Compensating Factors In Mortgage Qualification On Manual Underwrites

This Article Is About Compensating Factors In Mortgage Qualification And Manual Underwrites

Compensating Factors In Mortgage Qualification is required for borrowers with high debt to income ratio on manual underwriting.

  • Compensating Factors are positive factors that offset risk by higher-risk borrowers
  • Borrowers with less than perfect credit and/or lower credit scores are considered to be higher risk borrowers for lenders
  • Mortgage underwriters will look for compensating factors on manual underwriting files

Compensating factors can help get borrowers who need manual underwriting with poor credit, lower credit scores,  and/or financial profiles get approved for a mortgage.

When Are Compensating Factors Are Required By Mortgage Underwriters

Compensating Factors In Mortgage Qualification

Compensating Factors are normally required on borrowers with higher debt to income ratio on manual underwriting.

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

In this article, we will cover and discuss Compensating Factors In Mortgage Qualification On Manual Underwrites.

Refer/Eligible Findings And Manual Underwriting

Manual Underwriting Debt To Income Ratios can be capped up to 40% front end and 50% back end with two compensating factors. Otherwise, most lenders will cap debt to income ratio caps at 31% front end and 43% back end DTI with zero compensating factors:

Here are examples of compensating factors:

  • The borrower has a second job that is not used for qualifying income
  • However, the second job needs to be seasoned for at least one year
  • The borrower has verification of rent a payment shock is less than 5%
  • The borrower has three months of reserves
  • Reserves cannot be gifted and need to be borrowers own funds
  • The borrower has a larger down payment than the minimum down payment required
  • The borrower has a history of saving money 
  • The borrower has job longevity with a history of consistent wage increases and promotions

A larger down payment on a home purchase with lower debt to income ratio are considered strong compensating factors.

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 in traditional areas.

Here are some basic facts on FHA Jumbo Loans and VA Jumbo Loans:

Compensating Factors Considered By Mortgage Underwriters During  Underwriting ProcessWhat are Compensating Factors Considered By Mortgage Underwriters During  Underwriting Process

Files that render a referred/eligible per AUS Findings need to be downgraded to manual underwriting.

  • Manual Underwriting normally requires verification of rent and/or verification of mortgage
  • Debt to Income Ratios on manual underwrite is normally capped at 31% front end and 43% back end DTI with no compensating factors
  • With one compensating factor, the borrower’s DTI can be 37% DTI front end and 47% back end DTI
  • The debt to income ratio can be up to 40% front end and 50% back end with two compensating factors
  • Gustan Cho Associates has no debt to income ratio overlays on government and conventional loans

Debt to income ratio caps does not apply on FHA and/or VA Streamline Refinance.

Additional Compensating Factors For High-Risk Borrowers

Manually Underwritten transactions that are 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 the down payment

The mere fact that the mortgage borrower has a job and good credit are not considered compensating factors.

Examples Of Compensating Factors Accepts By Mortgage Underwriters

Here are examples of compensating factors in mortgage qualification:

  • Mortgage borrowers have little to no payment shock and have 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
  • The borrower is willing and able to put more than the minimum down payment required on the home purchase
  • 10% or more down payment on a home purchase without gifted funds is considered a compensating factor
  • Mortgage borrowers who have three months of reserves and has a history of accumulating savings is a great compensating factor
  • Borrowers having regard for credit and showing a history of re-established or established credit

Borrowers have documented income from other sources such as the following:

  • part-time income
  • bonus income
  • overtime income but is not used as qualifying income
  • For example, if a borrower has a part-time job for at least a year but not quite two years is considered a great compensating factor

If a new housing mortgage payment is less than the current rent payment, this is a huge compensating factor.

Partial Borrower’s Retirement Account May Count

Can Partial Borrower's Retirement Account May Count

Mortgage Borrower’s 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.

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