VA Loan Articles
Compensating Factors That Affect a VA Loan ApplicationWhen you apply for a VA home loan, it's easy to worry about whether you qualify for the right loan amount based on past credit issues, debt-to-income ratio, or employment issues.
Many loan applicants understand they have higher-than-normal debt or debt to income ratios that are close to the limit--but aren't sure what that limit is. Even a borrower who knows the VA debt-to-income ratio "tolerance" limit is 40%, understanding how the lender gets to that figure--and loan approval--based on the borrower's financial data can be a mystery.
But the VA doesn't go by the debt-to-income ratio alone when it comes to judging the a VA mortgage loan application. In many cases there could be "compensating factors" that offset the borrower's higher-than-normal debt-to-income ratio or related issues.
According to the VA, "Compensating factors may affect the loan decision. These factors are especially important when reviewing loans which are marginal with respect to residual income or debt-to-income ratio." Compensating factors cannot be used to offset unsatisfactory credit but may be used when such factors "represent unusual strengths rather than mere satisfaction of basic program requirements."
An applicant with the ability to pay closing costs out of pocket instead of financing them, for example, would be seen as meeting basic VA loan requirements--paying closing costs in cash is not unusual or exceptional, and therefore not a compensating factor.
But a borrower who brings "significant liquid assets" to the deal could offset a weakness in other areas--such assets could be viewed as a compensating factor. "Valid compensating factors should logically be able to compensate (to some extent) for the identified weakness in the loan."
The VA adds that that a lender may use "excellent credit history" and a pattern of long-term employment to compensate, as well as a "sizable" down payment amount. Other compensating factors include high residual income, tax breaks for child care, military benefits and minimal "consumer debt".
Compensating factors can be an important benefit to VA loan applicants on the margins qualifying where debt and income are concerned--they can help the borrower get closer to loan approval.
While the Department of Veterans Affairs lets the lender exercise some flexibility in this area, it's still the borrower's responsibility to make sure they can afford the loan and the additional financial responsibility the VA mortgage would bring.