Not all mortgage loan submissions are the same! When you are submitting a file to underwriting without a Fannie Mae Desktop Underwriter® (DU®) or Freddie Mac Loan Product Advisor℠ (LPA℠) loan approval, compensating factors may make a difference in getting borrowers into a home. This may also include loans submitted as a manual underwrite and loans your company is willing to keep in portfolio.
What are Compensating Factors?
When a borrower shows strong qualifications across the board, that feels like a much more straightforward mortgage loan approval process. But when some areas of a borrower’s financial profile are not as strong as others, that is when compensating factors come into play. A compensating factor is something that is used as a positive to offset a negative in the borrower’s credit qualifications.
For MI submissions, borrowers do need to meet some minimum underwriting requirements. However, there are compensating factors that may be considered to offset the risk of another item not meeting the requirements. The goal is to show and ensure that your borrower has the ability to repay their mortgage.
Compensating Factors to Consider
The following list of compensating factors is not exhaustive. It provides a great overview of some of the elements of a borrower’s profile that lenders and mortgage underwriters consider as they work on a borrower’s loan application.
- Higher than required down-payment – is the borrower able to put down more than the minimum required?
- Low debt to income – the borrower is not overextending themselves.
- Minimal use of consumer debt – minimal use of consumer debt may reflect a person living within their means and being able to afford a higher housing expense to income ratio.
- Minimal increase in housing expense – a borrower that is already paying a similar housing payment and maintaining overall good credit. Verify the most recent 12- month payment history.
- Reserves – verify all the borrower’s funds. Even if the borrower is not using certain accounts, whether it be retirement, checking, stock, mutual funds, etc. for closing, verifying all their assets can be a strong compensating factor.
- Credit score – a higher credit score indicates the borrower considers the timely payment of obligations to be a priority.
- Additional sources of income not being used to qualify – document these to support the compensating factor:
- other borrowers whose income is not being used to qualify,
- other income without a 3-year continuance,
- self-employment income that is not being used in qualifying,
- overtime or bonus income that has less than a 2-year history.
Many elements go into helping your borrowers get into a home. That’s why compensating factors are one of the many tools and considerations that underwriters, lenders, and mortgage professionals alike keep in mind as they work on these loans.
Tips to Help Highlight Compensating Factors
You can never underestimate the impact that adding a human touch can make to the homebuying journey. Taking the time to work with your borrowers to understand the full package and relaying that to their underwriter may just be the difference they need to achieve a successful mortgage loan close.
Cover letters can help – take the time to do them! In this day of machine risk assessment and artificial intelligence, we sometimes forget that there are still underwriting decisions being made by underwriters. If you have a borrower with a less than stellar loan submission, write a cover letter addressing why you think the borrower should be considered for the loan.
Create a letter of explanation from the borrower. Have the borrower explain and address in writing any dings in credit, gaps in employment, other sources of income, action they have taken to improve their situation, etc. The letter should be concise and legible. It can also be typed and signed by the borrower. A strong letter of explanation can make a difference. Please keep in mind that Enact underwriters do have some discretion on manual underwrites.
Want Even More Information?
Your Enact MI team is here to help. Our Regional Underwriting Team is available to assist you Monday-Friday 8am to 8pm ET at 800-444-5664 option 2.
Be sure to make the most of your MI experience. Please explore our many underwriting resources for more information. Because going the extra mile comes easy for us, we also offer a comprehensive suite of training resources to help boost your industry experience.
Source: Jody Hanson is a Regional Underwriter for Enact.
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