FHA home loans are a popular mortgage option for home buyers in Colorado. This program is particularly attractive to first-time buyers, though it’s not limited to that group. Today, we will look at some of the basic requirements for an FHA loan in Colorado, and how they relate to you as a home buyer and borrower.
Colorado FHA Loan Requirements in 2017
The Federal Housing Administration’s mortgage insurance program is overseen by the Department of Housing and Urban Development (HUD), part of the federal government. It is HUD that establishes the specific requirements and eligibility criteria for Colorado FHA loans.
It’s important to note, however, that the government does not lend money directly to borrowers. Instead, they insure loans made by banks and mortgage lenders in the private sector. This insurance gives the lender an added layer of protection, when in turn benefits the borrower by easing eligibility requirements.
A Down Payment of 3.5%
Some of the rules and requirements for Colorado FHA loans have exceptions to them. But the down payment is a firm rule. Borrowers who use this program to buy a house must make a down payment investment of 3.5% of the purchase price or the appraised value of the home, whichever is less.
Conventional (not government-insured) mortgage loans sometimes require more money down, which is why borrowers with limited funds often turn to the FHA program.
The good news is that the money doesn’t necessarily have to come from your own pocket. Under current 2017 FHA guidelines, Colorado home buyers could obtain some of their down-payment funds from an approved third party, such as a family member or close friend. This is generally allowable, as long as the donated funds are a gift and not a short-term loan.
Credit Score Requirements
Credit scores are another important requirement for Colorado FHA loans. Banks and lenders use these three-digit numbers to get a feel for how a person has borrowed and repaid money in the past. So they’re essentially a type of risk-assessment tool.
Timely payment on loan and credit obligations generally leads to a higher credit score. On the other hand, missed payments, delinquencies and defaults tend to lower a person’s score. A higher number can improve one’s chances of qualifying for a mortgage loan.
HUD has established some basic requirements for FHA credit scores. Generally speaking, borrowers must have a score of 500 of higher to be eligible for this loan program, and a 580 or higher to qualify for the 3.5% down payment mentioned earlier.
Colorado FHA Loan Limits
There are limits to how much you can borrow when using an FHA loan in Colorado. These limits are established by HUD and are partly based on the “conforming loan limits” set by the Federal Housing Finance Agency. They vary by county, due to regional differences in home prices.
In 2017, the FHA loan limits for Colorado range from $275,665 on the low end, up to $636,150 for the higher-priced counties of Eagle, Garfield and Pitkin. In the Denver metro area, the limit is currently set at $493,350. That’s for a single-family home.
This broad spectrum is a direct reflection of home-price variation from one area to another. When this article was published, the median home price for the state of Colorado was $327,300, according to Zillow. But in the pricier market of Boulder, it was $692,200. This accounts for the difference in FHA loan size requirements across the state.
This doesn’t mean you have to buy a home equal to or less than these amounts. These are just the limits for the loan size the FHA is willing to insure. You could buy a house that exceeds these amounts by making a larger down payment. But most Colorado home buyers who use the FHA loan program tend to purchase within the limits, in order to take advantage of the 3.5% down payment option.
These are certainly not the only requirements for Colorado FHA loans. But they are some of the most important criteria, from a borrower’s perspective.