5 Money Tests to Pass Before Getting Your First Mortgage

Buying your first home is an exciting milestone, but before you dive into the world of mortgages, it’s crucial to ensure your finances are in good shape. Securing a mortgage is often the largest financial commitment you’ll make, and lenders will closely scrutinize your financial situation. Here are five important money tests to pass before applying for your first mortgage:
1. Debt-to-Income Ratio (DTI) Test
The debt-to-income ratio is a key metric that lenders use to determine your ability to manage monthly payments and repay debts. It’s calculated by dividing your total monthly debt payments by your gross monthly income.
Ideal DTI Ratio: Most lenders prefer a DTI ratio under 36%, although some may allow up to 43% or more, depending on other factors like your credit score and down payment.
How to Improve Your DTI:
- Pay Down Existing Debts: Focus on paying off credit cards or personal loans to lower your monthly obligations.
- Increase Your Income: Consider taking on a part-time job or freelance work to boost your earnings.
2. Credit Score Assessment
Your credit score is a significant factor in determining your mortgage eligibility and the interest rates you’ll receive. Generally, a higher credit score indicates to lenders that you’re a reliable borrower.
Ideal Credit Score: Aim for a score of 700 or higher for the best mortgage rates. Scores between 620 and 699 may still qualify you, but expect higher interest rates.
How to Improve Your Credit Score:
- Pay Bills on Time: Consistently paying your bills on time can positively impact your score.
- Keep Credit Utilization Low: Aim to use less than 30% of your available credit to maintain a healthy utilization ratio.
- Check Your Credit Report: Regularly review your credit report for errors or fraudulent activity that could be dragging your score down.
3. Savings Buffer Test
Having a robust savings buffer is essential. Lenders want to see that you have enough savings to cover the down payment, closing costs, and a reserve for future mortgage payments.
Ideal Savings: Aim to have at least 3-6 months’ worth of mortgage payments saved up, in addition to your down payment. This demonstrates financial stability and preparedness for unexpected expenses.
How to Build Your Savings:
- Create a Budget: Track your income and expenses to identify areas where you can cut back and save more.
- Open a High-Interest Savings Account: Consider putting your savings in a high-interest account to make your money work harder for you.

4. Down Payment Readiness
The size of your down payment can significantly affect your mortgage terms and monthly payments. A larger down payment typically leads to better interest rates and lower monthly costs.
Ideal Down Payment: While the traditional amount is 20%, many lenders offer options with lower down payments (as low as 3% or 5%), but this may come with private mortgage insurance (PMI) costs.
How to Save for a Down Payment:
- Set a Target Amount: Determine how much you need for a down payment and create a timeline to reach that goal.
- Automate Savings: Set up automatic transfers to your savings account to help you reach your down payment goal faster.
5. Emergency Fund Test
Before taking on a mortgage, it’s vital to have an emergency fund in place. This fund provides a financial safety net that can help you cover unexpected expenses, such as home repairs or job loss, without jeopardizing your mortgage payments.
Ideal Emergency Fund: Aim to save at least three to six months’ worth of living expenses, including your mortgage payment.
How to Build Your Emergency Fund:
- Prioritize Saving: Treat your emergency fund like a non-negotiable expense in your budget.
- Use Windfalls Wisely: Consider putting bonuses, tax refunds, or gifts directly into your emergency fund.
Conclusion
Before embarking on the journey of homeownership, passing these five money tests can set you up for success. Assessing your debt-to-income ratio, credit score, savings, down payment readiness, and emergency fund will not only improve your chances of mortgage approval but also help you become a responsible homeowner. Taking the time to prepare your finances will provide peace of mind as you step into this exciting new chapter of your life!