Do you know what “Payment Shock” is and how it can affect USDA loan qualifying?
What is Payment Shock and how will affect me qualifying for a USDA loan?
Today’s topic is important for both First Time Home Buyers and previous owners that are re-entering the purchase market. Today’s video tip will discuss and explain how payment shock can affect USDA loan qualifying?
Payment shock is the difference between your current housing expense and what the new housing expense will be.
For example, if you are renting then we would compare what your current rental payment is versus your new mortgage payment which would include monthly amounts for your Principle and Interest, Property Taxes, Homeowner’s Insurance, USDA monthly premium, and any maintenance or association type fees.
Remember, even though fees such as HOA or Special Maintenance, of Community costs will not normally be included within an escrow account, they still have to be counted towards both debt ratios and the payment shock calculation.
Payment shock is a risk layer that underwriters will review and take into consideration during the loan approval process and it is calculated by diving the new total housing expense by the current rental payment.
Payment shock can be a factor on any loan that goes above the USDA published guideline for housing expense which is currently 29% of an applicant’s gross monthly qualifying income.
In the case of a First Time Home Buyer who is trying to qualify for a USDA loan, but may live at home rent free any new mortgage payment will be at 100% payment shock since you are going from NO verifiable rent history to a new mortgage payment.
Now let’s take a look at another example to help illustrate:
Mr. & Mrs. Smith have been renting for the past year, always pay their rent by check, and the current monthly amount is $700. They home they have found will have a new total monthly housing expense of $850 .
- Take the new housing expense of $850
- Divide by current rental payment: $700 = 1.214
- Then subtract “1”: 1.214 -1 = .214
- .214 = 21.4%
OK, I know what you may be thinking, what happens when the new mortgage payment will actually be lower than the current rent.
In this case you have a situation where there is actually NEGATIVE payment shock. As you can imaging, to be able to show you have consistently paid rental payments that are higher than your new mortgage payment, that is a tremendous positive factor to be considered towards the USDA approval process.
As I have mentioned many times before, in order to get credit for either low, no, or negative payment shock we must be able to actually verify rental payment history. This can be done through cancelled checks or verification by either a management company or apartment complex. Paying rent by cash, especially to a private landlord it not customarily an accepted way to verify rental payment history.
Remember to not let these details overwhelm you, because that is where we come in to help. As a USDA approved lender, Metroplex Mortgage Services holds an expertise in this unique program and can walk you through the USDA qualifying process step by step.