Definition - What does Compensating Factors mean?
When assessing the creditworthiness of a potential buyer, the underwriter tries to look at all the aspects of the case. Items such as income to debt ratio, credit score, and employment history are compensating factors. There are times when the customer’s case is weak (usually because of a low credit rating) then underwriter tries to use other compensating factors to get the loan approved.
Justipedia explains Compensating Factors
A low credit rating is not the only indicator of assessing the creditworthiness of a client. There are various other factors (that might not be there in the guidelines) but are worth noticing. These factors are known as compensating factors and following are the examples,
The person applying for the loan has a track record of managing house expenses (for 12 to 24 months), which is equal or more than the proposed house expense is another compensating factor. If the person applying is willing to pay a substantial amount as down payment or they have a previous credit history showing that the person applying for a loan has been contributing his income towards housing expense more than what is expected, etc, are also compensating factors.
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