A Colorado FHA Loan is probably one of the most commonly used mortgages for many home buyers including first timers. Before there recent mortgage crisis hit, sub prime mortgages where taking over the first time homebuyer markets with the 100% financing, and no income documentation loans. They were much easier to qualify for, less paper work and many of them didn’t have mortgage insurance. This began squeezing the Colorado FHA loan out of favor. We all know how that story ended, these sub prime mortgages put some home owners in very bad financial situations, facing increasing payments and some even foreclosure.

Now that the mortgage markets have crumbled and only the “traditional” mortgage programs still exist most home buyers are turning back to the Colorado FHA loan option which is really buyer’s only option for low and zero money down.

Colorado FHA Loan - Zero Money Down

The Colorado FHA loan requires that a buyer put 3% of their own money down. This down payment can be gifted to them by a family member or non-profit organization making the Colorado FHA loan a good zero money down option. The most popular non-profit gift institutions are Nehemiah and AmeriDream. There are many others but these are the most well know (locally). These programs allow a buyer to get into a home with zero money down by simply having the seller pay the 3%. Traditionally FHA doesn’t allow the seller to pay the down payment but FHA does allow down payment assistance (this may change in the future but as of right now they do. If things change I will post and update). So what these companies do is they allow the seller to make a charitable donation to them in the amount of the down payment. The charity (Nehemiah or AmeriDream) will then cut the buyer a check to pay for their down payment. Again FHA allows charitable gifts to the buyer.

Closing Costs

Closing Costs can range anywhere from 3-6% of your purchase price depending on who you work with. Another unique thing about the Colorado FHA loan is that FHA will allow the seller to also pay up to 6% of your closing costs as well. Pairing this strategy up with the above down payment assistance program will allow a buyer to purchase a house with very little or even zero money down.

Putting It Together

Now the key to making the Colorado FHA Loan – zero money down scenario work is getting the seller (and the seller's agent) to agree to pay these things. The seller must be willing to make a charitable donation of 3% and pay all closing costs up to 6%. The easiest way to get the seller to agree to paying all of these things is to simply mark the sales price up 3% and ask the seller to pay closing costs (which is common). This way the seller is netting the same amount, minus closing costs. Make sure that your agent writing the contract is using the right verbiage in the Colorado real estate contract. You must also make sure that the home’s value or equity will support the newly marked up price/value (without falsely inflating the value).

Colorado FHA Loan Approval

Currently FHA doesn’t have a minimum credit score requirement but in this mortgage mess most lenders are requiring a 620 credit score or higher. If the borrow has other compensating factors an exception might be granted. A Colorado FHA loan doesn’t require you to have much savings, just enough to cover your closing costs and down payment but like stated before we can work around this by having the seller pay these through a charitable donation. One’s debt to income ratio must be below 41%. For those of you who do not know what a debt to income ratio is, it is all of your bills (that appear on your credit report) plus your estimated mortgage payment divided by your income.

The Colorado FHA Loan is one of the only remaining low to zero money down mortgages still available. FHA loans can be used for other things as well such as rehabbing a property but I will cover that in a different post.

I hope this post will help many potential home buyers understand and know how to get into a Colorado FHA loan using very little or zero money down. Colorado Real Estate Advisors works with many first time home buyers and has a lot of experience working with FHA. If you have any questions please don’t hesitate to call or email. Feel free to also add a post here.