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Tuesday, May 16, 2006

Basic Terminology: Payment Shock

One common qualification guideline for mortgages is known as Payment Shock. Payment shock is the difference between a borrower's current mortgage or housing payment and the monthly payment on their new mortgage.

For example, say you currently have a mortgage or rent payment of $800 per month (lucky you), and you are applying for a new mortgage that would have a monthly payment of $1200. In this case the payment shock is $1200/$800, or 1.5.

Lenders set guidelines for payment shock that range up to 2.0 and higher. This lets the lender deny higher risk loans where the borrower is not accustomed to having such a high payment. However, not all lenders have payment shock guidelines, and those that do don't always apply them to every type of loan.

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