When applying for a mortgage, many potential homebuyers find themselves explaining to lenders that their financial debts are not as great as they appear to be on paper. These applicants may have a large amount of money saved. Lenders may see only that the applicant's debt-to-income ratio is high.
By showing that they have some compensating factors or strong points, applicants may be able to get approved despite not being able to show a lot of income on paper. These compensating points vary from lender to lender. They include things like a proven record of saving money, a high credit score, or extra income from roommates or renters.
There are even some programs with written guidelines that borrowers can use to determine how many compensating factors they have. The HomeReady program is one such option.
Here are some points to compensating factors that first-time homebuyers may not know:
- A borrower's income on paper may not be the same as their actual income. The self-employed, for example, may deduct some expenses on their taxes, making it appear that their income is lower than it is.
- Lenders don't always see all income. Commissions, tips, and bonuses may not be included.
- Lenders don't always look at all the expenses, or lack of expenses, that an applicant has. Those with few expenses may be able to pay more towards their mortgage.