10.14 PAYMENT SHOCK (03/09/16)

© RHS HB-1-3555 SFH Guaranteed Loan Program Technical Handbook

The term “payment shock” signifies the increase in housing expenses experienced by an applicant. Payment shock is defined as percentage under the following formula.

(New Principal Interest Taxes and Insurance (PITI) ÷ Previous Housing Expense) – 1

EXAMPLES	a. The applicant's new PITI is $187.00 and their former rent was $100.00. b. 187.00 % 100.00 = 1.87; 1.87 -1 = .87; .87 = 87 percent c. The payment shock in this example is 87 percent.
	a. The applicant's new PITI is $345.00 and their former rent was $150.00. b. 345.00 % 150.00 = 2.30; 2.30 -1 = 1.30; 1.30 = 130 percent c. The payment shock in this example is 130 percent.
	a. The applicant's new PITI is $2,000.00 and their former rent $1,000.00 b. 2,000.00 % 1,000.00 = 2.00; 2.00 -1 = 1.00; 1.00 = 100 percent c. The payment shock in this example is 100 percent.

In cases where the applicant did not have a housing expenses prior to purchasing a home, such as if the applicant was living with relatives, payment shock cannot be measured as a percentage.

Manually underwritten loans. Payment shock by itself (without the presence of other risks) is not an additional risk layer. Payment shock is a risk layer for underwriters to consider when the PITI ratio exceeds 29% and the proposed mortgage payment is 100% or greater than current housing expense. Payment shock is not a risk layer and requires no further supportive documentation if the PITI ratio is 29% or less.

In cases where payment shock is 100 percent or higher and qualifying PITI ratios are exceeded as noted above, as well as in cases where the applicant did not have a housing expense prior to purchasing a home, no additional risk layering (such as adverse credit waivers, debt ratio waivers, or temporary buydown) should be allowed without strong compensating factors. Acceptable compensating factors include, but are not limited to, the following examples:

The applicant(s) has an ability to accumulate savings or cash reserves;
The applicant(s) has a demonstrated conservative attitude toward using credit;
The applicant(s) has potential for increased earnings, as indicated by job training or education in the applicants profession;
The applicant(s) has a representative credit score of 680 or higher.

Automated Underwriting System – GUS “Accept”. Payment shock is part of the underwriting risk evaluation and is not subject to further evaluation or documentation unless disclosed in the GUS Underwriting and Findings Analysis.