-
WHAT ARE COMPENSATING FACTORS IN MORTGAGES
What are compensating factors and the importance of compensating factors in mortage lending?
-
1 Reply
-
What are Compensating Factors?
Compensating factors are strong borrower factors that minimize the lender’s risk. Compensating factors play an important role in manual underwriting for mortgage applicants, and mortgage underwriters have much discretion in manual underwriting.
Compensating factors are positive features of a borrower’s financial record that counterbalance higher-risk aspects in a mortgage application, such as a high debt-to-income ratio or low credit score.
Importance in Mortgage Lending:
Compensating factors can help borrowers qualify for a mortgage they may not be approved for otherwise. Some common factors include:
- Considerable Cash Reserves.
- Stable Employment History.
- Large Down Payment.
- Low Payment Shock
Lenders use these factors to allow loans that do not meet standard guidelines but ensure the borrower has additional financial strengths.
Common Compensating Factors Recognized by Mortgage Lenders:
Substantial Cash Reserves: Having saved multiple months’ worth of mortgage payments.
Large Down Payment: Contributing a higher percentage towards the purchase price lowers lender risk.
Stable Employment History: Consistent and long-term employment.
Longevity and History of Promotion: Borrowers with a history of getting consistent raises and promotions are considered compensating factors. For example, if a person went from a security guard to a police officer and were promoted to sergeant, lieutenant, captain, major, colonel, and deputy chief, this would be considered a compensating factor.
Minimal Payment Shock: The new housing payment is similar to the current one.
Residual Income: Extra money left over after all bills have been paid.
Part-Time Job Not Used As Qualified Income: If a borrower has a second job, part-time income, or other income that has been seasoned for at least 12 months and not used as qualified income, that income will be considered a compensating factor.
Low Debt Utilization: Low balances on credit accounts.
No matter how weak certain sections of their application may appear. These compensating factors can help them secure one anyway.