What is Considered a Compensating Factor for VA Mortgage Loans?

Many borrowers heard of the term VA compensating factors for VA when they started looking for a lender to get qualified and pre-approved for a VA mortgage loan. VA Compensating Factors are positive strong factors mortgage borrowers have. Compensating Factor comes into play on manual underwriting borrowers who have a higher debt to income ratio.
FHA and VA loans are the only two mortgage loan programs that allow compensating factors.
If a borrower gets an approval/eligible per automated underwriting system (AUS), a mortgage company like Capital Lending Network, Inc. does not care about compensating factors.
Capital Lending Network, Inc. has no lender overlays on government and conventional loans.
We just go off the agency mortgage guidelines of HUD, VA, USDA, Fannie Mae, Freddie Mac and have no additional lender overlays. What this means is CLN Mortgage Group will just go off the automated underwriting system findings and does not have any other higher lending requirements above and beyond the minimum agency guidelines. Lender overlays are additional lending requirements that are above and beyond the minimum agency lending guidelines set by individual mortgage lenders.

Compensating Factors Are Not Required On AUS Approved Borrowers

AUS Approved Borrowers

Capital Lending Network, Inc. will just go off the automated findings of the AUS.

As long as the borrower gets approve/eligible per AUS, CLN Mortgage Group will just go off the findings. As long as the borrower can clear all the conditions on the AUS, the loan will not just close but will close on time at Capital Lending Network, Inc.  Mortgage underwriters will underwrite AUS approved files. However, mortgage underwriters will just make sure the borrower meets all agency guidelines and can clear all the conditions of the AUS. There are not many mortgage underwriter discretion on AUS approved files for lenders with no lender overlays. However, most mortgage companies have lender overlays on government and conventional loans. Depending on the particular lender, the lender can give a lot of power to underwriters where they have a lot of underwriter discretion. Mortgage underwriters who work at mortgage companies with a lot of lender overlays can expect compensating factors on borrowers with less than perfect credit, lower credit scores, high debt to income ratio, and larger outstanding collections and/or charged-off accounts. This holds true even though the borrower has an approve/eligible per automated underwriting system (AUS).

Importance Of VA Compensating Factors in Manual Underwriting

There are only two home mortgage loan programs that allow manual underwriting.

VA and FHA loans. Compensating Factors are positive factors borrowers have that lessens the layered risks of the lender on manual underwriting. Usually with an approve/eligible per AUS, compensating factors are not required for lenders who do not have any lender overlays. However, many lenders have lender overlays on FHA, VA, USDA, and Conventional loans. Lenders with lender overlays can give their mortgage underwriters power where they have a lot of power and discretion on borrower’s files.
Lenders can give underwriters power to overrule the AUS FINDINGS and issue a mortgage loan denial if the underwriter sees potential risks that are at a higher tier than the lender is willing to take.
Mortgage underwriters have a lot of power and discretion on manual underwrites.
Compensating factors play a big role in the underwriter’s discretion for borrowers with high debt to income ratio on manual underwrites. HUD and the VA have issued general manual underwriting guidelines. VA and HUD manual underwriting guidelines are similar.

What Is Manual Underwriting

manual Underwriting

Manual underwriting is when the borrower cannot get an approve/eligible per automated underwriting system and get a refer/eligible.

Refer/eligible means the automated underwriting system finds the borrower eligible for the loan program that was submitted through DU and/or LP AUS. However, the AUS cannot determine whether or not the borrower can get an automated approval. Therefore, the borrower may get mortgage approval via manual underwriting. There is a lot more scrutiny on manual underwriting versus automated underwriting systems. Mortgage underwriters have a lot of discretion on manual underwriting.
For example, the maximum debt to income ratio on manual underwriting on both FHA and VA loans per manual underwriting agency guidelines is 40% front end and 50% back end with two va compensating factors. However, mortgage underwriters can exceed the recommended front end and back end DTI Agency Guidelines if the underwriter sees multiple strong va compensating factors.

Key To Getting A Mortgage Approval With VA Vompensating Factors

The key to getting loan approval on a manual underwrite is for the borrower to have timely payments in the past 24 months.

One or two late payments in the past 24 months are frowned upon by underwriters. However, one or two late payments in the past 24 months is not always a deal killer on manual underwrites. VA loans are more forgiving than FHA loans with regards to late payments in the past 24 months on manual underwrites. The mortgage underwriter will look at the number of compensating factors when trying to override late payments in the past 24 months. Underwriting exceptions are very possible on manual underwriting on borrowers who has multiple strong compensating factors. Late payments after bankruptcy, foreclosure, deed in lieu of foreclosure, short-sale are considered a kiss of death. Most lenders will not approve anyone who has late payments after bankruptcy and/or a housing event. This holds true even though the borrower has an approve/eligible per automated underwriting system.

The team at Capital Lending Network, Inc. has helped countless clients with late payments after bankruptcy and/or foreclosure.

What Are Strong VA Compensating Factors Considered By Mortgage Underwriters

Mortgage Underwriters

Compensating factors are positive attributes mortgage loan applicant has that offsets the lender’s risk factors on the particular borrower. Not all positive factors can be taken as va compensating factors by lenders. Both FHA and VA loans have the same agency guidelines when it comes to manual underwriting and the positive factors that can be used as compensating factors. Both FHA and VA consider the following examples to be used as compensating factors.

