Compensating factors are factors that give your FHA home loan request that extra push needed for approval.
For the home buyer the FHA program can simplify the purchase of a home, making financing easier and less expensive than a conventional mortgage loan product. Some highlights of the FHA loan program include:
Minimal Down Payment and Closing costs.
Down payment less than 3% of Sales Price Gifts are allowed Seller can credit up to 6% of sales price towards closing and prepaid costs. 100% Financing available No reserves required. FHA regulated closing costs.
Easier Credit Qualifying Guidelines such as:
No minimum FICO score or credit score requirements. FHA will allow a home purchase 1 year after a Bankruptcy. FHA will allow a home purchase2 years after a Foreclosure.
On FHA home loans where the ratio exceeds FHA guidelines (other that Approved/Eligible findings), the underwriter must list on the MCAW the compensating factors that lead to the approval of the FHA home loan. Any compensating factor used to justify mortgage approval must be supported by documentation. The following are a list of eligible factors per FHA home loan approvals:
A. 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.
B. The borrower makes a large down payment (ten percent or more toward the purchase of the property.
C. The borrower has demonstrated an ability to accumulate savings and a conservative attitude toward the use of credit.
D. Previous credit history shows that the borrower has the ability to devote a greater portion of income to housing expenses.
E. 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.
F. There is only a minimal increase in the borrower(s)housing expense.
G. The borrower has substantial documented cash reserves (at least three months= worth or payments) 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.
H. The borrower has substantial nontaxable income (if no adjustment was made previously in the ratio computations).
I. The borrower has a potential for increased earnings, as indicated by job training or education in the borrower=s profession.
J. 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.