When it comes to taking out a mortgage in Colorado, you’ve got choices. And one of the more popular home loan products among homebuyers is the conventional mortgage.
This is a unique type of home loan that differs somewhat compared to other mortgage products. It’s important to understand everything there is to know about conventional home loans in Colorado if this is the type of mortgage you plan to take out to finance a home purchase.
Here are a few common questions that borrowers tend to have about conventional mortgages.
A conventional mortgage is one that is not backed by the government. This type of loan differs from other loan types, like FHA loans and VA loans, which are insured by the government.
For this reason, conventional loans are a bit riskier for lenders who offer them because they are not insured by the government. That’s why borrowers who apply for a conventional home loan in Colorado will have to meet slightly more stringent lending criteria in order to minimize the risk for the lender.
Since conventional home loans are not insured by the government, as mentioned earlier, are they insured at all? And if so, how?
Conventional loans are not insured by the government, unlike FHA and VA loans. Instead, conventional loans are insured by private lenders and paid for by homebuyers.
You’ll need to put down at least 20% of the purchase price of the home you are buying in order to avoid having to pay mortgage insurance. Otherwise, you’ll need to pay Private Mortgage Insurance (PMI), which is provided by an insurance company in the private sector, rather than the government.
If you cannot come up with a 20% down payment, you may eventually be able to get rid of PMI when you have at least 20% equity in your home. Once you have managed to pay down your mortgage balance to 80% of your home’s original appraised value, you can ask your lender to cancel your PMI. Otherwise, once your balance dips down to 78% of the value, your lender is required to eliminate PMI.
Every year, the Federal Housing Finance Agency (FHFA) establishes a new set of “loan limits” for conventional loans that reflects the change in average home prices. The conforming loan limits take effect on the first day of January every year and are assigned on a county-to-county basis. That means one county in the same state may have a different loan limit for the respective year than another, based on the change in home prices in the area.
In 2021, the conforming loan limit in Colorado for most counties is $548,250. That’s an increase from 2020’s loan limit of $510,400 in most Colorado counties. In more expensive counties, single-family conforming loan limits are higher. For instance, loan limits in Adams, Boulder, and Eagle counties in 2021 are $596,850, $654,350, and $822,250, respectively.
If you take out a conforming loan that is over these thresholds, your loan would be considered a “jumbo loan.” Right now, the average home price in Colorado is $427,650, as of December 2020. That’s quite a bit lower than the conforming loan limit of $548,250 that is applied to most counties in the state. In this case, it should be relatively easy to find a home under this threshold to avoid taking out a jumbo loan.
Mortgage lenders assess many factors before approving a home loan application, including:
Credit scores. A credit score of at least 620 is generally required to get approved for a conventional home loan, though all other factors — including income and down payment — will need to be strong. Otherwise, it’s suggested that you go into a loan application with a higher credit score to increase your chances of approval.
Down payment size. A higher down payment amount may strengthen your application, as it reduces your loan-to-value ratio (LTV) and ultimately lowers the risk to the lender. For a conventional loan, a minimum 3% down payment is required.
Income. As with any other type of mortgage, your income will be looked at to ensure you earn enough to support a mortgage payment.
Debt levels. Your current debt will be assessed to make sure that you’re not overstretching your finances to squeeze in another bill payment into your budget.
As mentioned earlier, the requirements for a conventional loan tend to be a little more stringent than a government-backed loan, such as an FHA loan. If you lack the credit score needed to get approved for a conventional loan, you may want to look into an FHA loan to finance a home purchase.
If you are in need of the assistance of a seasoned mortgage broker, Sammamish Mortgage can help. We are a local, family-owned company based in Bellevue, Washington. We serve the entire state, as well as the broader Pacific Northwest region that includes Idaho, Colorado, and Oregon. We have been offering a wide variety of mortgage programs and products with flexible qualification criteria, and we’d love to help. Please contact us if you have mortgage-related questions.
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