How to Prepare for a Mortgage & Improve Your Approval Odds

Buying a home is a major financial decision, and preparing for a mortgage takes planning—especially if your credit score isn’t where you want it to be. The good news? Even if you don’t qualify for an automated mortgage approval, you may still get approved through manual underwriting by using compensating factors to strengthen your application. Let’s break down what you need to know about debt-to-income (DTI) ratios, manual underwriting, and compensating factors—plus tips to improve your approval odds!

Understanding DTI Ratios for Manual Underwrites


Your debt-to-income (DTI) ratio measures how much of your monthly income goes toward debts like your mortgage, car payments, and credit cards. Lower DTI ratios show lenders you can handle a mortgage responsibly.


For loans that require manual underwriting, the maximum DTI ratios depend on the number of compensating factors you can provide:


FHA & VA Loans


  1. 31/43% – No compensating factors required
  2. 37/47% – One compensating factor required
  3. 40/50% – Two compensating factors required


USDA Loans


  1. 29/41% – No compensating factors required
  2. 32/44% – One compensating factor required


If your DTI is higher than these limits, you’ll need compensating factors to improve your approval chances.


What Are Compensating Factors?


The following compensating factors are acceptable for manual underwrites:


1. Three Months of Mortgage Reserves


Lenders want to see that you have financial security. If you have at least three months’ worth of PITI (Principal, Interest, Taxes, and Insurance) in savings, it can improve your chances of approval.

💡 Pro Tip: Start saving now! The more reserves you have, the stronger your application will be.


2. Minimal or No Increase in Housing Payment


If your new mortgage payment is less than or no more than $100 higher than what you currently pay in rent, this shows stability and reduces risk for lenders.

💡 Pro Tip: Compare your future mortgage payment to your current rent. If it’s close, this can be a key compensating factor!


3. Additional Income Not Used to Qualify


If you have extra income that isn’t included in your mortgage application—such as overtime, bonuses, or income from a second job that you’ve had for at least 12 months but less than 24 months—it can count as a compensating factor.

💡 Pro Tip: If you have extra income, keep track of it! It could help tip the scales in your favor.


4. Meeting Residual Income Requirements


Residual income is the money you have left after paying all major expenses. Meeting certain residual income thresholds can be a strong compensating factor, especially for VA loans.

💡 Pro Tip: Budget wisely! Making sure you have enough residual income can improve your approval chances.


What This Means for You as a Borrower


If you’re thinking about buying a home, here’s how you can prepare now to improve your approval odds:


Work on Your Credit – The higher your score, the better. If your score is low, compensating factors will be essential.

Build Your Savings – Having at least three months of mortgage payments in reserves makes a big difference.

Compare Rent vs. Mortgage – If your future mortgage payment is close to your current rent, it helps your case.

Track Extra Income – If you have additional income that isn’t being counted, document it for future use.

Check Your Residual Income – Ensure you have enough left over after paying your major expenses.


Final Thoughts


Even if your loan requires a manual underwrite, you can still qualify for a mortgage by showing financial strength through compensating factors.


📌 Need help preparing? We’re here to guide you every step of the way! Reach out for a free consultation, and let’s put together a plan to get you approved.


📩 Have questions? Drop a comment below or send us a message!

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.