Compensating Factors for FHA Manual Underwrites

Written By: Stacey Sprain, Op-Ed Writer

FHA uses a standard ratio guideline of 31/43 for files that do not receive automated approval or for files where borrowers have insufficient credit or no credit to obtain AUS approval. However, in certain circumstances the underwriter will consider higher than 31/43 ratios as long as acceptable compensating factors are present to justify the risk of ratios that exceed the standard guideline.

You will find a list of the compensating factors that are recognized as acceptable by HUD in HUD Handbook 4155.1 Chapter 2, section 2-13. Go to Click Here>> to find the official list.

A. The borrower has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expense for the new mortgage over the past 12-24 months. (Always compare the present to proposed housing expense and if there is a significant increase proposed, address how the borrower intends to absorb the increased expense).

B. The borrower makes a large downpayment (ten percent or more) toward the purchase of the property.

C. The borrower has demonstrated an ability to accumulate savings and a conservative attitude toward the use of credit. (Obviously the more reserve, the lower the risk so always ask if additional sources of savings or reserve are present such as retirement funds, life insurance cash value, …)

D. Previous credit history shows that the borrower has the ability to devote a greater portion of income to housing expenses. (This would apply for a borrower whose ratios exceed 31/43 but who has a proven history of timely payments when a majority of the income has been going directly to housing- minimal other debt is present).

E. The borrower receives documented compensation or income not reflected in effective income, but directly affecting the ability to pay the mortgage, including food stamps and similar public benefits. (Income from overtime, bonus, commissions, and/or a second job that hasn’t been earned consecutively for a long enough period to be used in qualifying should be mentioned as a comp factor as long as you verify the continuance is expected).

F. There is only a minimal increase in the borrower's housing expense.

G. The borrower has substantial documented cash reserves (at least three months’ worth) after closing. In determining if an asset can be included as cash reserves or cash to close, the lender must judge whether or not the asset is liquid or readily convertible to cash and can be done so absent retirement or job termination.

Funds borrowed against these accounts may be used for loan closing, but are not to be considered as cash reserves. “Assets” such as equity in other properties and the proceeds from a cash-out refinance are not to be considered as cash reserves. Similarly, funds from gifts from any source are not to be included as cash reserves.

H. The borrower has substantial non-taxable income (if no adjustment was made previously in the ratio computations).

I. The borrower has a potential for increased earnings, as indicated by job training or education in the borrower's profession.

J. The home is being purchased as a result of relocation of the primary wage-earner, and the secondary wage-earner has an established history of employment, is expected to return to work, and reasonable prospects exist for securing employment in a similar occupation in the new area. The underwriter must document the availability of such possible employment.

Another compensating factor that I often suggest, especially for first-time homebuyers, is evidence of completion of a homebuyer education course. This is itself is not recognized by HUD as an acceptable compensating factor but it tends to ease underwriter concerns on borderline cases when a completion certificate is provided in the file from the borrowers. Completion of an education session proves that the borrower has been provided with additional information and education on the loan process and the responsibilities and expenses associated with homeownership. DPA providers like Ameridream and Nehemiah offer homebuyer education as do many non-profit agencies in local areas. Our company even recognizes completion certificates from reputable mortgage insurance companies who offer homebuyer education.

Here is a list of homebuyer education providers that may be helpful to your borrowers:

AIG United Guaranty Road to Homeownership Education:

Ameridream Homebuyer Education:

Genworth Homebuyer Education:

MGIC Buyer’s Education: English: Spanish:
You’ll find a Buyers Ed brochure in English at and in Spanish at

Nehemiah Homeownership Education:

Non-profit Agency Homebuyer Education: Find your state at HUD’s Local Home buying Programs website at Within your state’s website, you will find links to Housing Counseling Agencies and Education resources that are offered at no cost for first time homebuyers.

PMI Homebuyer Education:

RMIC Borrower Education: Click Here>>.


About The Author

Stacey Sprain - As an op-ed writer, Ms. Stacey Sprain is currently a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution. 


Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.