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
- Time on the job
You can see why it is very important that you get an experienced loan
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.