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What are compensating factors?

Compensating factors are strengths on a loan application, that will help the underwriter approve your loan, while overlooking any negative factors. These compensating factors often times result in the difference between getting a loan to fund, and having a loan denied. Compensating factors are yet another reason that you need to be completely upfront with your mortgage professional, and give them as much information as necessary.

As an example, a borrower with a poor credit score, may be approved for a loan that they otherwise may not, based on the fact that they have 50% to put down (for a purchase loan) or the Loan to Value(LTV) is no more than 50% (for a refinance loan). This would be a consideration of a compensating factor.

Underwriters will look at a variety of compensating factors to approve your loan, these can include the following:

- Debt to Income Ratio
- Reserves
- Length of current residence history
- Length of employment at the same place

A compensating factor would be a person who has a low DTI, debt to income ratio and can afford to obtain their mortgage on a 15 year term as opposed to a 30 year term. By using an automated desktop underwriting engine lowering your term may help you qualify for a loan that you may not qualify for on a 30 year term.

Banks evaluate mortgage applications based on the applicant's ability to repay the loan, how much equity will be putting into the home, the borrower's credit profile, how much in reserves does the borrower have. If a loan applicant is weak in one or more of these areas, he should present compensating factors by showing strenths in other areas.

Some lenders will allow you bolster up a weak credit profile with alternative credit sources, such as utility bills, etc.

Other compensating factors are if you are significantly reducing your debt-to-income ratio by paying off debts or changing from an adjustable rate to a fixed rate. Consult with your mortgage professional for details.

Liquid assets, including cash, stocks, and bonds, are key compensating factors which may allow you to qualify for a loan in a higher credit grade.

DISCLAIMER: The information contained in this article on 'What are compensating factors?' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.

What are compensating factors?

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