For many first time home buyers or current homeowners looking to move up, can be in for a shock. Even if they are aware of the higher payment from their current rent or mortgage and are ok with it and still have qualifying debt ratios, lenders still look at payment shock as a factor in determining whether or not your loan is approved.
Make sure to document full rent payments to avoid payment shock. If you are splitting the rent with roommates, collect the money from them and pay out of your checking account to show a paper trail.
Payment shock may also come in the form of a very large increase in the payment on an Adjustable Rate mortgage, along with most Interest Only or “Balloon” type loan programs. Watch for these terms in your loan documents and question their details and potential ramifications.
While these loans are perfect for a lot of folks, they may not be the best loan in your situation. If you’re currently in a loan with an impending rate or payment increase, contact Dave Zwierecki at 888-418-4467 and get matched with a low fixed rate today.
You may however be able to still increase your payment signifigantly and have the lender allow it. The underwriter will look at all compensating factors such as income levels increasing, amount of assets and amount of down payment amongst other things.
"Payment Shock" is one of the many loan qualifying criteria some banks scrutinize. It measures how much higher the proposed mortgage payment will be over the current housing expense. Banks have different guidelines as to what constitutes "payment shock". While one bank considers a proposed housing payment of 160% of the current expense to be a Payment Shock, another may allow up to 200% as long as the applicant's qualification in other aspects are strong, such as having a low "debt to income ratio" or high networth.
Payment shock may occur on an adjustable rate mortgage (ARM) after the expiration of the initial period and the interest rate resets higher. Contact a mortgage broker if you have or want to avoid payment shock to evaluate refinancing your mortgage to obtain a lower monthly payment.
Payment shock is also closely related to Negative Amortization Loans. An example is a home owner who borrowed $200,000 at 6% using an option ARM and in later years the payment rose to 8% driving the payment up to an unmanageable level.
If you have been making payments on a $100k mortgage and are going to jump into a million dollar home some lenders will look at this in an unfavorable manner even if your income supports it.
Every lender and situation is different so you must inquire/apply for a mortgage and we will be able to assist you in purchasing that particular property.
One reason for DTI requirements is to prevent payment shock.
The best way to avoid payment shock is to contact an experienced mortgage professional who can help analyze your financial situation with respect to your new/existing mortgage. If you have an ARM that's about to adjust, or if your looking to buy a new home and need to calculate payments, a mortgage professional can help guide you with current programs and rates that can specifically suit your needs.