Compensating factors are what make mortgage guidelines seem so inconsistent. You have probably read the basic guidelines and understand that normally they are followed to the letter. However, all customer portfolios are different and nothing is so black and white that it is set in concrete. If you have three very strong factors in your file they can compensate for one area where you may fall outside the guidelines.
One very good example of this is the Debt to Income Ratio. Most loans today are typed into an automated underwriting program that grades your application information, assets, pulls your credit and approves or does not approve your loan. Desk Top Underwriting (DU), Loan Prospector, and The Black Box are just a few of these programs. Technology is wonderful! These programs do all the calculations and make many of the decisions. DU is such a great program it actually takes into account compensating factors. Really.
I know a couple that had a 60% back ratio and were approved for a $200,000 Fannie Mae Loan. Fannie Mae's back ratio max is 36%. Their compensating factors were: Each had 18 years on the job, Each had retirement accounts over $150,000, and both had credit scores over 750. Without those three factors they would have been turned down for the loan.
So, nothing is really in concrete. Compensating factors can be any of the following: Ratios, credit score, equity/down payment, assets, and time on the job.
It is all very complicated and can be very confusing. It can be confusing even for the underwriter. You can see why it is very important that you get an experienced loan officer.