Each year, thousands of people flock to Colorado to take advantage of a growing economy, lower cost of living, and an outdoor lifestyle. Over the last decade, the state’s population has increased from 5 to 5.8 million—a notable boom.
If you’re planning on getting a mortgage in Colorado and settling in or near the Denver, Aurora, Colorado Springs, and Fort Collins areas, you may pay a small premium for a typical home. Don’t worry; we’re not talking about New York City or California prices, but it’s best to start saving regardless.
So if this is your first mortgage, where do you start?
Keep reading to learn more about the process of purchasing a home in Colorado.
Whip Your Finances Into Shape
If you’re a first-time homebuyer, it’s best to start planning early. Your first order of business is to get your finances in order, so you have a higher chance of securing a home mortgage in Colorado.
Below, we’ll discuss what you can start doing today to get on the right track.
Work on Your Credit
Haven’t checked your credit report in a few years? It’s time to take a look. Pull your credit reports and scores to see precisely where you stand.
Once you have access to your credit reports, look them over for potential errors or past-due accounts that have been sent to collections. These are liabilities that can create a substantial problem if you apply for a mortgage.
If you see anything amiss, immediately contact the creditor to see what the issue is and if you can sort it out.
For a free copy of your credit report, visit the Federal Trade Commission’s annualcreditreport.com website. You’ll have access to information from all three agencies (Experian, Equifax, and TransUnion).
Some banks also provide handy tools to help you track and improve your credit over time. Chase Bank’s My Credit Journey is an excellent example of one of these programs.
It’s essential to take a look at all three reports. If you only check one, you can end up with a false sense of confidence. With information from each reporting agency, you’ll be able to keep tabs on your credit activity.
If you’re not already signed up for a credit monitoring service, consider it at the beginning of your home-buying journey. These services will notify you if there is suspicious activity on your report or one of your scores changes.
Set a Budget
Now you can finally move on to determining a budget.
When purchasing a home, setting a clear budget and sticking to it is critical.
Just because a bank will give you money for a particular house doesn’t mean you can afford it. To start the process, take a good look at your monthly spending to see what you can afford. Keep in mind that you’ll be paying for taxes, principal, interest, and insurance. You should also factor in emergency savings and maintenance for repairs.
There are other factors to consider and household expenses that aren’t included on your credit report. Take into account your utilities, tuition, daycare, cell phone, car insurance, and grocery costs as well. All of these fixed monthly expenses will determine how much house you can afford.
Don’t stretch your budget and risk becoming house-poor, and don’t forget that homeownership often comes with sudden and unexpected expenses.
Organize Your Assets
When you request pre-approval from lenders, they will check your bank statements from the last two months. Make any large deposits from other accounts into your checking and savings accounts before that two-month window.
If you don’t, the lender will ask you to explain where any large deposits came from—in detail. For this reason, avoid racking up debt or opening new accounts right before seeking mortgage approval.
Choose a Mortgage Company
When you’re ready to begin searching for a home loan, it’s time to choose a mortgage company. Each lender has its own process for approval.
To ensure you get the mortgage that’s right for you, consider asking the following:
- What are the lender’s rates and fees?
- What is the lender’s average time to close on a home loan?
- Will the lender service your loan after closing, or will they sell it to another lender?
- What is the lender’s client satisfaction rating?
- What is the lender’s availability in case you have questions or need to get in touch?
Asking these questions will go a long way in determining which lender is the best fit for your situation and needs.
Apply for Loan Pre-Approval
Buying a new home is exciting, and it’s sometimes impossible to avoid browsing new listings and driving through potential neighborhoods to fawn over the houses of your dreams.
However, do yourself a favor and avoid falling in love with a home before getting loan approval.
Having a mortgage approval in hand will help you estimate the monthly payment you can afford.
There are several advantages to pre-approval, including:
- You and your realtor will not waste time looking at homes you can’t afford
- You’ll be in a better position to make a firm offer because the seller will know the lender has verified your finances
- You’re less likely to run into financial surprises after your offer is accepted
Getting pre-approved is only the beginning of the mortgage journey. When you find a home and make an offer, the house will have to pass inspection and get appraised.
Also, if your financial situation changes, so can your approval amount.
What Criteria Lenders Review
When deciding how much money you can borrow, lenders look at your assets, income, and credit.
Assets include items you own that you can liquidate if needed, such as checking and savings accounts, real estate, stocks, personal property, and more.
Lenders will review assets to confirm that you have enough funds set aside to make your payments after closing.
They do the same with income and check your debt-to-income (DTI) ratio to ensure that the debt you have doesn’t drastically offset your income. In most cases, lenders are looking for a DTI below 50%.
