What factors may need to be documented if a borrower has derogatory credit?

When a borrower has derogatory credit, it is important to document compensating factors to help offset the perceived risks associated with that credit history. Compensating factors are positive attributes in a borrower’s financial profile that can mitigate the concerns raised by past credit issues. These may include factors such as a stable employment history, sufficient income to support loan payments, substantial savings or assets, a low debt-to-income ratio, or a strong track record of on-time payments for other obligations.

These factors provide a more holistic view of the borrower's financial situation beyond just their credit score, demonstrating their ability and willingness to meet future mortgage obligations despite any past credit challenges. Potential lenders consider these compensating factors during the underwriting process to assess the borrower's overall creditworthiness and risk level.

In contrast, focusing solely on positive credit activities, reviewing family members' credit scores, or only counting the number of properties owned doesn’t adequately address the needs of the situation. Each of those options fails to capture the comprehensive financial picture necessary when addressing derogatory credit.