When a loan is approved by a person instead of by software, the underwriter starts from tight debt limits and raises them only for documented strengths. Those strengths are compensating factors. On a manually underwritten FHA loan, each one you can prove moves your allowed ratios up a step.
FHA's list of factors
HUD recognizes these, each with a specific test:
- Verified cash reserves. After closing, your own savings equal at least 3 monthly mortgage payments on a 1 or 2 unit home, or 6 on a 3 or 4 unit home. Gifts, borrowed money and the cash used to close don't count.
- Minimal increase in housing payment. The new payment is no more than $100 or 5% above what you pay now for housing, whichever is less, and you have 12 months of housing history with no more than one 30-day late payment.
- Residual income. The money left each month meets VA's residual income table for your household size and region.
- Significant additional income. Overtime or part-time pay with at least a one-year history that isn't counted in qualifying income. It can only be paired with another factor.
- No discretionary debt. The house payment is your only open account carrying a balance, and you've paid every card in full for the past six months.
How many you have sets the cap
| FHA, score 580 and up | Housing limit | Total limit |
|---|---|---|
| No compensating factors | 31% | 43% |
| One factor (reserves, minimal payment increase or residual income) | 37% | 47% |
| Two factors | 40% | 50% |
| No discretionary debt | 40% | 40% |
Buyers with a score below 580, or with no credit score, stay at 31% and 43% on a manual FHA loan. Conventional manual approvals start at 36% total and can reach 45% when the credit score and reserves meet Fannie Mae's eligibility matrix.
Two factors at work
Marcus earns $5,000 a month gross and has paid $1,900 a month in rent on time for two years. His FHA loan came back for manual underwriting. The new house payment would be $1,980, and his car and card payments total $420.
His ratios are $1,980 divided by $5,000, or 39.6% for housing, and $2,400 divided by $5,000, or 48% total. With no factors he's over 31% and 43%. One factor (37% and 47%) still leaves him over on both.
Two factors settle it:
- The payment rises $80. Five percent of $1,900 is $95, and the lesser of $100 and $95 is $95, so an $80 increase counts as minimal.
- He'll have $6,400 of his own savings after closing. Three payments of $1,980 is $5,940, so his reserves qualify.
With two factors his limits are 40% and 50%, and Marcus is approved at 39.6% and 48%.
Building a factor before you apply
Keep your own savings in the bank by letting a seller credit (up to 6% of the price on FHA) or a family gift cover closing costs. Shop for a payment close to your current rent. Pull together a year of pay stubs if you work overtime that isn't being counted.
Plug your payment and debts into the DTI calculator to see which manual tier you land in. If your loan is headed for a manual approval, call AAA Capital Funding at 888-601-8344 and we'll document the factors you already have and line up the one you need.