You may have heard the phrase "payment shock" get thrown around by your loan office or broker, and for good reason. It plays an important role in the underwriting and eventual outcome of your mortgage application, and can make or break your chance of approval.
Payment shock can be defined in a number of ways, but it is essentially any significant increase in monthly liability that heightens the risk of loan default. In simple terms, the more you need to pay out each month to creditors, the higher the chance you'll be unable to make a payment, especially if you're not used to making such large payments.
So let's assume your only history of carrying debt involves a car payment of $199 a month. If you applied for a home loan that carries a payment of $4,000 a month, payment shock would occur as you wouldn't be used to shelling out such a large amount of money each month. And this alone could be reason enough to get denied.
Many banks and mortgage lenders have a certain payment shock threshold that they allow, which can be dependent on things like documentation type and other compensating factors. Typically, max payment shock may be set at 200%, meaning your monthly mortgage payment can be no more than double your current housing payment. So if you currently pay $1,000 in rent each month, your max mortgage payment cannot exceed $2,000, or it may be subject to review or denial.
FHA Insured Mortgage loans help to aleviate this concern and can be a good solution for Owner Occupied home buyers.