NO........OR HAVE 



Compensating factors are best described as that little extra the can make a difference between a loan being approved or denied. They are not absolutes and may be interpreted differently by different underwrites and how much they may weight them in their overall decision making process. 

At face value, the phrase compensating factor means to have an element added to a credit application that is so strong that it offsets something weaker in the application.

Different mortgage types manage the consideration of compensating factors in different ways.  For instance, conventional loans backed by Fannie Mae and Freddie Mac typically evaluate them using an Automated Underwriting System (a software system that determines a borrower’s loan eligibility based on a predetermined set of financial criteria and is subsequently reviewed by a human).  FHA, USDA and VA mortgages are also evaluated this way but are underwritten manually too.  Through all these models, the principles of Compensating Factors remain the same. 

Automated and Manual FHA Underwriting Explained

In the mortgage industry, lenders will typically advertise to home buyers/borrowers that they use manual underwriting, use “common sense” underwriting, or accept files that “just make sense”. While a number of these are nothing more than just marketing gimmicks, potential borrowers need to understand the advantages of manual underwriting. Because of technology, when an FHA loan is submitted electronically, the approval/denial response can be instantaneous. This immediate automated underwriting saves time and reduces processing loads, but it can also be a disadvantage to applicants.  

With manual underwriting, human beings evaluate the file instead computers. As a result, if a file isn’t accepted under the black and white guidelines of automated underwriting, a manual underwriter could make certain exceptions because of specific compensating factors. Fortunately, one of the beauties of an FHA loan is the process of manual underwriting and compensating factors. For potential borrowers and those interested in FHA home loans, understanding how compensating factors work will give you the edge you need if your loan is on the borderline of an approval or denial.

Compensating factors won’t work miracles, but it may just give you the extra boost you need to get approved. With manual underwriting, it is all about painting a picture for the underwriter demonstrating your financial abilities. Especially in this tight credit market, if you find yourself faltering in one area, you’d better brush up on a few of these compensating factors. 


When a borrower applies for an FHA home loan, he or she may not fit the “ideal applicant” standard in terms of credit history, credit rating, loan repayment patterns, employment, etc. Sometimes the lender feels that an applicant may be a good credit risk in spite of these things, but needs something to justify approving the loan. Compensating factors can help the lender to do that.

The FHA loan rules found in HUD 4155.1 defines “compensating factors” as things which are used, “to justify approval of mortgage loans with ratios that exceed benchmark guidelines must be recorded on the Underwriter Comments section of Form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary. Any compensating factor used to justify mortgage approval must also be supported by documentation.”


FHA guidelines outline specific examples of compensating factors that may be taken into consideration:

  • The borrower 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 borrower makes a large down payment (ten percent or more) toward the purchase of the property.
  • The borrower has demonstrated an ability to accumulate savings and a conservative attitude toward the use of credit.
  • Previous credit history shows that the borrower has the ability to devote a greater portion of income to housing expenses.
  • The borrower 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 borrower’s housing expense.
  • The borrower 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 borrower has substantial non-taxable income (if no adjustment was made previously in the debt to income ratio computations).
  • The borrower has a potential for increased earnings, as indicated by job training or education in the borrower’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.

The top 5 BEST FHA Compensating Factors 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 or 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.)


​A non-occupant co-borrower can make the difference and help to overcome many of the items that would normally get your mortgage application denied. A non-occupant co-borrower is someone who is willing to be on your mortgage application but who will not be living with you in the house. Generally this co-borrower is a family member who has better credit, a good income, a low debt ratio, and savings. This extra addition to your application can literally take away many of the negative or weak items on your application and make them a strength.

Talk to your parents, to your brother or sister, ask them for their help, later down the road we can refinance them off your mortgage when you have gained the ability to do it on your own. By the way, you can have more than 2 people on a mortgage, my record is 5 family members on the mortgage and 3 were non-occupant co-borrowers.


Not all lenders will manually underwrite a mortgage application and not all mortgage loan officers understand the process required to take you from a NO to a YES or compensating factors for that matter. If you have been denied already or if you have been told your credit is not good enough, or if you are simply not sure contact me directly I will help you.

I am a mortgage lender that understands because I do this every day PLUS I was once an FHA Underwriter!


You May be able to get approved without compensating factors! CLICK HERE to learn how to get approved with less than perfect credit and FHA.

Hi, I am Bob Rutledge with New American Funding a progressive and customer oriented Mortgage Company. I have been a Mortgage Loan Officer for over 2 Decades, I have closed 1000s of mortgage, I have experience as a Mortgage Underwriter too.  I specialize in First Time Home Buyer Programs, Renovation and Construction Mortgages, and knowing the best mortgage options, programs and guidelines to provide the best to my clients.  I concentrate on making more options available to home buyers! When we work together you will find that I answer all questions, sometimes before they are asked. I prefer to be available to you as much as my family and life will allow, I am accessible to you via my cell, text, or email, or you can come and visit at my office. You will never wonder if I left you. 




Bob Rutledge Mortgage

Loan Officer NMLS#: 297044

New American Funding 12321 Olive Blvd, ste 150
St. Louis, MO 63141