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Eight Compensating Factors for Mortgage Approval

Have you been looking into purchasing a house, but feel that you should delay due to your credit or income?

Unfortunately, a lot of people put off buying a home because they assume their loan application won’t get them very far. When in reality, you may have a stronger argument than you’re giving yourself credit for. 

Although factors such as credit scores and monthly income are important in your loan application, weakness in those areas doesn’t necessarily mean a direct path to denial. That’s because strong compensating factors may be able to help you through the threshold. 

Are you wondering, “What are compensating factors?” Don’t worry. It’s a common question. To help you better understand your options, we’re going to review examples of compensating factors for mortgage approval. 

1. Exceptional Credit History 

A notably large salary or even savings doesn’t necessarily translate into a decent credit score. There are plenty of people with large salaries who still live well outside of their means, causing them to miss payments and decreasing their credit score. Moreover, the ability for young people to purchase a house isn’t solely dependent on being a beneficiary of generational wealth. 

If a less than stellar income is holding you back from buying a home, take a look at your credit score. Managing an exceptional credit score of 800+ is no small feat. 

A high credit score indicates a responsible person who diligently pays all of their bills on time every time. 

Mortgage lenders may be inclined to approve your loan if you have a high score, especially if you’ve been maintaining that high score for several years. 

[Related: How to Maintain Your Credit Score While Shopping for Mortgage Rates]

2. Low Non-Housing-Related Debt

Managing to stay out of debt can go a long way. While you may not have the optimal down payment or monthly salary, don’t be so quick to throw in the towel.

Typically, mortgage lenders prefer to keep new housing payments at a maximum of 28% of your monthly income. 

However, if you have low or no debt outside of your housing payments, you may get some wiggle room. That’s because without other outstanding debts, a mortgage lender may be willing to approve a loan with payments reaching higher than 28% of monthly income.

[Related: Guide for Renters Curious About Owning in Seattle]

3. Large Down Payment

A sizable down payment may get you the keys to your new house quickly. If you can put down at least 20% of the purchase price, lenders view that as a compensating factor. However, it’s important to note that the down payment must be funded by cash, not an equity line or second mortgage. 

So if you have a sizable sum for a down payment, don’t be discouraged if other areas are lacking. Not only will the larger down payment help secure a loan, but it may also reduce monthly payments going forward. 

So if you’ve been stocking your savings away in hopes of homeownership, don’t hesitate because you feel you fall short in other areas. You may be closer to hearing the jingle of your own home’s keys sooner than you think.

[Related: Your Seattle Down Payment Guide]

4. Non-Qualifying Additional Income

While your income is very important in buying a new home, it might not all be considered. Additional irregular income, such as bonuses or overtime, need to have been happening consistently for at least two years to qualify.

But if you’ve been receiving bonuses and overtime regularly for a full year, a lender may see that as a compensating factor. In the eyes of a lender, they may see this pattern of additional income as more substantial than you may assume. 

There are a lot of factors to consider. If your company is having a good year and that is resulting in bonuses, go talk to a lender. Don’t wait for the market to change and those bonuses to dry up. Get in while the getting is hot and your bonuses are still rolling in. This may be your big chance to seal the deal and finally own your own home. 

[Related: Tips for Budgeting on How Much Home You Can Afford]

5. Savings Equal to Six Months of House Payments

Having large cash reserves on hand may equate to a compensating factor in the eyes of the lender. Typically, lenders require you to have at least two months of housing payments in the bank. This takes the pressure off the lender because their business depends on you holding up your end of the deal.

If your salary or credit score isn’t looking too great, but you have accessible savings, you may be okay. A lender will most likely consider a reserve of six monthly housing payments as a compensating factor. 

If you’re unsure if your savings are substantial enough, go ahead and talk to a lender. You’ve been putting in the work — it’s time to reap the rewards.

[Related: Five Priceless Reasons to Save Up to Buy a Home vs. Renting]

6. Significant Assets

Proving your financial strength can go a long way when applying for a mortgage. Large assets, such as retirement savings, investments, and even liquid savings can help you seal the deal on a new house. This is helpful for people who have been able to put money away despite a less than optimal salary. 

These assets don’t necessarily need to be used toward the down payment either. Instead, it is indicative of financial strength. Lenders have confidence in this compensating factor as you would be less likely to default on a mortgage. 

[Related: Make Sure You Have These Supporting Documents for Loan Approval]

7. History of Similar House Payments

Whether you’ve been renting or already own a home, consistent and timely monthly housing payments are important. If the home you’re wanting to buy requires a monthly payment 10% higher than what you’re already paying, a lender will look at your payment history. 

If you haven’t been diligent about your rent payments because you don’t think it matters, make an effort to make all payments on time. To make this easier, ask your landlord if you can set up a scheduled payment for each month. They would likely be happy to have your payments coming in consistently. And there may be an option to have these payments reflected on your credit score.

Consistent monthly payments help prove to a lender that you are responsible and can improve your credit score. That’s a win-win on the road to homeownership!

[Related: Can I Afford to Buy a Home in Seattle?]

8. Promising Career Growth Potential

Younger homebuyers right out of college may have a compensating factor in their career path. For instance, a young engineer working at a company known for growth potential tells the lender that this person will have an increased salary in a few short years. 

Rather than put off buying a home, the promising future of young professionals may be what a lender needs to give their stamp of approval. Rather than spending your 20s renting apartments with your friends, you could be the one turning all that would-be rent money toward equity. 

By the time your peers get around to buying their first homes down the road, you could be moving on to the house of your dreams. 

[Related: Why Waiting to Save a 20% Down Payment May Not Be the Right Move]

Get Your Mortgage Approved

Ready to put your roots down in Seattle?

Don’t put it off because you think you need to get everything right. You could have more in your application than you realize. When you reach out to Seattle Mortgage Planners, you’ll have a team of experienced professionals to review and discuss your options. 

If you’re ready to put your monthly payments toward homeownership, now is the time to act. Contact us today to get started!

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