FHA loans are a popular financing option among home buyers in Colorado. They are especially popular among first-time buyers, due to the relatively low down payment that is allowed. Below, we have answered some frequently asked questions relating to Colorado FHA loans.
1. How do FHA mortgage loans work?
The Federal Housing Administration (FHA) mortgage insurance program is unique in that it provides government insurance for home loans originated within the private sector. This insurance gives lenders some degree of protection from losses relating to borrower default. It also enables lenders to offer more flexibility, in terms of mortgage qualification criteria — and that benefits borrowers directly.
2. What are the basic requirements for this program?
Requirements for Colorado FHA loans are outlined in HUD Handbook 4000.1, also known as the Single-Family Housing Policy Handbook. But that’s a 1,000-page resource, and you’re probably in a hurry. So here’s a quick overview:
- Home buyers seeking an FHA loan in Colorado must make a down payment of at least 3.5% of the purchase price or appraised value.
- A credit score of 500 or higher is required for basic eligibility.
- A score of 580 or higher is needed to take advantage of the 3.5% down payment mentioned above.
- Borrowers should also have a manageable level of debt. With a Colorado FHA loan, the total debt-to-income ratio limit is generally set somewhere between 43% and 50% (depending on the borrower’s situation).
3. What are the benefits of using a Colorado FHA loan?
As mentioned earlier, FHA loans are insured by the government via the Federal Housing Administration. This government backing allows lenders to be a bit more flexible when qualifying borrowers (compared to a conventional mortgage product). Borrowers who have trouble qualifying for conventional financing might be able to get approved through the FHA loan program.
That’s one of the primary advantages of this program. But there are others as well. Borrowers also enjoy the relatively low down payment, and the fact that they can use gift money provided by a third party to cover some or all of their down payment expense.
4. Are there limits to how much I can borrow?
Colorado FHA loans have specific size limits that are determined by the Department of Housing and Urban Development. These limits put a cap on how much the government will insure, so they can also affect the amount you are able to borrow when using an FHA loan in Colorado.
Loan limits vary by county because they are based on home values, which also vary by location. In Colorado, the FHA loan limit for a single-family home purchase ranges from $275,665 to $636,150. The limit for the Denver metro area, the most populous region of the state, is $493,350. Higher limits are allowed for multifamily properties such as duplexes.
5. How do I begin the application process?
Because FHA loans are originated in the private sector, the application process is very similar to any other type of mortgage product. There are a few extra documents that are specific to the FHA program, but the overall process is similar across the board.
As a first step, you might want to consider getting pre-approved for a Colorado FHA loan. We can help with this. We can review your current financial situation to determine how much you might be able to borrow. This will help you focus your home search on the types of properties you can afford.
You’ll need to complete a standard mortgage application as well, and provide additional documents relating to your finances. (This is true for Colorado FHA and conventional loans alike.) Again, the process is very similar regardless of the financing method.