“Compensating Factors” For USDA Home Loan Approval

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, the USDA Home Loan program allows us to use Compensating Factors on a limited basis.

USDA Home Loan Debt Ratio Waivers will be considered when the borrower has a middle credit score of 660 or higher, and the co-borrower has a credit score of at least 620.  In those cases, the Bank may request a Debt Ratio Waiver for loans with ratios exceeding program guidelines of 29/41.  To be eligible for a waiver we need to prove that the borrower will not experience any payment shock, and that they have other compensating factors, as well.

Applicants with credit scores of 680 and higher do not require additional compensating factors to be identified for debt ratio waiver requests – as long as their housing ratios are below 32% and their TOTAL debt ratio is below 45%.

If borrowers have credit scores of 679 or below, additional compensating factors will need to be documented for the USDA Home Loan Underwriters.  If the compensating factor, for instance, is that the borrower recently graduated from college, we will need transcripts, or a copy of the actual diploma.  My point being that these cases must be well documented.

A recent change in the GUS Automated Approval System also makes having some cash available after closing, and a very low payment shock important factors in receiving the USDA Loan Debt Ratio Waivers.

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 single USDA home loan file.  So the loan is being underwritten more than one time.  First, by the Automated Underwriting system (GUS), then by the Underwriters at our Bank, and THEN by the Underwriters at USDA… if you are receiving a Mortgage Tax Credit from NCHFA, then you have yet another underwriter looking for at the loan!

If you are one of the borrowers who needs compensating factors to buy your dream home – please keep that process in mind.  We could be asking you for more documentation at every step – because each person, or model that looks at your file, might have a different set of “compensating” factors they want!

Compensating factors for higher USDA Home Loan debt ratios include, but are not limited to, the following:

• Credit score of 660 or higher for the borrower and at a minimum a credit score of 620 for the co-borrower
• Cash reserves after closing equaling at least three months of PITI.  This idea of having a couple of months of money in the bank, after closing, without it coming from a GIFT is one of the more important changes for 2014 that we are seeing to the Automated Approvals.
• Potential for increased earnings and career advancement\ a college degree
• A new housing payment that is similar to what you’ve been paying for the past 12 months.  Payment shock is not good… in fact this is one of the biggest areas that the “automated Underwriting System ” is looking at.
• Conservative use of credit, with low balances and few outstanding accounts.
• 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 can be a great way to get a “YES!” from the USDA Underwriter!

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 have more questions about USDA Compensating Factors for higher ratios, or 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, no down payment loan are located!