Common Mortgage Loan Options
In 2021, over 75% of residential transactions in Denver were purchased using a loan. An even greater percentage (over 90% nationally) of first-time homebuyers use a loan. Real estate financing is generally used to describe the method of securing funds for a real estate transaction. Here are some of the most common real estate loan types:
Federal Housing Administration (FHA) loans have a minimum downpayment of 3.5% and interest rates are always the lowest available. FHA loans are typically used for buyers who have less-than-perfect credit (minimum credit score of 600 is required) or those who do not have access to capital to make a large down payment. Using a FHA loan with less than 20% for a down payment means that private mortgage insurance (PMI) is required. Mortgage insurance is paid upfront as well as each month in addition to principle, interest, taxes, and insurance. Currently, the maximum loan amount for a single family home, townhome, or condo in Denver is $684,250. FHA financing can be used on properties with up to four units and the maximum loan amount increases with each unit. Not all properties allow FHA financing. Apartment and condo buildings have to be FHA approved. Not all homes will qualify for FHA financing. Make sure to let me know if you will be using FHA financing so I can ensure your property search is only showing FHA approved properties.
Conventional loans require a minimum downpayment of 3% for a first-time home buyer and 5% for a non first-time home buyer. Typically the interest rates for a conventional loan are slightly higher than FHA and can vary depending on your credit score, downpayment amount, and ownership type (primary residence, investment property, etc.). Similar to a FHA loan, using a conventional loan with less than 20% for a downpayment means that PMI is required. Once you reach 20 percent paid on your conventional loan, however, your PMI payments stop. Similar to FHA loans, you can use a conventional loan for a single family home up to a four-unit property, as well as condos, townhomes, and apartments. The maximum loan amount for a single family home, townhome, or condo in Denver is $684,250.
Veterans Affairs (VA) loan is a mortgage that is guaranteed by the United States Department of Veterans Affairs. The borrower must be a service member, veteran, OR eligible surviving spouse. There is no down payment required (0%) and interest rates are usually just slightly higher than FHA loans. Unlike FHA and conventional, there is no PMI, even if paying less than 20% in down payment funds. There is a funding fee required for all VA loans (2.3% for first time and 3.6% for all others), however, the fee is waived for disabled veterans. Similar to FHA, there is a minimum credit score of 600 that is required for eligibility. Not all properties allow VA financing, so make sure you let me know if you’ll be using it so I adjust your search criteria.
Home Equity Loan or Home Equity Line of Credit (HELOC) is a loan you can take out against the equity you have in your personal residence. A HELOC can also be used in addition to a conventional loan to purchase a home that is priced higher than the maximum loan limit for a 1-4 unit property. If using a conventional loan and a HELOC to purchase a home, you are required to put 10% down using the conventional loan.
To learn more about the basics of financing, reach out and let’s schedule time to connect!