Compensating Factors Can Help You Secure a Loan
By Sadiya Anjum
Lenders usually have strict guidelines when it comes to approving loans but sometimes they make exceptions. If you have a relatively good record but you fail in one crucial aspect that is required to qualify you, then it may not be a lost cause yet. ‘Compensating factors’ can help you secure that home loan you really need. Compensating factors are any strong points you have in your financial profile that may make up for the black mark.
When you apply for a loan, a lender will check several factors before qualifying you. But they all come under two main aspects: your ability to make payment and your willingness to do the same. Your ability is basically checking your income, assets, debt to income ratio etc. Your willingness is judged by your credit report and history; how you have been making your other payments.
If you fall short in one of the main criteria then the lender may not be willing to approve the loan. But he may take a risk if you can prove to him that you have other strengths that sufficiently hide the dark spot.
Your black mark could be a flaw in any aspect: an extremely high debt to income ratio, low income, a defect on your credit report etc. As long as you are strong in other aspects, the lender may be willing to qualify you. If you can make a large down payment of over 20%, then you may stand a good chance. A good credit history with payments made on time is also a major strength. If you had to pay a high rent before but you managed to make payments on time, it may indicate your ability to handle money well despite the size of your income.
A large amount of liquid savings, satisfactory employment, an expected salary boost, good credit score, assets and just about anything that lends to the overall strength of your financial profile can be your compensating factors. Even a strong educational background is a plus point as it indicates a better chance for employment. Even if the property is energy-efficient, lenders may accept it as a compensating factor. But you have to provide proof for all the compensating factors.
If you know that you may have trouble landing a loan because you fall short in one aspect, then you better start analyzing your compensating factors. Discover your strengths that can help you obtain a loan. In fact it may help you afford a larger home and even put you in a position to negotiate on the lender’s terms regarding interest rates, fees etc.
However it may not be that easy especially with automated underwriting programs and rigid guidelines. Nevertheless nothing is impossible especially since the lender is also seeking to do business with you. If you can indicate your compensating factors, a lender is most likely not going to let go of a good customer with a black mark in just one aspect. But these factors vary from one lender to another, so it will pay to shop.
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