2022 Compensating Factors: What Are They?

If you are going through the mortgage process and the topic of Compensating Factors comes up, you might have no clue what your mortgage expert is talking about.  Well in this article we will go over the current 2022 Compensating Factors and how you can use them to ensure that your mortgage gets approved and funded.  There is a common misconception amongst potential borrowers and that is they believe that if they meet a loan program’s minimum requirements as set for Conventional, FHA, VA, or USDA they are guaranteed a loan.  Well this is definitely not the case and individual lenders can decide who they will fund loans for and most lenders will have their own Lender Overlays or additional requirements on top of the loan program in order to determine credit worthiness.  Lenders are under no obligation to make any and every loan as they are looking out for their own risk and how risky individual borrowers will be.

Just because a loan is government insured as seen in FHA loans, no lenders wants to go through a borrower defaulting on a loan so it is in everybody’s best interest to take on as little risk as possible.  FHA monitors all defaulted loans that they insure, and if it is seen that a certain lender has a lot of defaults they could be under scrutiny and even have their HUD funding removed.

Now, in an effort to ensure that borderline borrowers will indeed be able to handle their mortgage obligations, there are Compensating Factors.  Now the 2022 Compensating Factors are positive factors that a borrower uses to strengthen their case and credit worthiness to the lender and allow their credit profile to be approved for a loan.  Underwriters will be looking for 2022 Compensating Factors if there are borrowers that have increased risk due to various reasons.

2022 Compensating Factors: Which Scenarios Needs Them?

If you are curious as to which borrowers will need to show Compensating Factors, the list is as follows and not limited to:

• Borrowers without established credit or credit scores
• Borrowers with low credit scores
• Borrowers who are living with family or are living rent-free who can’t show evidence of rent being paid
• Borrowers who have high amounts of collection accounts on their credit report
•  Borrowers with higher debt to income ratios
• Borrowers with employment gaps or short-term employment or industry experience
• Borrowers dependent on gift funds to facilitate their mortgage closing as they do not have their own funds to use

2022 Compensating Factors: Examples Used

Mortgage lenders have about five compensating factors that they are looking for when it comes to approving and funding a loan.  I will go over each one below for a better understanding on how the 2022 Compensating Factors can help in getting your mortgage approval.

1. Verification of Rent (VOR) and Payment Shock: All mortgage lenders are concerned with payment shock of their potential borrowers.  If you are not familiar with payment shock, it is the calculation of how much your future mortgage payment will be as compared to your current rent payment.  The closer your rent payment is to your actual P.I.T.I (Principal, Interest, Taxes, Insurance) the more comfortable a lender will be and this is where showing at least 12 months of timely rent payments will help your cause in obtaining a mortgage.
2. Reserve Funds: Reserve funds are funds in your possession that are not gifted funds and those that are above and beyond your funds needed to close your loan.  If you are able to show at least 3 months of reserves that can cover your new mortgage payment, this is considered a solid compensating factor and will prove worthiness of the loan.
3. Discretionary Debt: If you can show that the only debt you will have is your new mortgage, this can be seen as a great compensating factor.  If you pay your credit cards off monthly  and don’t have any other monthly debt obligations, you will be in good shape for a loan.
4. Additional Income: If you have other avenues of income that are not disclosed on your mortgage application for qualification processes, that have been received for at least a year is a great compensating factor if these funds will continue to be earned.
5. Residual Income: If there are members of your family who was not used to qualify for the mortgage but are contributing income to the household every month, this is a great compensating factor to give more confidence the mortgage payment will be made every month.

2022 Compensating Factors: Conclusion

As you can see the 2022 Compensating Factors are vital in ensuring your mortgage approval if your credit worthiness is questionable.  The goal is to present the strongest case possible to mortgage underwriters and compensating factors will do exactly that!  Here at Loan Consultants we can help you with the 2022 Compensating Factors and getting you the mortgage you deserve.  Please reach out anytime day or night at 888-900-1020 or email us at contact@loanconsultants.org.