The 5 C’s of Mortgage Underwriting – Compensating Factors

Every situation is different and there are an infinite number of things that cannot be planned for, foreseen, or addressed in policies and guidelines. Compensating factors is something of a catch-all category for things the underwriter may consider, usually to offset weakness in one of the other 5 C’s.

Compensating Factors

While they may be used to offset a weakness in one or more of the 5 C’s, excessive strength in another of the 5 C’s may be a compensating factor. An abundance of assets after closing, exceptional credit, or an extremely low Debt-to-Income (DTI) ratio could all be potential compensating factors.

A compensating factor could also be an anticipated change of circumstance in the near future, such as the completion of a degree that is likely to lead to an increase in pay or perhaps the sale of another home that will result in substantial proceeds a short time after the current purchase. The point is that a lot of things can be a compensating factor provided it can be documented or reasonably expected.

The catch is that there is no way to measure just how much compensation the factor will be worth to the underwriter since it is largely a subjective notion. The larger the impact, the more reliable its occurrence, and the more relative to the weakness it is compensating for, the better the chance that it will affect the overall decision, but there are no guarantees.

A final note of clarification with regard to compensating factors: they cannot be used in all circumstances. Some rules are hard rules. For example, if a loan program has a minimum credit score requirement, a very low DTI or any other potential compensating factor will hold no sway even if your score is only a couple points below the minimum. Compensating factors are only relevant when the issue they are compensating for allows flexibility and then only to overcome very slight deficiencies.

As always, I provide this information to help answer any questions you may have and help you understand the process, but the best way to get information about your unique situation is to contact me. I am available at your convenience to help you achieve your goals.

Look for the companion articles to this one on my blog:

The 5 C’s of Mortgage Underwriting – Capacity

The 5 C’s of Mortgage Underwriting – Credit

The 5 C’s of Mortgage Underwriting – Collateral

The 5 C’s of Mortgage Underwriting – Capital