Understanding Credit
Section 5 - 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.
Section 6 - Budget Letter
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