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Are you considering applying for a conventional home loan in Denver?
Most homebuyers need some financial help to make a home purchase in Denver, CO, which is where mortgages come into the picture. But there isn’t just one type of mortgage that exists.
Instead, there are a few to choose from, and the one you apply for should be based on your particular financial situation and needs.
That said, the more commonly-used mortgage product among Americans is the conventional home loan. While there are some similarities between this type of mortgage and other home loan programs, conventional mortgages have certain unique traits. Before you commit to buying a home and apply for a conventional home loan, it’s important to understand what these mortgages are all about.
Here are some things you should know about conventional home loans in Denver before applying.
Conventional Mortgages: Defined
Unlike government-backed home loans — like FHA and VA loans — conventional mortgages are not guaranteed or insured by the government. If they do need to be insured (based on the down payment amount), private insurance companies would insure them.
Conventional home loans are considered somewhat riskier for lenders because they are not backed by government entities. That’s why the lending criteria for conventional mortgages are a bit more stringent compared to requirements needed to get approved for a government-sponsored loan, like an FHA loan.
The credit score requirements tend to be more strict, for instance, so you’d need a higher credit score to secure a conventional mortgage than you would for an FHA loan.
That said, conventional loans can also be more flexible than government-backed loans, which is why many qualified home buyers choose these types of loans.
Conforming Vs. Non-Conforming Conventional Loans
What’s the difference between conforming and non-conforming conventional mortgages?
“Conforming” conventional loans are those that do not exceed the loan limits as set by the Federal Housing Finance Agency (FHFA). Each year, the FHFA assesses the current loan limits relative to housing prices and typically increases them every year, as housing prices typically go up every year.
Conforming loan limits take effect on January 1st of each year and are set based on a county-by-county basis. So, each county in the state of Colorado, for instance, could have its own unique loan limit.
For 2021, the loan limit for most counties in Colorado is $548,250, which is higher than 2020’s limit of $510,400. Denver’s conforming loan limit for 2021 is $596,850, which is slightly above what most other counties in Colorado are at. The same is true for other high-cost areas in the state.
That means that you would have to buy a home that is under $596,850 in Denver in order to stay within the conforming loan limit and have your mortgage be considered a conforming loan.
“Non-conforming” conventional loans are those that exceed the conforming loan limits established by the FHFA for that calendar year. So, if you buy a home in Denver for $600,000 in 2021, for instance, that would exceed the conforming loan limit for that county. In this case, you would be taking out a “non-conforming” loan — or “jumbo loan.”
Non-conforming conventional loans are not purchased by Freddie Mac or Fannie Mae because they do not meet the loan amount requirements.
Perks of a Conventional Loan
Many homebuyers choose to take out a conventional home loan in Denver for a few reasons:
Low down payment options. If you have a solid credit score and a low debt-to-income (DTI) ratio, you may qualify for a down payment as low as 3% of the purchase price of the home. This can be very attractive to many homebuyers, as coming up with a few thousand dollars for a down payment can be a deterrent to buying a home.
Option to avoid mortgage insurance. All government-backed FHA loans require mortgage insurance, no matter what your down payment amount is. That means you’ll be stuck having to pay mortgage insurance throughout the term of your mortgage in most cases, depending on your original down payment amount.
But with conventional loans, you have the ability to either get rid of mortgage insurance at some point or avoid it altogether. If you can gather up at least 20% of the purchase price of the home in the form of a down payment towards a conventional mortgage, you can avoid having to pay Private Mortgage Insurance (PMI), which is required with down payments less than 20%.
And even if you start off paying PMI, you can eliminate it after you’ve paid your mortgage down and have gained at least 20% equity in your home. Once your mortgage balance has been paid down to 80% of the property’s original appraised value, you can request to have your lender cancel the PMI. Otherwise, PMI will be automatically canceled after your equity reaches at least 78% of the purchase price of the home.
How to Qualify For a Conventional Mortgage in Denver
To be eligible for a conventional loan, you will need the following:
- A credit score of at least 620 (though a higher score may afford you with a lower interest rate)
- A down payment of at least 3% of the purchase price (or 20% to avoid PMI)
- A solid income
- A debt-to-income (DTI) ratio of no more than 50% (though no more than 43% is usually recommended)
Have Questions About Conventional Home Loans in Denver?
If you need help from an experienced 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 since 1992, and we’d love to help. Please contact us if you have mortgage-related questions.