FHA Compensating Factors – FHA Flexability

FHA (and all government underwriting for that matter) is somewhat different from other, more automated systems of loan approval. On an FHA loan you can actually have a real person look at the loan and apply the golden rule – not just a bunch of meaningless stipulations.  These FHA Compensating Factors, and FHA’s Common Sense Underwriting Approach are often sited as the difference in making the dream of home ownership a reality… because not everybody has a perfect credit history, with a 20 year job, and 2.3 kids!

This is important to understand because as of April 1, 2013 – FHA Underwriting Guidelines got TOUGHER.  There are four things you need to know about this update specifically in the Mortgagee Letter, :

1. These changes are effective for case numbers assigned on or after April 1, 2013.

2. Manual underwriting is required for loans with a credit score less than 620 AND a debt-to-income ratio greater than 43 percent. This is huge.  Most Lenders and Broker Shops will NOT allow manual underwrites.

3. Any compensating factor used to justify approval of a loan that exceeds ratios must also be supported by documentation.  Note that most Underwriters Focus on Payment Shock when they are looking at Ratios and FHA Compensating Factors.

4. Energy Efficient Mortgages do not have these ratio restrictions

With FHA Loans – there’s the ability to use “Common Sense Underwriting” approaches to approving the loan.  The magic of  FHA COMPENSATING FACTORS, is that it provides the Underwriter with some flexibility. Remember that these compensating factors, like adding a Non-Owner Occupying Co-Borrower will NOT offset bad credit.  If you have low credit scores, we need to help you get those up – simply adding someone else to the loan is not going to make you a qualified buyer.

Some of our favorite 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.)

FHA requires that part time employment have a history of at least 12 months. Therefore if you have a  part time job with 8 months of history (for instance) we could not use those in the debt ratios – but we could use that income as an offsetting factor for higher ratios.  Rent from potential roommates, which would be logical income even with a lease agreement, is rarely considered in our experience.  8o(

If you have questions about purchasing a home in the Raleigh Metro area or want to know more about FHA Underwriting Guidelines in NC-, and get info on the BEST mortgage rates Available?  Call Steve and Eleanor Thorne 919 649 5058 – find us on Facebook – add us to your Circles on Google + / we want to connect and find out how the housing market looks in YOUR corner of NC!