Compensating Factors and FHA

Mortgage and Lending with Equity Resources NMLS 67179 Licensed in NC

I was at a seminar today that reminded me of one of my favorite things about FHA...

the 5th C of Credit!see  We've all heard about the other 4 C's.

  • Cash:  How much can you put into the property, how much have you saved?
  • Credit:  Do you have a credit history?  If not, FHA will accept some non-traditional credit.  Do you have a spotless credit history?  If not, FHA might still be willing to insure your loan!
  • Collateral:  Do you have a property FHA wants to insure?
  • Character:  Have you moved 8 times in the last 3 years?  Do you have a history of employment in your chosen field?  Do you have a ton of collections?  These are all part of the "Character" an underwriter is looking at.

In some cases Conventional Loans will make "exceptions," but in today's environment - that's a rare site.

With FHA though - there's a 5th point of consideration.  COMPENSATING FACTORS.  Those factors could be what weighs the loan in your favor!  Some of our favorites include:

  1. Borrower has already demonstrated they can afford this house payment.  No payment shock, or at least a payment shock of less than 10% is a great offsetting factor for slightly higher debt ratios swingor a job history that is not as solid as we'd like to see.

2.     Borrower can afford to put 10% down.  I'm not talking about a gift (which FHA allows) I'm talking about a good old fashioned asset, and a behavior to save.

3.     Conservative use of credit.  Does the borrower have a 3 year old car that's paid off because they don't like having payments?  Do they pay their credit cards off every month? 

4.     The Borrower will have at least 3 months of PITI in reserves after closing on their Primary Residence.  FHA does not require reserves to insure a primary residence (unlike Conventional loans) and this additional "padding" can be a great offsetting factor.

5.     Borrower has potential salary increases that you are not counting in your Debt ratios... if the employer indicates that the borrower has a review and potential raise coming up in the next few months this is a great off-setting (or Compensating) factor.  (It's difficult to get an employer to put that in writing for obvious reasons.)  Also - if the borrower has a part time job with 8 months of history (for instance) and you could not use those in the debt ratios, they might be considered as an offsetting factor.  Rent from an additional bedroom, which would be logical, is rarely considered in our experience.  8-(

If you or someone you know is considering purchasing a home in Raleigh or Cary - please call Steve and Eleanor Thorne  Government Loan Experts in Raleigh, NC  919-649-5058.  We offer the areas best government mortgage rates!


Comments (3)

Bonnie & Terry Westbrook
Westbrook Realty - Ada, MI
Grand Rapids MI Real Estate

Darn, Eleanor, I was sorta counting on that rent from the extra bedroom, would Ebay profits be a compensating factor?

Jun 10, 2008 01:05 PM
Justin Williams
Independent - Virginia Beach, VA
Loan Officer

Its all about telling the story of the borrower, whats the overall big picture and the 5c's should demonstrate that.  Great post.

Jun 10, 2008 01:07 PM
Joe Adams
Major Mortgage USA/Branch Manager - Montrose, CO

I love the 5th C...... and Mortgage pros like you know it when you need it.....

Jun 10, 2008 01:43 PM