Let’s say you’ve been living at home, saving money to purchase your first home, and you are one of those lucky folks who have never paid rent before. Did you know that you could be scrutinized by the mortgage underwriter a little harder than other folks, even if you have good credit scores? One of the requirements for a Home Loan in NC is a great Rental “Housing” payment record. If you’ve never paid for rent, then the Underwriter is forced to consider Payment Shock.
The term “payment shock” signifies the increase in housing expense experienced by a borrower.
Let’s look at another example. What if you’ve been sharing an apartment with friends, and your portion of the rent was only $300 a month? A mortgage payment is likely to be at least $600. Even if you can easily afford the $600, and you have good credit scores, one of the requirements for a Home Loan that a NC underwriter considers will be to explain (basically) in the file why they “believe” you can handle the higher monthly housing expense.
Here’s what the NC USDA Home Loan Guidelines say (these guidelines are pretty consistent for other Government Loan guidelines, including VA, FHA and First Time Home Buyer Programs in NC):
When the payment shock is 100 percent or higher, or the applicant has no previous rent or housing expenses, no additional risk layering (such as adverse credit waivers approved by the lender), debt ratio waivers (approved by Rural Development), or temporary buy-downs should be allowed without strong compensating factors.
Obviously, this begs the question of what Compensating Factors or requirements for a Home Loan the underwriter will consider. There’s a pretty long list (fortunately) that includes:
Payment shock is defined as a percentage under the following formula:
- Credit score of 680 or higher. Credit scores of 680 and higher can be documented as a stand alone compensating factor, if no additional risk layers are present. The biggest issue we run into is when someone has a good credit score – but their TOTAL debt, meaning housing payment and
- No or low “payment shock:” a minimal increase in housing expense or current rent is comparable to proposed PITI (100 percent increase in payment or less).
- Conservative attitude toward the use of credit and ability to accumulate savings with regular deposits.
- Previous credit history verifies the applicant has the ability to devote a greater portion of income to housing expenses.
- Employment history: 2 or more years in current position (no gaps due to multiple separations)
- Cash reserves available: Meaning after closing you will have 2 or 3 months worth of payments in the bank. Some folks buy a house and we only show them with $149 left in the bank. If you are going to be one of the “payment Shock” loans, an underwriter wants you to have cash in the bank after closing. This can be a gift.
- Potential for increased earnings and career advancement (literally putting a copy of your College Degree in your file for the USDA Underwriter to see helps! We’ve done it MANY MANY times!)
- Trailing spousal income : For instance, let’s say your spouse has worked as a nurse for the last 10 years. Even though they haven’t gotten a paycheck from their new hospital, we can use that income as an offsetting factor, and allow you to close.
- Low Total Debt Ratio: A low Total Debt Ratio by itself does not compensate for a high PITI ratio; however, when other strong compensating factors are present, a low Total Debt Ratio ratio should be viewed as a positive mitigating factor.
As you can see from looking at this – another major requirement for home loan approval includes looking at your Total Debt Ratio. meaning, not only are they looking at the idea of how much your housing payment (or PITI) is when compared to your Gross monthly income – they are also looking at how much your TOTAL debt is when compared to your monthly Gross Income.
In general, USDA Home Loans have ratios of 29/40. We can get exceptions, however. Specifically, if you have offsetting compensating factors – Underwriters can approve loans right now above the 40% benchmark. USDA Home Loan Underwriters at the Bank can submit a USDA Loan Debt Waiver.
First Time Homebuyers in NC, looking for a USDA Home Loan, should also look at the way they calculate maximum Income for your county.
Want to see the specific Requirements for A Home Loan in your situation, and what the Underwriters will think about your Payment Shock – Call Steve and Eleanor Thorne 919 649 5058 – find us on Facebook - add us to your Circles on Google + / we want to connect and find out how the housing market looks in YOUR corner of NC!