Compensating Factors In Mortgage Qualification And Manual Underwrites
This BLOG On Compensating Factors In Mortgage Qualification And Manual Underwrites Was UPDATED On October 22nd, 2017
Compensating Factors In Mortgage Qualification is required on manual underwriting. Compensating Factors are positive factors that mortgage borrowers have and can offset the poor credit and/or financial profile of mortgage borrowers.
Compensating Factors is normally required on the following types of borrowers:
- Borrowers with a referred/eligible are candidates of manual underwriting downgrades
- Mortgage Borrowers with credit scores under 620
- Mortgage borrowers with high debt to income ratios: FHA 46.9% front end DTI and 56.9% back end DTI
- Manual Underwriting Guidelines needs to be followed on refer/eligible findings per AUS borrowers
Refer/Eligible Findings And Manual Underwriting
Manual Underwriting Debt To Income Ratios can be capped with compensating factors. Otherwise most lenders will cap debt to income ratio caps at 43% DTI.
Here are examples of compensating factors:
- Borrower has second job that is not used for qualifying income
- However, the second job needs to be seasoned for at least one year
- Borrower has verification of rent an payment shock is less than 5%
- Borrower has two months reserves
- Reserves cannot be gifted and needs to be borrowers own funds
- Larger down payment on home purchase than the minimum 5% down payment
High Balance Loan Amounts
There are many parts of the country where it is designated as high cost areas. Many counties of California are in high cost areas where the loan limits in high cost areas are substantially higher than traditional areas.
- Mortgage Rates may be higher
- Pricing Adjustments depending on type of housing, credit scores, and down payment
- Lower debt to income ratio restrictions
- Automated Underwriting System Findings may require reserves
Compensating Factors Considered By Mortgage Underwriters During Underwriting Process
Files that render a referred/eligible per AUS Findings needs to be down graded to manual underwriting.
- Manual Underwriting normally requires a verification of rent and/or verification of mortgage.
- Debt to income Ratios on manual underwrite is normally capped at 43% but can go up to 50% DTI with compensating factors.
- Debt to income ratio overlays does not apply on FHA and/or VA Streamline Refinance Mortgage Loans.
Additional Compensating Factors For High Risk Borrowers
Manually Underwritten transactions that is considered high risk are the following cases:
- High debt to income ratios
- Lower than 620 credit scores
- High payment shock
- No reserves
- Gift funds for down payment
The mere fact that the mortgage borrower has a job and good credit are not considered compensating factors.
Here are examples of compensating factors in mortgage qualification:
- Mortgage borrowers has little to no payment shock and has proven that they made timely rental payments in the past 12 months with no late payments
- The new housing payment shock is less than 5% of the current rental payment or lower
- Borrower is willing and able to put more than the minimum down payment required on the home purchase
- 10% or more down payment on home purchase without gifted funds is considered compensating factor
- Mortgage borrowers who have two months reserves and has history of accumulate savings is a great compensating factor
- Borrowers having regard for credit and showing a history of re-established or established credit
- Mortgage Borrowers has documented income from other sources such as part time income, bonus income, overtime income but is not used as qualifying income. For example, if a borrower has part time job for at least a year but not quite two years is considered a great compensating factor
- If new housing mortgage payment is less than current rental payment, this is a huge compensating factor
Partial Borrower’s Retirement Account May Count
Mortgage Borrowers retirement accounts such as IRA, 401K, and Keogh Plans can be used as assets.
- In order to make sure that taxes and early withdrawal are covered, lenders only allow 60% of the vested dollar amount
- Retirement account agreement must be provided and show terms of withdrawals under conditions other than in connection with borrower’s employment termination, retirement, and death
- Borrowers who have substantial non-taxable income can be grossed up by 15%
- Mortgage borrowers who have obvious potential income increase potential either by training, certification, and/or education in their chosen profession is considered compensating factors
Gustan Cho NMLS ID # 873293