What are Compensating Factors?

For those of you that are just slightly short of qualifying for a Lake of the Ozarks mortgage when it comes to your credit score and/or debt-to-income ratio, keep reading! Today's blog discusses what compensating factors are and how, while they can't "fix" everything, they can be helpful.

Compensating Factors

Compensating factors are essentially factors that compensate for your shortcomings when it comes to applying for a mortgage at the Lake of the Ozarks. For example, if your credit score is a little low or your debt-to-income ratio is a little high, a compensating factor could level it out for you. However, a really awful credit score or out of control debt can't be overcome with these factors. Compensating factors make it possible for those on the borderline of getting approved. Below is a list of a few common compensating factors you may come across; however, each type of loan and each lender will determine what factors are acceptable and how much weight they have.

1. Cash - The more cash you have upfront to use as a down payment on a home, the less risk you pose. Therefore, the more likely you are to get approved for a loan. For example, if you're able to put more down than what's required, you may be able to slide by with a not-so-great credit score. This is dependent upon how bad your credit score is and what caused it to get there.

2. Savings - Not only can your available cash help you, but your savings is another compensating factor. Banks refer to long-term savings as "reserves" and will count these reserves in your favor, especially when they are of a substantial amount. A good example of savings could be your 401k.

3. Credit Score - If you have an excellent credit score, chances are that this will make up for other problems in your profile. As long as you meet the minimum requirements for the loan program, a really high credit score can allow a higher debt-to-income ratio.

4. Debt-to-Income Ratio - Your debt-to-income ratio is one of the best indicators of how likely you are to default on your Lake of the Ozarks home loan. Keep your debt-to-income ratio low and it can become a compensating factor. Therefore, if your debt is reasonable or well below the lowest risk tier, you can still get approved with a slightly unfavorable credit score or a lower down payment.

Obtaining a mortgage is not straightforward; there are a lot of factors that can affect your application and its approval. As your Lake of the Ozarks mortgage lender, I'll help you analyze these factors and help you through every step of the mortgage process, starting with a pre-approval. Give me a call at 573-746-7211 to get started today!

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Michael Lasson

Senior Loan Officer

NMLS #: 493712

4655 B Osage Beach Parkway

Osage Beach, MO 65065

Direct:  (573) 746-7211

Cell: (573) 216-7258

Fax:(866) 397-0318

Email:  mlasson@fsbfinancial.com

**The postings on this site are my own and do not necessarily represent First State Bank of St Charles’s positions, strategies, or opinions.