Can You Buy a Home in Colorado With a Small Down Payment?


You might need years to save enough for a house, while rent, groceries, bills, and everyday expenses continue taking a bite out of your paycheck. For many Colorado residents, the down payment is the barrier that makes homeownership seem like a pipe dream. But you should know this: You don't have to have a hefty 20% nest egg to make homebuying doable. Several First time home buyer programs in Colorado can help you buy a house with limited cash on hand. With low down payment mortgage options, state programs, and other loan programs, you can get your foot in the door without depleting your savings, as long as you understand what each one entails.

Is a 20% Down Payment Really Necessary?

Let's dispel a myth right away. A 20% down payment on a house is not an obligation. It is just the most common rule of thumb that many homebuyers still believe they have to work around. In fact, certain conventional loan programs permit up to 3% down for qualified homebuyers, while FHA loans require as little as 3.5% down for creditworthy borrowers, which is a world of difference when you're buying a home in a market where they tend to come with pretty high price tags. (Of course, on the flip side, that usually means you have to borrow a bigger loan and pay private mortgage insurance.) But any reason to delay doing so for another five years just to reach that "magical" number may not be worth it.

Learn More About Colorado First-Time Homebuyer Assistance

If you are an eligible buyer, there are also programs to help you with the cost of your down payment. The Colorado Housing and Finance Authority (CHFA), for example, has some programs for first time homebuyers, which use an approved lender to qualify. Assistance comes in the form of a grant or a second mortgage that can cover a part of your down payment or your closing costs, which many buyers find to be another unforeseen expense of homeownership. The program has requirements such as income and purchase price limits, credit standards, and sometimes required education prior to closing. Read the guidelines for the program you are interested in and talk to a lender beforehand, rather than relying on first-time homebuyer status to justify your new costs.

Think About FHA Loans With Lower Down Payments

If you're a buyer who has little money saved up, an FHA mortgage loan may be a good option to get started. These government-backed loans, which are insured by the Federal Housing Administration (FHA), are available from private lenders approved to make the loans. If you qualify, an FHA loan allows the homebuyer to buy a home with as little as 3.5% down (assuming you meet the credit score minimum). An FHA home loan might be easier to qualify for than some conventional loan alternatives depending on your credit history, but at what cost? The costs are usually higher in upfront and annual mortgage insurance premiums, so you need to compare a monthly payment, the mortgage insurance premiums, and the total amount you plan to borrow against just the down payment.

Consider Traditional Financing Options With Minimal Down Payments

FHA isn't the only game in town. There are conventional mortgage programs with down payment minimums of as low as 3% that can help buyers with limited savings. Fannie Mae's Home Ready and Freddie Mac's Home Possible programs are designed for low- and moderate-income borrowers to make low-down-payment home purchases; there are income limits, occupancy restrictions, and type of property restrictions. One potential advantage is that you can cancel private mortgage insurance on a conventional loan once you have enough equity in the property to buy out the mortgage insurer (this is usually once you reach 80% of the house's value). This is not always how FHA mortgage insurance ends, so it is another reason to consider a conventional loan with lower down payment requirements. It all depends on your savings, but your credit score, debts, employment history, and other factors matter as well. Ask a lender about which program makes the most sense.

Could You Qualify for a VA or USDA Loan?

Ask your lender about the following options: VA: These loans are available to veterans, active duty service members, and certain eligible spouses of service members. VA guarantees these loans, and it is possible for qualified borrowers to get a mortgage with zero down if they have plenty of entitlement and meet the lender's guidelines. USDA: Buyers in qualifying rural and select suburban areas in Colorado may be able to finance 100 percent of the purchase price with these USDA loans. This is subject to income and other restrictions, and there's a loan fee for the guarantee, as well as other costs that should be covered. Confirm the property's address and your qualifying criteria before you get your heart set on a property.

Consider Also Closing Costs And Expenses

That small down payment helps a lot, but there's a lot more to buying a home than money down. Some of the costs that may be tacked onto the closing table include lender fees, appraisal costs, title service fees, recording costs, property taxes paid in advance, and homeowners insurance. Incurred sooner or later, those can all add up. And then there are the costs that come after you've moved in. Is the water heater a little off, the garage door openers broken, and the leaky faucet fixed? Or maybe there's just a couple of things you realize you can't wait to fix. Either way, don't put all your cash into buying the home-set aside some to pay the regular bills during that house's first months. Down payment assistance will sometimes cover some of those closing costs, too, depending on the rules of the program.

Improve Your Financial Position Before Applying

Even if you're planning to put down a small amount, your finances do play a role. Make sure there are no errors on your credit reports and reduce any revolving debt you have, as much as possible. Don't open a bunch of new credit accounts in the weeks or months before you apply for a mortgage. Keep in mind that when applying, the bank will look at your debt-to-income ratio, or all your monthly debt payments vs. your total gross monthly income. That number can be very high, even if you work a steady job, and make it more difficult for you to get approved. It's also a good idea to keep a paper trail of your employment history and where your down payment money originates from. Under some programs, gifts from certain family members are allowed; however, a paper trail for gift money is important. Your goal isn't to make your finances perfect overnight, but to prove you're able to manage the new payment without penny-pinching.

Compare Lenders and Choose a Mortgage That Fits

Don't just shop for the lowest advertised interest rate in search of a mortgage. Consider every aspect of the loan, including lender fees, mortgage insurance, repayment terms, and potential assistance opportunities. Different lenders may have access to some loan options while others do not, and may participate in various state programs. That's why it pays to shop and compare mortgage companies in Colorado before you make your final choice. Find out how much the lender requires to close, what your monthly payment will be, and if you qualify for any down payment assistance. Don't just compare rates - get a Loan Estimate so you know what actual loan options are like, and take note of how thoroughly the lender explains each aspect.

Conclusion: Home with a Lower Down Payment

In some cases, yes. You don't have to wait until you've saved 20% to shop for a home, thanks to programs like FHA mortgages, conventional loans with a low down payment requirement, VA and USDA loans, and state assistance programs. But don't let a low down payment take your eye off the prize - your mortgage payment, monthly insurance, taxes, upkeep, and other expenses should stay comfortably within your budget. You'll want to compare your options, get familiar with money-lending rules, and speak with a Colorado lender, so your first mortgage never gives you a financial headache. Good loans - and realistic borrowing limits - make buying a home truly worth it.

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