Ever wondered why your mortgage loan application was denied by one lender but approved by another? While it is true that mortgage lenders have access to different loan products, more often than not this is not the reason why loan applications get denied. Some mortgage lenders are more lenient with their ability to qualify borrowers through the use of tools such as compensating factors.
Compensating factors are positive aspects of a borrower’s overall financial picture. These can be used to offset certain other ‘weaknesses’ of their loan application. Because life happens almost all borrowers have some sort of imperfection with their financial profile on paper. Compensating factors essentially allow lenders to overlook certain negative traits that might otherwise prevent you from qualifying.
Below is an example of some of the better compensating loan factors:
- Stable job history – Being in the same industry or employed by the same company for a significant period of time
- Excess savings/reserves – Having extra funds not used in the transaction to cover the mortgage payment if needed
- Exceptional credit – The higher the credit score the better the chances are the lender can overlook some other factors
- Large down payment (or low loan-to-value) – This allows the lender to be more confident the borrower will not default because they will not want to lose their large equity position
- Low debt to income ratio (or high income) – This provides evidence that the borrower is buying a home that is well within their budget
If you have any further questions, please give us a call at (760) 930-0569 and we will be happy to answer any questions about the mortgage loan process.