Compensating Factors and FHA

I was at a seminar today that reminded me of one of my favorite things about the FHA Mortgage Program… Over the last few months mortgage products have been deleted on a daily basis – but FHA is getting new features and really “beefing up” their presence!  Today, FHA loans are the “Loans of Choice” for most first time home buyers!

 There are supposed to be “4 C’s” that are required to get a mortgage loan.  They include:

• Cash:  How much can you put into the property, how much have you saved?  OR can you qualify for a Government Grant to cover your down-payment, or use one of the no money down programs like USDA Home Loans or Veteran Home Loans.
• Credit:  Do you have a credit history?  If not, FHA will accept some non-traditional credit.  Do you have a spotless credit history?  If you have Bankruptcy, a Short Sale or Foreclosure in your past – FHA might still be willing to back your loan!
• Collateral:  Do you have a property FHA wants to insure?
• Character:  Have you moved 8 times in the last 3 years?  Do you have a history of employment in your chosen field?  Do you have a ton of collections?  These are all part of the “Character” an underwriter is looking at.

In some cases Conventional Loans will make “exceptions,” but in today’s environment – that’s a rare sight.

With FHA Mortgage Guidelines, though – there’s a 5th point of consideration.  COMPENSATING FACTORS.  Those factors could be what helps us show the underwriter why this loan makes sense!  Some of our favorites 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 house payments 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 pay-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.)  Also – if the borrower has a part-time job with 8 months of history (for instance) and you could not use those in the debt ratios, they might be considered as an offsetting factor.  Rent from an additional bedroom, which would be logical, is rarely considered in our experience.  8-(

If you or someone you know is considering purchasing a home in Raleigh or Cary – please call Steve and Eleanor Thorne  Government Loan Experts in Raleigh, NC  919-649-5058.  We offer the areas best government mortgage rates, and we understand the FHA Underwriting Guidelines!