Payment Shock Clarification

[kjenkins79]

My understanding of Payment shock is that your account has to grow monthly by that amount. What happens if your current rent increases to the amount that you set at your cap for your monthly mortgage. Do you still have to save that initial amount?

[Nelsont]

Yes and no.

There is usually a $200 minimum payment shock in situations where your rent is equal to or very close to your approved monthly payment amount. They may not require it depending on your circumstances but, they definitely want to see a pattern.

Otherwise if your rent increases you can always ask for a decrease in payment shock though the response you get will be are you able to continue to save the original payment shock and if so why don’t you want to because that’s not a good mental habit.

Edit: It’s also not your account. It’s essentially your net worth or total assets. The sum total of ALL of your accounts needs to grow.

• This reply was modified 2 years, 3 months ago by Nelsont.

[kjenkins79]

@Nelsont

So as long as the total amount of my accounts grow by that amount I should be ok with the payment shock.

[Nelsont]

Yes.

And just to be clear your own personal cap on what you want to spend on a mortgage is not what counts. You will be qualified for up to 31% of your gross income depending on your current debt and spending habits and your payment shock will be based on that maximum approved amount (likely 31%) unless you specifically state you want to be qualified for less.

If your income is relatively high or you live in an area where home prices are relatively low then it may not matter. There is no rule that says you need to buy at your max and in fact it’s better if you don’t but, not being able to buy at 31% just because you didn’t want to could potentially hurt you if you live in a hot market or find a house that needs repairs.

[kjenkins79]

@nelsont

Let me pick your brain again. So say for example, if I place my payment shock into a separate account and that account continues to grow but the account you pay bills with does not show growth how does that go about calculating payment shock.

[Nelsont]

Possibly.

1. Add up the ending balance for the December statement on every account you have liquid money in.
2. Then add up the ending balance for the January statement of every account you liquid money in.
3. Now subtract 1 from 2.

If #3 = a negative value you are spending more money than you make
If #3 = zero you are not saving
If #3 = a positive value you are on the right track
If #3 = 200 or more then you met 1 month of payment shock

Now for month 2 your “#3” must have an additional payment shock plus the value from last month. So using 200 as an example you “#3” must be 200 then 400 then 600 then 800 and so on until the day you close on your house.

Also you cannot average payments. So if you plan to go on vacation lets say saving up an extra 200 this month in order to spend an extra 200 next month won’t count. Banks don’t take partial payments or double payments and a skipped payment – you will always be on the hook every month regardless so this is to see if you can manage that.

[Nelsont]

For what it’s worth it may be easier on you to keep multiple accounts but, it is easier on the underwriters to have just 1 account. Each additional account will provide potential confusion, LOEs and conditions.

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