Saving for a down payment is the first — and often the most challenging— part of the house-hunting process. While the standard amount required for a down payment is typically around 20% of the house price, first-time homeowners usually opt for a 10% down payment.
However, the skyrocketing cost of living combined with rising housing costs has made it difficult for many people to make ends meet, let alone save for the future.
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Personal finance expert Dave Ramsey explains what buyers should do when trying to save a down payment while renting and warns on specific financing options to avoid.
Identifying how much you’ll realistically be able to afford will help create a goal to work towards and can help you understand which housing markets to explore.
Creating a budget may seem obvious, but many prospective buyers don’t realize they’re living above their means. Tracking expenses can help make progress toward financial goals. However, saving for a dream home may require some sacrifice from renters.
Here’s what Dave Ramsey thinks home buyers should focus on.
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Budgets are key to saving for a down payment
Housing costs have steadily risen over the past two decades, increasing exponentially in the post-Covid market. Inflation-adjusted rent has increased 20% from 2000 levels, and housing costs have risen much faster than income.
This disparity has created a conundrum for prospective homeowners: while buying a home is usually cheaper than paying rent in the long run, many can’t afford the down payment or get approved for manageable mortgage loans.
The New York Federal Reserve Bank found that only 40% of renters think they’ll ever own a home, marking a historic low in housing sentiment. However, making a few key changes in spending habits and savings can help buyers reach this goal.
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Ramsey highlights that buying a home in such a competitive market may require buyers to buckle down, cut costs, and stick to a monthly budget.
“It can be easy to lose focus and forget what kind of house fits your budget and lifestyle,” he wrote. “Budgeting gives you the power to tell your money where to go instead of having to wonder where it went.”
He suggests renters start by writing down their monthly take-home pay, listing monthly expenses, and identifying their monthly down payment savings goal before allotting for leisure spending.
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Ramsey says to avoid rent-to-own programs
As of August 2024, the average down payment in the U.S. was $67,500. While it is great to put down as much as possible to lower your monthly mortgage and interest payments, many Americans worry they will never save enough to purchase a home.
Other financing options are available for home buyers who can’t save the recommended minimum of 10%, but they have downsides.
Related: Dave Ramsey explains how your mortgage is key to early retirement
Rent-to-own programs allow consumers to rent the home they want to buy first, with the option to purchase it before the lease ends.
These programs have become popular among millennial home buyers who think it's a shortcut to saving for a down payment. Roughly 5 million Americans are participating in rent-to-own programs nationwide.
However, Ramsey warns first-time buyers to avoid rent-to-own programs, which will cost far more in the long run.
“You can start to see why this isn’t a great idea,” he noted. “Why fork over a whole bunch of extra money to lock yourself into a bad deal instead of just saving the money by yourself? What if you decide you don’t want to buy that particular house after the rental period is over?”
While it may be tempting to purchase a home without saving up tens of thousands of dollars, it is a smart financial move to continue renting while saving until you’re ready to close on a house within budget.
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