Are you a first-time or move-up homebuyer with a champagne appetite on a chablis income? Do rising interest rates threaten to hold you back financially from the home you want to purchase? If so, you need the two magic words that can make a difference with lenders and cinch the financing you need -- compensating factors.

What is a compensating factor? Simply stated, it's a positive used to offset a negative in mortgage qualifying. For example, let's say that as a first-time buyer you're a bit short on qualifying for the $1,250 monthly payment you need. But since you've made timely rent payments of $1,250 for the past two years, it signals to the lender that you're capable of handling that size payment and you get the loan.

Or perhaps your household monthly income is shy for the loan you need; but your spouse is returning to work soon in a job she's been trained for and can show a previous track record in that line of work. Again, a compensating factor.

Don't overlook income increases in your current employment that are guaranteed to begin within sixty days after loan closing. If verified by letter from your employer with no other qualifying criteria to meet (like an additional performance evaluation) the lender can count the pay increase as qualifying income for the mortgage. This can mean affording a much larger home or securing a better bargaining position with the lender on interest rates, points, and fees.

Other compensating-factor ammunition you could use might include a strong pattern of saving part of your monthly income (as shown by savings account statements or checking account balances, etc.) the ability to accumulate assets and net worth, or a track record of keeping your debts low and under control.

Your good credit history and strong credit score is an additional positive factor for loan qualifying. It shows that you properly managed your previous obligations and hopefully will do the same with a new mortgage.

Lastly, the property itself can serve as a compensating factor to help you qualify. If the house is energy efficient, a large percentage of loans will allow the borrower's qualifying ratios (both housing and total long-term debt) to exceed the guidelines by two percent. This is one reason why buyers often gravitate to new construction since the building specs are readily available to prove that the house was built to energy-efficient standards. On resale construction, energy efficiency can be proven by utility records, energy audits, and/or by verifying updates and improvements made to the home. Don't let volatile interest rates price you out of the market for the home you desire. Uncover and use your qualifying strengths as compensating factors to magically turn the lender's "no" to "go"!

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Published: January 28, 2000

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Julie Garton-Good, DREI “The Frugal HomeOwner™” As a syndicated newspaper columnist, author and international speaker, Julie Garton-Good DREI, C-CREC™, is called “America’s Home Affordability Expert”, addressing more than 25,000 persons annually on topics of real estate industry trends and home affordability. She is the author of five real estate books and is the sole two-time recipient of the international "Real Estate Educator of the Year" award from the Real Estate Educators Association. In 1997, The National Association of Realtors® nominated Julie as one of the fifty most influential people in the real estate industry. She shared the list with only three other women.