Compensating Factors Considered By Lenders On Manual Underwriting

Gustan Cho Associates

This BLOG On Compensating Factors Considered By Lenders On Manual Underwriting Was UPDATED On May 30th, 2019

Compensating Factors
Gustan Cho Associates

Compensating factors are positive factors which adds strength to borrowers:

  • Larger down payments, cash reserves, rental verification, low debt to income ratios, and job longevity are examples of compensating factors
  • Comp factors are extremely important for borrowers who need FHA or VA manual underwriting who have the following:
    • lower credit scores
    • recent late payment
    • high debt to income ratios
    • 100% gifted funds and no funds of their own for the down payment
    • prior bankruptcy
    • foreclosure
    • deed in lieu of foreclosure
    • short sale
    • those mortgage applicants who cannot get an approve eligible per DU FINDINGS and need a manual underwrite

Who Needs Compensating Factors?

Compensating Factors are very important on all FHA and VA manual underwriting borrowers.

Mortgage Underwriters will look for comp factors by the following types of borrowers:

  • 580 credit score
  • very little to no credit tradelines
  • late payments after housing event or bankruptcy
  • no verification of rent
  • multiple job changes in the past 2 years
  • unpaid collection accounts
  • no reserves or down payment
  • down payment to be gifted
  • multiple late payment history
  • Borrowers with the above types of credit history are borrowers who will most likely need compensating factors.

What Is A Good Compensating Factor?

Gustan Cho Associates
Gustan Cho Associates

The layers of risk a mortgage lender is faced with needs to be offset by one or many comp factors for borrowers with weak credit and financial profile.

  • Comp factors are viewed as positive strength on borrowers
  • Comp Factors offsets the risk factors lender faces
  • It also helps demonstrate borrowers willingness and ability to pay the mortgage loan
  • All mortgage loans have a degree of risk factors
  • Using the many risk factors weak credit profile borrowers faces and adding the compensating factors the applicant has can greatly increase chances of a mortgage loan approval

Examples Of Positive Compensation Factors

High residual income is one of the best compensating factors for mortgage underwriters.

  • A residual household residual income of $1,200 for a single person household
  • For a two-plus person household, a $2,500 residual income is considered a favorable compensating factor

Low debt to income ratios is considered a comp factor.

  • What is a lower debt to income ratio to be considered a positive comp factor?
  • A debt to income ratio that is lower than 5% or more than the mortgage loan programs maximum requirement is considered a positive compensating factor

A higher credit score and positive credit history with longevity are considered a positive compensating factor in the views of a mortgage lender.

  • Higher credit scores that are 720 or higher are comp factors
  • Various types of credit tradelines with longevity is considered positive and good compensating factors

Reserve Requirements On Manual Requirements

Reserves, cash in the bank, is a strong compensating factor.

  • 3 to 6 months of reserves which include principal, interest, taxes, and homeowners insurance are considered reserves
  • A history of the saving pattern is a very strong compensating factor
    • Investment accounts
    • CD’s
    • mutual fund investment accounts
  • Borrowers with the above accounts prove financial responsibility and the eagerness of borrowers to save

Verification Of Rent

Rental verification is a strong compensating factor.

  • Rental verification is only valid if the mortgage loan applicant can provide 12 months canceled checks and/or bank statements paid to the landlord
  • For those renters who are renting from a registered property management company, a VOR FORM provided by the lender and completed and signed by the property manager is a valid rental verification and can be used in lieu of canceled checks
  • Low payment shock is a strong compensating factor
  • For example, if the renter is currently paying $1,000 in rent and the proposed new housing payment that includes principal, interest, taxes, and insurance is $1,050
  • This is a strong good comp factor due to low payment shock
  • Up to 5% or less payment shock is a strong comp factor

Down Payment On Home Purchase

Gustan Cho Associates

Gustan Cho Associates

Larger down payment than the minimum required is considered a strong compensating factor.

  • For example, if the minimum down payment required is 3.5% on a home purchase
    • The home buyer wants to put 10% down payment
    • This is considered a strong comp factor
    • Less risk on the mortgage lender because the home buyer has more skin in the game
  • FHA loan programs require a minimum of 3.5% down payment
  • 100% of the down payment can be gifted by a family member and/or relative of home buyers
  • If borrowers have his or her own funds for the down payment instead of getting 100% funds gifted for the down payment, it is considered a stronger borrower
  • It adds more weight in the financial and credit strength of the borrower
  • Employment history and a history of income increases are strong comp factors 
  • Also, verified income but income that cannot be used is considered strong compensating factors
  • For example, to be able to use overtime or part-time income, borrowers need a 24-month history
  • If borrowers only have 18 months of overtime or part-time income, it cannot be used as income since it is short of the 24-month requirement
  • However, the overtime and part-time income can be verified so this verified income is a comp factor even though it cannot be used for income qualification purposes

Risk Factors Viewed By Mortgage Lenders

There are several factors that mortgage lenders view as risk factors.  Mortgage lenders view limited reserves as high-risk factors.  Smaller down payments or minimum down payments are considered as risk factors versus larger down payments by home buyers.  No rental verification and weak credit payment history are also considered risk factors by lenders.  Limited credit and credit history are considered risk factors.  High debt to income ratios are definitely risk factors and so are gifted funds for the down payment.

For more information on this blog or other mortgage topics, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at

  1. Demetrice Morrison says

    I am looking for a mortgage licensed broker here in Miami for a FHA loan for a Ch 13 discharged bankruptcy effective 7/28/20. Please email me any contacts here in Miami, Florida Thank you.. Demetrice

    1. Gustan Cho, NMLS 873293 says

      We are lenders licensed in Florida. Please call us at 262-716-8151 or text us for a faster response. Our email address is Looking forward to working with you and your family.

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