | Who It's Best For |
|---|---|---|---|
| Conventional (Fannie/Freddie) | 3% | 620+ | Buyers with good credit, modest savings |
| FHA Loan | 3.5% | 580+ (10% if 500–579) | First-time buyers with lower credit |
| VA Loan | 0% | No official minimum | Active military, veterans, surviving spouses |
| USDA Loan | 0% | 640+ recommended | Rural area buyers within income limits |
| Conventional (no PMI) | 20% | 620+ | Buyers who want no mortgage insurance |
Beyond the down payment, budget for closing costs of 2–5% of the purchase price and a cash reserve of 2–3 months of mortgage payments that lenders often require. On a $400,000 home, that means your total cash needed could be $12,000 down (3%) + $12,000 closing + $6,000 reserve = $30,000 total.
Private Mortgage Insurance (PMI) is required on conventional loans when your down payment is less than 20%. It protects the lender — not you — against default. PMI typically costs 0.5% to 1.5% of the loan amount per year, added to your monthly payment.
| Home Price | Down Payment | Loan Amount | PMI Rate | Annual PMI Cost | Monthly PMI |
|---|---|---|---|---|---|
| $350,000 | 5% ($17,500) | $332,500 | 0.8% | $2,660 | $222/month |
| $350,000 | 10% ($35,000) | $315,000 | 0.5% | $1,575 | $131/month |
| $350,000 | 20% ($70,000) | $280,000 | None | $0 | $0/month |
PMI on conventional loans cancels automatically when your equity reaches 22% of the original appraised value (via regular payments). You can also request cancellation at 20% equity. The key question is whether saving for an extra few years to hit 20% is worth the opportunity cost — for many buyers in rising markets, buying sooner with 5–10% down and paying PMI short-term beats waiting while rents and home prices rise.
Down payment savings have a shorter time horizon (typically 1–5 years) and cannot afford significant volatility. The goal is to earn a meaningful yield while guaranteeing the principal will be there when you need it.
| Account / Vehicle | Typical Yield (2024–2025) | Safety | Best Timeline |
|---|---|---|---|
| High-Yield Savings (HYSA) | 4.5–5.2% APY | FDIC insured | Any; fully liquid |
| Money Market Account | 4.5–5.0% APY | FDIC insured | Any; very liquid |
| 6-Month Treasury Bill | 4.8–5.4% | US government backed | 6+ months |
| 1-Year CD (Brokered) | 4.5–5.2% | FDIC insured | 12+ months, fixed date |
| I-Bonds (TreasuryDirect) | Inflation-linked (~3–5%) | US government backed | 1–5 years; 1-year lock-up |
First-time homebuyers (typically defined as not having owned a home in the past three years) have access to programs that can significantly reduce the cash needed at closing.
| Program | Max Assistance | Income Limit | Repayment? |
|---|---|---|---|
| State DPA Grant (example: NC 1st Home) | $15,000 | ~80–120% AMI | No (forgivable) |
| State DPA Silent Second | $10,000–$25,000 | Varies | Yes, on sale/refi |
| IRA First-Time Buyer Exception | $10,000 lifetime | None | N/A (your money) |
Once you know your target down payment amount and timeline, the monthly savings target is straightforward arithmetic. The key inputs are: (1) home price target, (2) down payment percentage, (3) closing cost estimate, (4) reserve requirement, and (5) current savings.
Example: $400,000 home, 10% down, 3 years to save:
| Home Price | Down (10%) | Total Cash Needed | Monthly to Save (3 yr) | Monthly to Save (5 yr) |
|---|---|---|---|---|
| $250,000 | $25,000 | ~$37,500 | $1,042/month | $625/month |
| $400,000 | $40,000 | ~$57,000 | $1,583/month | $950/month |
| $600,000 | $60,000 | ~$82,500 | $2,292/month | $1,375/month |
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