At the very end of the USDA RD Home Loan Underwriting Guidelines there’s a section that’s titled “Compensating Factors.” This brief section is for the situation where a borrower is just outside the guidelines to qualify for a USDA Home Loan, meaning someone with housing and debt ratios higher than 29/41.
We’ve seen folks who have income we can’t count – maybe they’ve only worked at a part time job for a year, or they receive bonus checks, but haven’t been paid for their bonus this year, or they are eligible for a raise in 90 days… folks who needed us to look at their situation a little differently. In those “common sense” mortgage underwriting scenarios, USDA has this to say about Compensating Factors:
Debt ratio waivers may be requested for loans with ratios exceeding program guidelines of 29/41 when compensating factors are present in the file. Applicants with credit scores of 660 and higher do not require additional compensating factors to be identified for debt ratio waiver requests. If co-applicants have a credit score of 659 or below, additional compensating factors should be documented to further support the ratio waiver request. There is no minimum credit score required to be eligible for a debt ratio waiver request.
At this point it’s best to understand that just like FHA and the Veteran’s Administration, USDA is not actually “making” mortgage loans. This is an Insurance that the Government is issuing, through USDA, that compensates the Bank / Investor, in the event the loan ends up in foreclosure.
Unlike FHA and VA – USDA RD Underwriters actually look at every USDA home loan file. So the loan is being underwritten twice. First, by the Underwriters at our Bank, and THEN by the Underwriters at USDA.
Compensating factors for higher debt ratios include, but are not limited to, the following:
- Credit score of 660 or higher for any applicant
- Cash reserves after closing
- Potential for increased earnings and career advancement\ a college degree
- Similar housing expenditure
- Conservative use of credit
- Low total obligation ratio. A low total obligation ratio does not compensate for a high total housing ratio (29% of Gross Income); however, when other strong compensating factors are present, a low total obligation ratio should be viewed as a positive mitigating factor.
If there’s additional household compensation not included in the qualifying income, such as part time job income with less than a two year job history, or as we said, potential bonus or commission income from a job – this is considered an off-setting, or compensating factor for making the loan. We can NOT use potential rental income to offset high ratios.
It’s also important to remember that USDA has a very specific way that they look at Student Loans that are in Deferment.
If you are interested in a USDA Home Loan in NC, Call Steve and Eleanor Throne 919 649 5058, we know the guidelines, and we know where the houses that qualify for a USDA, 100% Mortgage loan are located!