Finally, lenders will examine your credit. Good credit will help you qualify for a lower interest rate. This is because you’ve proven that you’re a responsible borrower. Some lenders require a minimum FICO score.
When lenders pull your credit reports, it may lower your scores by a few points. However, if you’re shopping around for a mortgage, credit reporting agencies will count multiple inquiries as a single credit pull, and your score will only go down once.
You’ll also need to consider which type of mortgage you want to apply for, and there are several types. We’ll discuss the most popular options.
Conventional mortgages are ones not insured by the federal government. Conventional mortgages can be conforming or non-conforming.
A conforming loan means the amount falls within maximum limits set by the Federal Housing Finance Agency (FHFA). Non-conforming loans do not have to meet these guidelines. Jumbo loans are the most common type of non-conforming loans.
Typically, lenders will require you to pay private mortgage insurance (PMI) if you apply for a conventional mortgage without putting down a down payment of 20% or more.
Government-insured mortgages are just that, mortgages insured by the federal government. While the government doesn’t lend money, it helps more American citizens become homeowners.
Three agencies back these mortgages.
These loans are backed by the Federal Housing Administration (FHA) and help make homeownership possible for those who can’t put a large amount of money down or have less-than-ideal credit.
To receive the maximum amount of 96.5% financing, borrowers need a minimum FICO score of 580. Then they’re required to put 3.5% down. If you can put at least 10% down, a score of 500 is acceptable.
FHA loans are unique in that they require two mortgage insurance premiums. The first premium is paid upfront, while the other is paid annually throughout the mortgage life if you put less than 10% down. This premium can increase the overall cost of your loan.
The U.S. Department of Agriculture backs loans to help low-income borrowers purchase homes in rural areas.
To qualify, you must meet specific income limits and choose to buy a home in a USDA-eligible area. Borrowers with significantly lower incomes may not have to put down any money.
VA loans provide a way for U.S. military members and their families to get flexible, low-interest mortgages. These loans don’t require a down payment or PMI. In most cases, the seller pays the closing costs.
A percentage of the loan amount is charged as a funding fee to offset the cost to taxpayers. You can roll this amount into the loan or paid upfront at closing.
If you have low cash savings or poor credit and can’t qualify for a conventional loan, government loans are ideal. As far as terms and flexibility, VA loans tend to be the best option for qualified borrowers.
Jumbo mortgages are non-conforming loans—the price of the home exceeds federal loan limits.
In 2021, the maximum loan limit for a single-family home in most of the country is $548,250. In certain areas, this maximum cost increases to $822,375.
Jumbo loans are typical in higher-cost areas. To qualify, a lender may require more in-depth documentation.
If you’re an affluent buyer seeking to buy a high-end home, a jumbo loan may make sense for you. You’ll need a high income, good to excellent credit, and the ability to put down a substantial amount of cash.
Many reputable lenders offer jumbo loan options at competitive rates. However, whether you need a jumbo loan is determined by how much financing you’re looking for, not by the property’s purchase price.
Fixed-rate mortgages maintain a steady interest rate over the life of your loan, which keeps your monthly mortgage payment the same. You can find fixed-rate mortgages in Denver in terms of 15 years, 20 years, or 30 years.
Adjustable-rate mortgages don’t provide the same stability as fixed-rate ones. These have fluctuating interest rates that vary due to market conditions.
Many adjustable-rate mortgages begin at a fixed interest rate for a set number of years and change to a variable rate for the remainder of the loan term.
The lender will provide adjustable-rate mortgage loan caps to show how much our monthly rate can fluctuate. Pay attention to these numbers so you can avoid financial trouble when the interest rate switches to a variable one.
Don’t Make Any Major Purchases Before Closing
Once you’ve secured mortgage preapproval, your work isn’t done. You can’t quit your job or make any significant financial decisions between loan approval and closing on your home.
Lenders realize that situations change rapidly, but they will re-check your income and credit scores a few days before closing to make sure everything still looks acceptable. If you choose to finance a purchase and your DTI increases, you might jeopardize your loan.
Keep it safe and avoid applying for new credit until after you own your new home.
You’re on Your Way to Getting a Mortgage in Colorado
Securing a mortgage can be an overwhelming and frustrating experience—even more so for a first-time homebuyer.
However, doing your research ahead of time can help you understand the types of loans available and any lender requirements for a mortgage in Colorado.
Purchasing a home in Colorado can be difficult, thanks to a tight housing market. Getting pre-approval status can make the difference between owning the house of your dreams and walking away with nothing.
When you’re ready to begin the process, Team Hickman at Fairway in Denver seeks to be your source for efficient service. Contact us today to start the pre-qualification process.