Conventional Loans in Colorado: Limits, Requirements, & More

The term “conventional home loan” may apply to almost any type of home mortgage loan that is not backed by a government entity. Conventional loans come from private lenders, such as a mortgage company or bank.

Most conventional home loans in Colorado are subject to requirements and limits set by the federal government and organizations affiliated with the federal government. The following is an overview of the rules governing conventional loans in Colorado.

What is a Conventional Loan?

Conventional home loans do not have the backing of a federal government agency. They might, however, be backed by a government-sponsored enterprise (GSE). GSEs are corporations regulated by the Federal Housing Finance Agency (FHFA).

No Federal Backing

Conventional loans are not government-backed. Government-backed loans include those guaranteed by:

• The Federal Housing Administration (FHA)
• The U.S. Department of Veterans Affairs (VA)
• The U.S. Department of Agriculture (USDA)

These types of loans may come from private lenders with a guarantee from the government, or they may come directly from a government agency. Conventional loans come from private lenders.

Conventional home loans are generally available to people with good credit history and a high credit score. They tend to have higher interest rates than government-backed loans, but they are not subject to as many restrictions.

Conforming and Non-Conforming Loans

Two types of conventional home loans are available:

• Conforming loans meet the criteria set by the federal government and the two main GSEs, Fannie Mae and Freddie Mac.
• Non-conforming loans do not meet those criteria.

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Fannie Mae and Freddie Mac purchase loans from the originating lenders and sell them to investors in a secondary mortgage market. This provides those lenders with more cash to issue more loans. As long as borrowers and properties meet the GSEs’ criteria, the risk for lenders is fairly low.

Non-conforming conventional loans have fewer restrictions. They also present a greater risk for lenders since they do not have access to the secondary mortgage market.

Because of these protections for lenders, most conventional home loans are also conforming loans, to the point that many people think that “conventional” and “conforming” are synonymous. The two terms are not synonyms, although we may use them interchangeably in this article.

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What are the Conventional Loan Requirements in Colorado?

Conventional loans may have requirements that apply to your financial situation and the property you intend to buy.

The Property

While government-backed loans are mostly only available for the purchase of a home that you intend to use as your primary residence, conventional loans are more flexible. GSE criteria allow the use of conventional home loans to buy a single-family home where you will live full-time, a second home, or a multi-family property that you plan on using as an investment property.

Conforming conventional home loans have few, if any, restrictions regarding the kind of home you may buy. You will need to obtain an appraisal, however, to verify that the home’s condition and value are close to the purchase price and greater than the amount you want to borrow.

The Borrower (You)

The GSEs set minimum eligibility criteria for borrowers. Typical criteria include:

• A credit score of 620 or higher
• A debt-to-income ratio (DTI) of 45% or less, based on monthly debt payments and income
• A down payment of at least 20% of the purchase price, or at least 3% with private mortgage insurance (PMI)

Lenders can set their own standards, as long as they are stricter than those set by Fannie Mae and Freddie Mac. For example, a lender may require a higher credit score, and they may offer lower interest rates for higher credit scores. Lenders may also adjust one criterion based on another, such as requiring a higher credit score for someone whose DTI is close to 45%, while accepting a credit score closer to 620 for someone with a much lower DTI.

PMI is required for conventional home loans with down payments of less than 20%. It protects the lender in the event that the borrower stops making mortgage payments. A borrower can get rid of PMI once they have equity of at least 20% in the home.

What are the Conventional Loan Limits in Colorado?

The FHFA sets limits on the amount of conforming conventional home loans. It announces the loan limits for a calendar year towards the end of the preceding year.

In Colorado, conventional loan limits are set on a county-by-county basis. The more expensive an area’s housing costs, the higher the limit. Denver’s conventional loan limit, for example, is likely to be higher than the limit in many less-populous areas of the state.

Nationwide, the baseline conforming conventional loan limit for a one-unit property in 2022 is $647,200. High-cost areas may have a limit of up to $970,800. The limit in most of Colorado is set at the baseline amount. Eagle County has the highest limit in the state for one unit, $862,500.

Conventional Mortgage Lending Made Easy

If you have questions about conventional home loans in Colorado or elsewhere in The Rocky Mountain Region, the experienced mortgage professionals at Fairway of the Rockies are here to help. Your first step is to get pre-qualified with our easy fillable form.