Someone explain

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  • #70974
    jkp2020
    Participant

    I currently pay $950 in rent and my payment shock is $1029, which is less than 300. Am I only putting $79 (the difference between what I pay now and what I will pay in the future) to the side each month or the whole $1029 to prove I can pay my new monthly mortgage rate?

    #70977
    Nelsont
    Member

    Based on what you have said more information is needed. Payment shock is the difference between between your rent and you your maximum payment will be. Based on that your payment shock is 79 and that’s what you need to save.

    However you said you’re payment shock is 1029 which means the maximum you will be approved for is 1979. If this is the case then you need to save 1029.

    So figure out your maximum monthly payment.

    #70980
    jkp2020
    Participant

    @nelsont my maximum monthly payment is $1029. So all I need is to put $79 to the side each month?

    #70982
    Nelsont
    Member

    Yes. All that is required is 79. But remember these 3 things:

    Under 200 is still recommended to save 200 so save as much as possible and don’t stop at 79 if you can

    Don’t think of it as setting aside 79 because that can potentially set you back. The sum of all of your accounts needs to grow by 79 each month so if you put 79 in one account and you have another account that decreases by 5 then really what you saved is 74 and your timeline starts over. Really the underwriters don’t know whether you have separate accounts for payment shock and they will not connect the dots. They will look at all of your balances and add them up.

    This pattern can never stop. You need at least 3 months in order to qualify but, you need to continue until you close on your house or risk losing your qualification.

    #70983
    jkp2020
    Participant

    Thank you! This was very helpful. I’ve been saving more than this before they told me my monthly maximum, so I think I’m good.

    #70987
    TTrumble
    Member

    Hello jkp2020,

    Just to clarify a couple of things, your “ideal” monthly savings amount would be $279.

    The first $79 is your actual Payment Shock, the truly required savings each month, the difference between your current rent and your desired mortgage payment (not necessarily your maximum payment).

    The extra $200 will accomplish two functions: 1) It will help you build a buffer or emergency fund, and can also be how you build your MRF to take care of required reserves, initial taxes and insurance at closing, inspections, earnest money, etc. 2)It also demonstrates that you will not be “cash poor” when you close on the home and there will be extra cash left over each month to save for emergencies or invest for kids’ college funds, retirement, etc.

    (Actually, the “secret” third feature is that it creates some wiggle room against accidentally missing that $79 amount if you miscalculate things one month.)

    Remember that to demonstrate whether or not you have saved your Payment Shock each month, you must add up the ending balances for ALL your bank accounts each month, then compare it to the previous month. It is that SUM TOTAL of all accounts that must increase by at least $79 each month compared to the month before.

    The $79 is your official Payment Shock, but savings in excess of that are a very powerful tool in showing that you are managing your money well and building toward a solid financial future after you close.

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

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