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What is a compensating factor in mortgage underwriting?
A compensating factor is a favorable characteristic of a borrower or loan scenario that may strengthen the overall file when another part of the scenario carries more risk. Underwriters weigh compensating factors as part of the complete file, and how much they count depends on the loan program and its guidelines.
Underwriting looks at layered risk: one weak area on its own may be fine, while several together may not be. Compensating factors are the other side of that ledger, the parts of the file that make the overall loan stronger.
A compensating factor doesn't cure an eligibility issue or guarantee approval. Which factors a program recognizes, and when they apply, are set by its guidelines.
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