Payment Shock

While credit score is one of the most important pieces of the lending decision it is not the only factor in making a loan decision. One of the other important factors is payment shock. Payment shock is the percentage and dollar amount of increase in the consumer's current payment for either a mortgage or rent compared to their new mortgage payment. Example: the consumers current rent payment is $500.00 per month. The new mortgage payment is $1,500.00. This means that the housing payments are increasing $1,000.00 or 200% (($1,500.00-$500.00)/$500.00)) this means that the new payment is three times the amount of the old payment. This increase has to be an amount that the borrower can easily afford based on their earnings or else the loan approval is in jeopardy. The compensating factor to offset payment shock would be a savings pattern. If at the $500.00 per month housing expense level, the consumer is saving approximately that much or more per month based on their bank account, then there is a good chance they can afford the increase payment amount. If on the other hand, the consumer has no money in the bank while making a $500.00 per month housing payment then it is unlikely they will be able or at least willing to make the higher payment if they are given such a loan.