Compensating Factors: facts and myths

Consumers are becoming more and more educated these days. Some clients even quote me guidelines. I blame myself. After all I’m the one posting these online. Believe it or not, I love educated clients. It makes my job easier. It also means their reading my posts!

But for those of you savvy borrowers out there, here’s a list of compensating factors for FHA borrowers whose debt-to-income ratios exceed benchmark recommendations.

  • The borrower has successfully demonstrated the ability to pay housing expenses great than or equal to the proposed monthly housing expenses for the new mortgage over the past 12-24 months.
  • The borrower makes a large down payment of 10% or higher toward the purchase of the property.
  • The borrower has demonstrated an ability to accumulate savings and a conservative attitude toward using credit.
  • Previous credit history show that he/she has the ability to devote a greater portion of income to housing expenses.
  • The borrower receives documented compensation or income that is not reflected in effective income, but directly affects his/her ability to pay the mortgage. This type of income includes food stamps, and similar public benefits.
  • There is only a minimal increase in the borrower’s housing expense.
  • The borrower has substantial documented cash reserves (at least three months worth) after closing.
  • Substantial non-taxable income.
  • Potential for increased earnings as indicated by job training or education in his/her profession. Think doctor in residence, not salesperson.
  • The home is being purchased because the primary wage-earner is relocating, and the secondary wage-earner has an established employment history, is expected to return to work, and has reasonable prospects for securing employment in a similar occupation in the new area.

Charles Dailey – Branch Manager, Loan Officer, Certified Military Housing Specialist – CA DOC, MN DOC & WI DFI


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