Here is the list of acceptable compensating factors:

  • Low payment shock of 5% or less from what the borrower was paying for rent and the proposed new housing payment.
  • Verification of Rent (VOR) is only valid if the borrower can provide 12 months of canceled rental checks paid to the landlord or 12 months of bank statements reflecting on-time rental payments.
  • The landlord needs to complete, date, and sign a verification of rent form provided by the lender.
  • If the borrower rented from a registered property management company, proof of payment such as 12 months of canceled checks and/or bank statements is not required.
  • The property management manager has to complete, date, and sign a verification of rent form provided by the lender.
  • A down payment of 10% or higher is a strong compensating factor.
  • It shows the borrower has skin on the game and a larger down payment means more equity in the subject property thus lessening the risk for the lender.
  • The borrower’s ability and habit of saving and careful use of credit over the past 24 months will be carefully analyzed and evaluated.
  • Borrowers who have the ability to save and has a low utilization ratio on their revolving accounts for the past 24 months is considered to have compensating factors.
  • Previous credit history shows the mortgage borrower has the ability to devote a greater portion of income to housing expenses.
  • The borrower has a second job and/or source of income that has been seasoned for at least 12 months but yet not 24 months that is not used as income on the loan application is considered a strong compensating factor.
  • Borrowers who have three or more months of cash reserves after closing is considered a compensating factor.
  • Borrowers with longevity on the job, with a history of consistent promotions and wage-earning increases due to job training, certifications, and/or advanced degrees are considered to have employment and income stability.
  • These type of borrowers with job longevity and consistent promotion in their professional line of work is considered a strong compensating factor.
  • The borrower has a non-borrowing spouse not on the loan but has a full-time job.
  • The spouse has over a two-year history of making full-time income but the spouse’s income is not used as qualified income is considered a strong compensating factor.

There are dozens of other positive factors that a mortgage underwriter can be as compensating factors. Again, mortgage underwriters have a lot of power and discretion on manual underwriting. Compensating factors play an important role for borrowers with higher debt to income ratio on manual underwriting.

VA Compensating Factors Guidelines On Debt To Income Ratio 

There are manual underwriting recommended agency guidelines on FHA and VA loans on debt to income ratio versus the number of va compensating factors.

Here is how it works:

  • Borrowers with zero va compensating factor can have a maximum front-end debt to income ratio of 31% and back end DTI cap of 43% DTI.
  • Borrowers with one va compensating factor can have a maximum front-end DTI of 37% and back end DTI of 47%.
  • Borrowers with two va compensating factors can have a maximum front-end DTI of 40% and back end DTI of 50%.

Mortgage underwriters can surpass the above manual underwriting debt to income ratio guidelines if the underwriter uses her discretion and sees strong multiple va compensating factors.


Gustan Cho is a senior mortgage expert and National Managing Director, providing direct-to-consumer advice at NEXA Mortgage LLC. We are a mortgage brokers licensed in multiple states. We are experts in FHA Loans, VA Loans, USDA Loans, Conventional Loans, FHA 203k Loans, Reverse Mortgages Jumbo Mortgages, Non-QM mortgages, Bank Statement Mortgage Loans for self employed borrowers, and alternative financing.

7 Comments

I’m in Texas. Call early if must. Title company said they would close on Saturday if need be. Please get this pushed to the top. My son is deploying and I am a key witness in a grand jury trial with the guy who assaulted me. I can’t close after Saturday. I’m not playing this game one more day. I explained to myself. This woman didn’t file until august 27 to be unassociated with my home and as I stated and she stated it was supposed to be February. Syed has the most horrific communication skills with Dora I have ever seen. I got a hold of Virginia, tom, and Latoya back in early October because of the lack of professionalism and communication by Dora and Syed. Alex Carlucci, Jammi Cash, Gustan Cho Associates, and Capital Lending Network, Inc. are the only reason I’m not going to news and my lawyer hasn’t filed a complaint. I appreciate you very much. Since July 27th? Too long and it’s Syed’s fault. I have been dealing with Gustan Cho Associates for the past ten years and Gustan Cho and his team have been nothing but professional and the best of the best in the mortgage industry. I would not use anyone else but Gustan Cho Associates and Capital Lending Network, Inc. I do realize there was a problem with the appraiser but can you please have Mr. Gustan Cho, Alex Carlucci, or Mike Richardson or some other higher-level executive at Gustan Cho Associates or Capital Lending Network, Inc. put some pressure on this file so we can get this close. I appreciate it.

Gina,

My apologies and no need to worry. I spoke with my director of mortgage underwriting Kathleen Steffek and she will issue a clear to close with appraisal conditions in about an hour. I will take over this file and Alex Carlucci, Mike Richardson, Tammy Trainor, and Jammi Cash will assist. Your mortgage processors will be Dawn Sabathne and Fiona McCue. No problem and no need to worry. I will send you a separate email explaining our plan towards next Wednesday’s closing that I had our closing department set up.

Jennifer Anne Burking

I’m currently in a chapter 13. My 12 months will be in March. Trying to get a head start on the home buying process. Can I please have someone from Capital Lending Network, Inc. contact me at 619-832-9845. My name is Jennifer Anne Burking and I am in Southern California.

Jennifer, I will have my Associate Mike Richardson call you shortly. Mike Richardson is my partner and is based in Redding California’s home office of Capital Lending Network, Inc. Looking forward to working with you and your family.

First time home buyer retired military 100 percent disabled wanting to use my VA loan to buy a home in Gladstone Missouri

Wondering what the down payment requirements would be if I had a previous Chapter 7 discharged in May, and also wondering if you accept gift funds. Thanks!

Myron, good morning and thank you for posting on Capital Lending Network, Inc. Non-QM mortgages one day out of bankruptcy and/or foreclosure requires a 30% down payment. As the bankruptcy and/or housing event ages, the down payment requirement lessens.

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