There are certain VA loan requirements that simply cannot be overruled and there are guidelines that provide lenders with a bit of discretion while still being able to retain the VA loan guarantee. For example, no matter how well qualified a borrower is the loan still cannot be used to finance a rental property. VA loans cannot be approved if the borrower had a VA loan foreclosed upon and there is no remaining entitlement. On the other hand, lenders can approve a loan application when the borrower’s debt-to-income ratio is say 44 instead of the 41 guideline. When a lender decides to issue an approval based upon the lender’s stance the loan is acceptable it backs up the approval with compensating factors.
A compensating factor is an item that goes far above the minimum VA approval guidelines. For instance, a borrower has a high debt ratio of 44 or 45. A VA lender could be justified approving the loan because the borrower has a very high credit score of say 820. Or the borrower has been on the same job for 10 years or there is a substantial amount of liquid assets in the bank or investment account.
Compensating factors are in the eyes of the lender and while there is no clear cut definition of what is and what is not a bona fide compensating factor, if the lender provides an explanation why the exception was made the loan can still be approved and retain the VA loan guarantee.