What Is Payment Shock & How Can It Hurt My Mortgage Loan Application?

Last Updated 6/11/2015

Could payment shock sabotage your mortgage loan application?

There are many hidden quirks of mortgage loan underwriting which most consumers are unaware of, and even many newer loan officers fail to anticipate when taking mortgage loan applications. Payment shock is one of them. So what is it? How can borrowers preempt and overcome it?

What is Payment Shock in Mortgage Lending?

This is another one of those factors which relates to a borrower’s credit report that has nothing to do with credit score. You could have a perfect payment record and an 850 credit score, yet have your mortgage loan application denied due to payment shock. In the reverse; theoretically a borrower with a 580 credit score and a previous foreclosure and bankruptcy could still get a home loan if payment shock is not an issue.

Essentially payment shock comes into play and is an underwriting red flag when borrowers are going to experience far larger payments than they have proven they can handle in the past. For example; trying to buy a million dollar home, when your previous home loan was only for $150,000 and the payment were far less. Lenders are far more comfortable if you have a proven track record of maintaining payments and debt in a similar range as to what you are asking for.

Compensating Factors

Obviously some borrowers will appear to be experiencing payment shock, even though they have been very responsible, and just haven’t used credit. For the financially secure borrower there may be compensating factors which can offset payment shock. For example; large amounts of savings and investment accounts, other real estate assets, low LTVs or debt-to-income ratios, or credit accounts which aren’t showing up on your credit report. However, expect to have to suggest this to most lenders and loan officers rather than expect them to brainstorm ways to make it work.

How to Preempt Payment Shock during Mortgage Loan Applications

For those individuals with big goals and big house dreams it can be wise to plan to squash payment shock in advance. This can be achieved by moving up the housing ladder in several steps, requesting credit line increases on credit cards, or even taking out loans and paying them off to prove ability to pay.