Compensating Factors On Manual Underwriting Mortgage Loans

This BLOG On Compensating Factors On Manual Underwriting Mortgage Loans Was UPDATED On May 2nd, 2019

Compensating factors are favorable circumstances that help mortgage loan borrowers who have marginal credit or borrowers who get a refer/eligible per Automated Underwriting System and the file needs to be a manual underwrite.

  • Compensating Factors On Manual Underwriting  is required for higher debt to income ratio borrowers
  • Borrowers who barely met the bare minimum mortgage qualification requirements set by both FHA and Fannie Mae mortgage guidelines can help themselves if they have compensating factors on manual underwriting

Borrowers who barely met the mortgage lender’s minimum mortgage requirements or have higher debt to income ratios should have Compensating Factors On Manual Underwriting

  • For example, the minimum credit scores to qualify for FHA Loans is 580 FICO
  • The maximum debt to income ratio is 46.9% front end and 56.9% back to get an automated approval on Automated Underwriting System
  • However, on Manual Underwriting, most lenders will cap debt to income ratios at 43%
  • Debt To Income Ratios can go up to 50% DTI on manual underwriting with 3 compensating factors
  • If borrowers refer/eligible per AUS barely meet credit and DTI requirements, compensating factors on manual underwriting will most likely be necessary

What Are Compensating Factors On Manual Underwriting ?

Examples of compensating factors are the following:

  • Three months reserves
  • Verification of rent with low payment shock of no more than 5% payment shock or $100 increase whichever is less
  • Borrower has part-time income and/or other income for at least one year but not used as qualifying income
  • Working spouse who is not on the mortgage loan, and assets

Letters Of Explanations To Mortgage Underwriters

Letters of Explanations to mortgage underwriters are required on all of the following:

  • Derogatory Credit
  • Bankruptcy and housing events
  • Credit Inquiries
  • Late Payments
  • Collections and Charge Offs
  • Judgments and Tax Liens
  • Gaps in Employment

A good letter of explanation detailing borrowers compensating factor attached with the mortgage application will make the mortgage application much stronger. It will give more confidence for the mortgage loan underwriter in issuing a mortgage loan approval. Loan Officers will go over with borrowers on what to state on letters of explanations.

Compensating Factors On Manual Underwriting
Gustan Cho Associates

Examples Of Compensating Factors On Manual Underwriting

The mortgage loan borrower has verification of rent that can be proven via cancelled checks for at least 12 previous months:

  • 24 months verification of rent will be a stronger compensating factor
  • Rental payment that is close to the new mortgage payment will be considered a compensating factor
  • This is because there will be no or very rental shock payment
  • The borrower makes a down payment greater than the bare minimum required
  • This is a strong compensating factor because it proves to the mortgage underwriter that borrower has more skin in the game
  • The mortgage lender has less risk due to the stronger down payment
  • More equity investment from borrower means less risk for the lender and a stronger borrower
  • The borrower has strong assets and reserves and has established credit history or a re-established credit history with no late payments after a bankruptcy and/or foreclosure
  • Maxed out credit cards or too much credit with high balances are not considered compensating factors
  • This will scare away lenders 
  • This is because it shows financial irresponsibility as well as the borrower living beyond his or her means
  • The longer the borrower’s credit history from his or her credit report shows the overall character of the mortgage loan borrower

Ability To Repay Mortgage

The borrower has part time income or overtime income that has not yet been seasoned for two years so it cannot be used for income qualification but shows that the borrower has extra income:

  • This is considered compensating factors for the borrower
  • The mortgage loan underwriter will take this into consideration
  • There is only a minimal increase in the borrower’s housing expense so there is no payment shock
  • The borrower will not go from paying zero rent to a mortgage payment of $2,000
  • The borrower has cash reserves for at least three months of housing payments and has other assets
  • This is a huge compensating factor that is viewed extremely favorably by mortgage underwriters
  • Borrower has non taxable income whether from social security and/or pension income that has not been grossed up by 15% during income qualification
  • Borrower has advanced training in his field such as advanced degrees and/or specialized training that indicates the likelihood of borrower being marketable in his or her field
  • Shows a promotion or income advancement likely in the very near future
  • For example, a police officer with a law degree versus a police officer with a high school diploma
  • The law degree will be considered a compensating factor
  • This is due to the likelihood that he or she will have a greater chance of employment and/or advancement
  • This is due to their advanced education in the event if he or she were terminated or injured on the job

Are Compensating Factors On Manual Underwriting Mortgage Loans

Gustan Cho Associates Mortgage Group at Loan Cabin Inc. are direct lenders with no overlays on government and conventional loans. A substantial percentage of our business are manual underwriting.

  • The Gustan Cho Team at Loan Cabin Inc. are direct lenders with no overlays
  • Overlays are mortgage guidelines that are above and beyond those of the federal minimum requirements imposed by FHA, VA, USDA, Fannie Mae, Freddie Mac
  • What this means is that as long as borrowers get an approve/eligible per DU Findings via Fannie Mae Automated Underwriting System, they are pretty much guaranteed a mortgage loan approval as long as borrowers can satisfy AUS Conditions
  • Compensating Factors on AUS Approvals are not required
  • Compensating factors security blankets for lenders and offsets risk

Many Banks and Lenders may require compensating factors on approve/eligible borrowers as part of their overlays.

Home Buyers who cannot get an approve/eligible per Automated Underwriting System on VA and FHA Loans and need to qualify for mortgage with direct lender with no overlays on VA and/or FHA Loans can contact The Gustan Cho Team at Loan Cabin at 262-716-8151 or email us at We are one of the largest lenders of originating FHA and VA Loans during and after Chapter 13 Bankruptcy with manual underwriting.

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