Payment shock is something that banks use to determine if a first time home buyer can handle their new mortgage.  Because rents are less than mortgage payments, banks want to try make sure that the new mortgage isn't SO much more than what they are used to paying in rent.  The way banks do this is by calculating what they call "payment shock." 

Not all banks have the same calculation.  This is another example of why working for a broker is advantageous over working for a direct lender because what Countrywide uses as their formula for payment shock may not be the same as what PRMG or Fieldstone use for their calculation.  However we can still send a loan to Countrywide when they have the best rate. 

One bank that I have done many transactions with uses a very simple rule for payment shock.  Basically whatever the borrower pays in rent now, take that number and multiply it by 2 and you have the maximum monthly mortgage payment that a first time home buyer obtaining a mortgage can qualify for.  That number must include taxes and insurance.  So if the borrower is used to paying $1,300 in rent, they can qualify for a maximum monthly payment of $2,600.  Other banks have different rules and it might be ony a 75% increase over what you are used to paying in rent. 

Another bank just changed their guidelines and payment shock is no longer a factor in qualifying with them.  Of course they no longer offer 100% financing going stated income but the 1st bank I mentioned does.  So while they are not as concerned with payment shock now, they still It's quite interesting to see how guidelines can vary from bank to bank. 

Questions or comments?