FHA Loans Colorado

You can have a much lower credit score with an FHA loan than a conventional home loan, but the catch is that you’ll need a larger down payment if you have a lower credit score.

Those with credit scores between 500 and 579 will need to provide a 10% down payment, while those with credit scores of 580 or above only need to put 3.5% down. As the average Colorado resident puts down about 14%, using Colorado FHA loans greatly lowers the bar for those seeking their first home.

This doesn’t mean that every lender will work with you, though, so work to rehab your score before applying. With a better score, you’ll benefit from less money down and lower interest rates, reducing your monthly costs.

As mentioned, borrowers still have down payment requirements as with any other loan, but they are specifically tied to the borrower’s credit score. The low down payment stipulations are part of what makes the FHA program so attractive to borrowers.

Unlike with conventional financing, you will need to notify the Federal Housing Administration if you are using gift funds as part of your down payment through what is known as a gift letter. This assures the lender that you’re not taking out an additional loan amount to pay for this and that the funds are provided without the expectation of repayment.

Like with conventional loans, FHA lenders will need to see your debt-to-income (DTI) before approving your loan. There are higher limits on DTI for FHA loans. You can have up to a 57% DTI, meaning that up to 57% of your income goes to debt service. For conventional loans, this is typically capped at 43%. Given that Colorado residents have the sixth-highest consumer debt in the nation, many find FHA loans one of the best ways to secure a loan, even with a high DTI.

However, 57% is simply the Federal Housing Administration (FHA) limit, and some lenders may not work with you if your DTI is that high. Reduce your other financial obligations and repay your debts for the best chance at financing.

Your closing costs for an FHA loan are about the same as for a conventional loan, or approximately 3% to 6% of the overall loan value. However, FHA loans come with the added burden of the upfront mortgage insurance premium (UMIP), which protects the lender in case of default. This is usually about 1.75% of the total home cost.

FHA loans have limits, which we’ll discuss in further detail shortly.

This can make it difficult for FHA borrowers to purchase in high-cost counties, where the average purchase price may exceed what they can afford. For example, the median sales price in Pitkin County is a shocking $7 million, making it nearly impossible for low-income borrowers to buy homes in places like Aspen.

However, finding homes in areas close to major cities is possible. El Paso County, home to Colorado Springs, has a median sales price of $480,000, meaning there are plenty of homes within the limits of this metropolitan area. Grand Junction’s county, Mesa, has a median sales price of $415,000, making it another good option.

The most affordable area of Colorado is Otero County, home to only about 18,000 people. This county has a median sales price of just $102,000.