I’m writing this article for those of you that are either curious or unsure of your ability to qualify for a conventional home loan.

Lenders will sometimes impose additional requirements, making it harder to qualify. If you need an exception that can be found below, but your current lender or mortgage broker isn’t offering it, please contact me for help.

Definitions: If you’ve ever heard the terms Conventional and Conforming thrown around, here is a brief explanation:

Conventional loans are not issued or guaranteed by the U.S. Government, but rather by private lenders. They are loans that require private mortgage insurance unless you have a 20% down payment – the private mortgage insurance covers anything over the 80% that the lender is putting at risk by giving you the loan.

The following article summarizes, simplifies, and generalizes most lenders’ guidelines for approving a mortgage application in Utah

A Conventional loan that conforms to certain loan amount limits is considered a conforming loan.

Lenders sell conforming, eligible loans to Fannie Mae and Freddie Mac whenever they need to replenish their cash reserves –  this is known as the secondary market.

Below is a table showing the maximum 2023 conforming limits for Utah mortgage loans, dependent on County location:

For Utah, there are 8 Counties that have higher loan limits: Box Elder, Davis, Morgan, Summit, Wasatch, and Weber. These are all considered high-cost areas.

While still conforming, some loan requirements for these higher amounts will be slightly different – they fall under the loan program category called “high balance conforming.”

As a side note, loans that exceed any conforming limits are ineligible for sale to Fannie Mae and Freddie Mac – they are called jumbo loans, and you can read about them in a different article.

Utah Conventional Mortgage Loan Eligibility

When applying for a Utah mortgage loan, your credit, income and property information will usually run through an automated underwriting system. This is done by either the loan officer or his/her processor, and the system used can be either Fannie Mae’s DU(Desktop Underwriter) or Freddie Mac’s LPA (Loan Prospector).

There are slight differences between DU and LP, and you can notice some in the below eligibility matrix. DU is most widely used for Conventional loans, but LP can sometimes make the difference between a loan being approved or denied. This is something that your loan officer should (hopefully) know.

The following Utah Conventional Mortgage Loan Eligibility Matrix is based on occupancy status, loan to value (LTV) and credit score requirement. The loan to value the percentage of the loan vs the value of the home (95% LTV on a purchase means there is a 5% down payment being made).

For high balance loans (loans in areas deemed high cost):

Private mortgage insurance is mandatory on Utah Conventional mortgage loans that have less than a 20% down payment. The largest and most known mortgage insurance companies are Radian, ARCH MI, MGIC, Genworth. Your lender is generally the one that decides which company to use and sets up the private mortgage insurance.

Utah Mortgage Loan Qualifying Guidelines

Let’s look at the Conventional conforming home loan guidelines in more detail so that you know what you’re “up” against.

I’ve addressed the following issues: credit history, co-signing debt, qualifying ratios, income, non-occupying co-borrowers, gift funds, non-arms length transactions, and interested party contributions.

For comments or questions, you can e-mail me at [email protected].

Credit History – Derogatory Information

Foreclosure

Having to foreclose on a home is a lender’s worst nightmare. It a lengthy and costly procedure for both parties involved, and it should be avoided whenever possible.

In Utah it takes approximately 120 days to complete an uncontested non-judicial foreclosure on a home loan, a process that can be delayed if the borrower contests the action in court, seeks delays/postponements of the sale, or files for bankruptcy.

If you were unfortunate enough to experience a foreclosure on your home, the waiting period before becoming eligible for a conventional loan is as follows:

• 7 years for financial mismanagement
• 3 years with lenders that will make an exception under “extenuating circumstances”; maximum loan to value accepted is 90%, and purchases are only allowed if owner-occupied.

Definition: Extenuating circumstances

The borrower must have re-established credit for two years after, as well as provide proper documentation and letters of explanation evidencing the incident was not due to financial mismanagement. Examples:

• death of the primary wage earner
• long term illness or disability not covered by insurance
• prolonged loss of employment for reasons out of the borrower’s control (such as site closings or mergers)

Bankruptcy

Chapter 7 or 11 waiting period:

• financial mismanagement:    4 years
• extenuating circumstances:   2 years

Chapter 13 waiting period:

• financial mismanagement:  2 years from discharge
  • 4 years from dismissal
• extenuating circumstances: 2 years from discharge or dismissal

Multiple bankruptcies: 5 years waiting period

Pre-foreclosure/ Deed-in-lieu/ Short Sale

• 2 year waiting period with a maximum allowed loan to value of 80% and a 680 credit score
• 4 year waiting period with 90% maximum loan to value and 680 credit score
• 4 year waiting period with 90% maximum loans to value and 620 credit score in the case of extenuating circumstances
• 7 year waiting period with standard loan to value and credit score requirements

Restructured or Modified Loans

Ineligible to refinance on the subject property.

