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FHA Compensating Factors

This is what makes the mortgage business seem so inconsistent. You have read the basic guidelines and normally they are followed to the letter, but all customer portfolios are different and nothing is so black and white it is set in concrete.

If you have three very strong factors they can compensate for one area where you may fall outside the guidelines.

One very good example of this is Debt to Income Ratios. Most loans today are sent through automated underwriting programs that grade your application and approve or don't approve your loan.  I remember a couple that had a 60% back ratio and were approved for a $200,000 Fannie Mae Loan.  The Fannie Mae back ratio maximum is 36%.  Their compensating factors were: each had 18 years on the job, each had retirement accounts over $150,000, and both had credit scores over 750. Without those three factors they would have been turned down for the loan.

The rule is there should be three strong factors to compensate for one issue that falls out of the guidelines.  Mortgagee Letter 97-26 explains this further.

So as you can see, nothing is really set in concrete.  Compensating factors can be any of the following provided they are very strong.

  • Debt to Income Ratios
  • Credit Score or Credit History
  • Equity or Down Payment
  • Assets
  • Time on the job

You can see why it is very important that you get an experienced loan officer.

While every situation is unique, most of the time when a mortgage company tells a borrower not to look at an FHA loan, it's because they are not a HUD approved FHA Lender.

Qualifying for a  FHA home mortgage is much easier than the qualification process involved in conventional Freddie/Fannie loan programs or a Sub-Prime loan. The benefits of the FHA mortgage are substantial, with the most important being the security offered to borrowers and the expanded opportunities of homeownership that some home buyers might not otherwise receive. 



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