The VA Loan Payment Shock
If you’ve never applied for a VA loan or it’s been a while, you’re probably not aware of the amount of paperwork, disclosures and forms for you to review, sign and return. The amount of paperwork is not just a VA loan requirement, but all mortgage loans have their own fair share of paperwork.
In addition, VA loans ask that you provide evidence of an acceptable credit history. You’ll provide signed copies of your most recent tax returns, W2 forms and pay check stubs from your employer. Bank statements? Those too along with your most recent statements from any retirement account, disability award or social security income. Yes, VA loans do require a bit of paperwork.
But there is one other element that doesn’t require paperwork but is still an important piece to the underwriting puzzle: payment shock. What’s payment shock?
Payment shock is expressed as a percentage increase from someone’s current rental or housing payment to the new payment from the new VA mortgage. An underwriter, the person who reviews and approves the physical VA loan application, will also take a peek at any potential payment shock.
Payment shock is an issue when someone is paying say $800 per month and the new house payment, which includes principal and interest, taxes and homeowner’s insurance is ay $1,600. Can someone who is used to paying $800 be comfortable paying twice that much? Or even active duty who got a housing allowance and recently discharged, will the borrower be able to make the payments?
Typically, any payment shock below 125 percent is no big deal. But when payment shock approaches 150 percent or more, the file will be given a bit more scrutiny. For instance, a borrower has a low credit score of 620, there’s one late rent payment last year and the debt ratio is high at 44. If the change in payment is too great, the loan might in fact be declined.