February 7, 2012
The FHA has standards for qualifying for an FHA insured mortgage including income, employment, credit score and other factors. In most cases, borrowers who don’t meet the minimum required credit score or debt-to-income rations can’t qualify for an FHA loan.
But are there exceptions? For example, could a borrower who has a debt-to-income ratio that’s too high still get an FHA loan approved? And why would the FHA approve a loan when the applicant doesn’t meet FHA loan standards?
FHA loans include an option for lenders to review any “compensating factors” the borrower might bring to the bargaining table. For example, one such factor has to do with the borrower’s ability to pay–and a history of being able to pay–even though the debt-to-income ratio might exceed FHA standards.
According to the FHA rules as listed in HUD4155.1 Chapter 4, a compensating factor is considered present when “…The borrower has successfully demonstrated the ability to pay housing expenses greater than or equal to the proposed monthly housing expenses for the new mortgage over the past 12-24 months.”
Another compensating factor is how much money the borrower is willing to use as a down payment. Compensating factors are present when “…The borrower makes a large down payment of 10% or higher toward the purchase of the property.”
Even the presence of additional cash reserves can be used to offset some otherwise negative aspects of an FHA loan application. The FHA compensating factors table says the lender can apply leniency when “…The borrower has demonstrated
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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