All debts listed on the credit report, and all debts reported by the applicants must be listed and accounted for in the calculation of debt to income (DTI) ratio. If the applicant has disclosed a debt that is not listed on the credit report, it is the responsibility of the loan officer to make sure this debt is listed on the initial loan application.

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Compensating Factors

Although every effort will be made to stay within the lending guidelines, there will be occasions when underwriting exceptions are made. Sound judgment should be used, and the identification of compensating factors should be explicitly noted on each file where an exception is made. The following represents examples of compensating factors, which may support the approval of an exception to the lending guidelines.

• Low LTV (Loan to Value ratio)
• Low DTI (Debt to Income ratio)
• Long time on job with stability
• Long and stable residence time
• Large disposable income
• Large reduction in monthly outgoing debt which will greatly increase and improve the customers financial position.

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The underwriting department also has the job of protecting the lender as well. Every time they review a loan, an underwriters goal is to limit the lenders exposure to risk. Default, credit and interest rate risk can all be reduced or at least controlled, through careful documentation and analysis.

Through careful diligence in the analysis of the borrowers income, credit, collateral and assets, considering both compensating and/or derogatory information, the underwriter can make sure that the loan requested is right for this borrower. Not only does this ensure the lenders likelihood of repayment, it also ensures that the borrower is not entering into a financial transaction that is beyond the limits of their ability to repay.

When these factors are taken into consideration, it is easy to see why the process of underwriting the loan file is critical to the success of the loan process. The Loan Officer must take this seriously, since part of their job is to request all documentation and perform all preliminary analysis necessary to prepare the file for the underwriting review. They must be familiar with the underwriting guidelines and act within these parameters.