On other properties than the subject property:

• Extenuating circumstances: 2 years have passed and the loan to value is the lesser of 90% or minimum program guidelines
• Financial mismanagement: at least 4 years have passed since the completion date of the loan modification or restructure; minimum loan to value is the lesser of 90% or minimum credit guidelines, and a re-established credit history with a 680 credit score is required.

Collections/Charge-offs

• on 1 unit primary residences, the borrower is not required to pay outstanding collections and charge-offs provided they do not threaten the 1st lien position
• on 2-4 unit, primary residences and second homes amounts exceeding $5,000 need to be paid prior or at closing
• on investment properties, individual accounts > $250 and accounts totaling more than $1,000 need to be paid prior or at closing.

Major Adverse Credit

• judgments, garnishments, and liens must be paid in full prior to or at closing (with documentation)
• past due accounts must be brought current

Mortgage Late Payments

• no more than one 30 day mortgage late payment in the past 12 months, and no 60 days or more late payments in the past 2 years

Disputed Trade Lines

• if it does not belong to the borrower, written documentation must be obtained
• if it does belong to the borrower, the dispute must be removed before the loan can fund (note that LP will allow one disputed trade line)

Re-establishing Credit History

• A minimum of four credit references is required: at least one traditional credit reference and one housing related (mortgage payments or rental payments for the past 12 months).
• Three of the four credit references must have been active in the past 24 months preceding the mortgage application.
• No more than two 30days past due payments and absolutely no 60days or more late payments on installment or revolving credit in the past 24 months.
• No past due housing payments since foreclosure/bankruptcy.
• No new public records for bankruptcies, foreclosures, deed-in-lieu, pre-foreclosure, unpaid judgments or collections, garnishments, liens etc.
• All accounts reported must be current.

Co-Signed Debt

• A borrower is considered responsible for the full payment on a co-signed debt, even if he/she is not actually the person making the payments. New guideline updates state that a mortgage liability can actually be excluded if it can be documented that another person has been making the payments on time for the past 12months.An outstanding debt that was assigned to another party by court order (such as a divorce decree or separation agreement), and the creditor does not release the borrower from liability, the debt may be excluded from the borrowers monthly debt obligation if a copy of the applicable pages from the court order and evidence of the transfer of ownership (if applicable) is provided.

Maximum Qualifying Ratios

The guideline will usually restrict the debt to income ratios to 45%. Compensating factors (excellent credit + large amounts of assets) can sometimes allow the debt to income to go as high as 50%.

Income

Income from: commission, tips, bonuses, and overtime must be verified with two years past tax returns; this also applies to part-time and second jobs, along with the requirement that the income has been uninterrupted.

Rental income is fully recognized if verifiable with two years past tax returns; one year is usually considered if a current lease agreement is provided, and there are other compensating factors.

If the borrower is converting his primary residence into a rental (investment) property, he will have to qualify in full for both mortgage payments unless he or she can provide a copy of a fully executed long term lease agreement. 75% of the rental income can be used to qualify. Note that rental income from a family member is not allowed.

On multi-unit purchases meant as a combination of primary residence and investment property, rental income will only be considered if landlord experience can be verified (typically 2 years).

Declining income will not be averaged; most recent and lower income will be used to qualify.

Non Occupant Co-Borrower

•    Must be an immediate family member
•    Borrower must qualify at 35/43 debt to income ratios
•    Maximum loan to value has to be the lesser of 90% or minimum program guidelines
•    If the loan to value exceeds 80%, at lear 5% has to come from the borrowers own funds
•    Non-occupant co-borrowers are not allowed on cash-out refinances.

Gift Funds

• Permitted only on primary residence and second homes, not on investment properties
• Must be accompanied by proper documentation – download Gift Letter Sample below.
• Gifted equity is allowed on primary residences.

Non Arms Length Transactions

• A non-arms length transaction occurs when there is a business or personal relationship between the borrower and the builder or seller; it has to be disclosed, and it is only allowed on primary residences.
• It is not allowed on a short-sale when seller and buyer are related, and not allowed as a means to bail out the current owner from an existing delinquent mortgage.

Interested Party Contributions