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         What are compensating factors           

Compensating factors are best described as that little extra the can make a difference between a loan being approved or denied. They are not absolutes and may be interpreted differently by different underwrites and how much they may weight them in their overall decision making process.

How many compensating factors you need is also subject to an underwriter’s discretion. Obviously the more you have the better you chances are on getting approved if you loan is one that is a close call.

Here is an example of compensating factors:

Taking a homebuyer education class

Amount of down payment. Putting down 10% in stead of 3%

Debt Ratios significantly under the maximums

Strong Credit or credit scores

Time on the job. The longer the better.

Time at current residence. The longer the better.

Down payment has been saved by the borrower verses getting a gift

Amount of money left in savings after the purchase. Often called reserves.

Change in current housing expense. A large increase in the borrowers housing expense would be unfavorable.

No recent (last 12 months) derogatory accounts or prior derogatory accounts were caused by extenuating circumstances.

Some practical examples of using compensating factors might be:

A borrower has a debt ratio of 31/42. However, the borrower’s current housing expense is $900 and the new housing expense will be $750. Obviously this borrower has shown they have the ability to manage a higher payment.

A borrower has some 30 day late payments on consumer credit cards. However, borrower is putting down 15% of the purchase price of the home from their own savings.

A borrower is currently paying $300 per month in rent. The new house payment will be $800. However, after the borrower puts down their 3% for their down payment, the will still have $2,500 in reserves.



How to Qualify
Understanding fha loan credit guidelines
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fha loan income guidelinesIncome Guidelines
overcome credit problems to get approved for a fha loanOvercoming Credit Problems
FHA loan case studies

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FHA loan underwriting

What are compensating factors ?

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