What are FHA compensating factors?
(FHA compensating factors are the stronger elements of a credit application that it offsets something weaker in the application) but it’s more complicated than that.
Different FHA Lenders manage the consideration of compensating factors in different ways.
FHA’s written guidelines outline specific examples of what FHA compensating factors may be used in consideration:
• The FHA mortgage applicant has demonstrated an ability to accumulate savings and a conservative attitude toward the use of credit.
• The FHA mortgage applicant has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expense for the new mortgage over the past 12-24 months.
• The FHA mortgage applicant has demonstrated an ability to accumulate savings and a conservative attitude toward the use of credit.
• Previous credit history shows that the FHA mortgage applicant has the ability to devote a greater portion of income to housing expenses.
• The FHA mortgage applicant receives documented compensation or income not reflected in effective income, but directly affecting the ability to pay the mortgage, including food stamps and similar public benefits.
• There is only a minimal increase in the FHA mortgage applicant’s housing expense.
• The FHA mortgage applicant has substantial documented cash reserves (at least three months’ worth) after closing. In determining if an asset can be included as cash reserves or cash to close, the lender must judge whether or not the asset is liquid or readily convertible to cash and can be done so absent retirement or job termination.
• Funds borrowed against these accounts may be used for loan closing, but are not to be considered as cash reserves. “Assets” such as equity in other properties and the proceeds from a cash-out refinance are not to be considered as cash reserves. Similarly, funds from gifts from any source are not to be included as cash reserves.
• The FHA mortgage applicant has substantial non-taxable income (if no adjustment was made previously in the debt to income ratio computations).
• The FHA mortgage applicant has a potential for increased earnings, as indicated by job training or education in the FHA mortgage applicant’s profession.
• The home is being purchased as a result of relocation of the primary wage-earner, and the secondary wage-earner has an established history of employment, is expected to return to work, and reasonable prospects exist for securing employment in a similar occupation in the new area. The underwriter must document the availability of such possible employment.
