Compensating factors

Compensating factors are strengths in an application, such as reserves or a high credit score, that a lender's policy accepts to offset a ratio above its standard limit, such as debt to income. They are considered when the application exceeds that limit and the policy specifies which strengths can support approval.

Example

For illustration, a lender's standard debt-to-income limit is 45%, but an application at 47% has reserves and a qualifying credit score. If the policy accepts those strengths as compensating factors, it may permit approval; if they do not meet the policy's conditions, the application may be referred for further review.

In mortgage underwriting, applications above the standard debt to income limit are approved when the policy’s compensating factors hold and referred to a person when they do not.