Compensating factor

From CEOpedia | Management online
Compensating factor
See also

Compensating factors are facilities for the borrower which lender can make while mortgage application. These factors are very important during balancing on being approved or not due to the debt-to-income ratio, for instance. Those can not reverse horrible credit situation but can help who are close to getting a mortgage [1]. Compensating factor can be measured using following formula [2]: "Compensating factor = Effective compensating winding turns / Effective d-axis armature turns"

Types of Compensating factors

One of the most famous factors is the history of borrowers payments for housing debt obligations, demonstrated as yearly or 24 monthly comparisons [3]. Other factors are [4]:

  • making a huge upfront pay towards the acquisition of the house,
  • acquisition of a property certified as an energy-efficient or passive house,
  • showing the capacity to aggregate reserve funds and to keep up a decent record with debt-free positions,
  • having a potential for expanded income and progression due to educating or taking part in training, even though the person has recently entered the work-life activity,
  • having the momentary profit that could not be considered as stable pay, since it would not be received for any event three years before the date of the loan application,
  • buying a property due to corporate change of the primary and secondary salaried employee, with an employment history in a former workplace, whose return to the labor is prospective (also in the case that new capacity has not been obtained yet),
  • owning assets of sufficient value, to prove mortgage repayment possibility.

Conditions mentioned above, are not only sufficient for falling into them borrower but to be counted into higher ratios for a mortgage with a loan to value indicators over 90%, at least one of ensuing factors must takes a place [5]:

  • the person who borrows must have saving that can be utilized to convey the loan obligation for a few months,
  • the borrower more likely than not showed the capacity to give a more noteworthy part on their salary to lodging costs, a brilliant installment history on any earlier home loan commitment and an adequate record as a consumer,
  • the person who borrows must have a complete commitment to pay proportion loan (at the moment of applying) of 30% or less, great story of person's paid expenses and installment repayment.


  1. De Herr R. (2009), p. A-124
  2. Bakshi U. A. (2009), p.6-6
  3. De Herr R. (2009), p. A-60
  4. De Herr R. (2009), p. A-61
  5. De Herr R. (2009), p. A-62


Author: Maria Kucz