USDA Loan Compensating Factors

Some great news for those who apply for a USDA loan and might not meet each and every requirement, is that underwriting guidelines allow for what are called “compensating factors”.  There are several criteria that an underwriter will look at, and if you are stronger in certain areas, but weaker in others, you still might get approved.  What are these compensating factors?

A very common situation that applicants face is not meeting the debt-to-income ratios.  These are 29/41, which the 29 represents the total percentage your mortgage payment is compared to your monthly income.  The 41 is the combined percentage that your mortgage payment and personal debts are when compared to your monthly income.  If your ratios are higher on one or both of these, you could potentially face an application denial.  However, if you were to have any of the following “compensating factors”, you could still get that desired “stamp of approval” so to speak.

The official compensating factors for a higher DTI ratio are:

• Money in Savings – Having money in savings after you close the loan can really help your case.  These are called “cash reserves after closing”.   Having reserves weighs a lot since if you were to face a job loss, the savings could help you cover your mortgage payments until you find new employment.
• No Substantial Increases to Housing Payments – If your new mortgage payment is not much higher, the same, or even lower than your current rent payments, this can compensate since you will not be taking on a higher level of debt (or much higher if your new payment is not much of an increase).  The official verbiage used by the Department of Agriculture is “similar housing expenditure”.  By avoiding what could be considered “payment shock” from taking on a higher housing payment, it shows the USDA that you should not have any difficulty taking on the new mortgage payments.
• A 660 or Higher Credit Score – Having a 660 credit score will automatically provide a “debt waiver” for your higher ratios.
• Additional income – If you have extra income aside from your primary employment, such as a part-time job, residual income, or other types of supplementary income, this is considered a compensating factor.
• Conservative Use of Credit – Having a history of not taking on a lot of unneeded debt, such as lots of credit cards, excessive auto loans, and other non-critical debts shows fiscal responsibility on your part and can assist in getting an approval for higher debt ratios.
• Low Backed End Ratio – If your new front end ratio (the percentage of your income that your mortgage payment is), is higher than 29%, but your backend ratio (total debts including mortgage and other debts) is lower than 41%, this is taken into consideration.

As long as you have a 620 credit score or higher, and 2 years of verifiable employment, we encourage you to apply for a USDA loan.  Even if your debt ratios are higher, or you perhaps don’t meet each and every guideline, you still may have a chance at getting approved.  This is especially the case if you have any of the aforementioned compensating factors.