Category: Real-Estate / Podcast

On this episode, sponsored by First Horizon, Tony Umholtz talks about navigating the mortgage market, important factors home buyers should understand when evaluating lending options, the anatomy of a home loan, and when to engage with a lender in the home-buying process. 

About Today’s Guest

Tony Umholtz graduated Cum Laude from the University of South Florida with a B.S. in Finance from the Muma College of Business. He then went on to complete his MBA. While at USF, Tony was part of the inaugural football team in 1997. He earned both Academic and AP All-American Honors during his collegiate career. After college, Tony had the opportunity to sign contracts with several NFL teams including the Tennessee Titans, New York Giants, and the New England Patriots. Being active in the community is also important to Tony. He has served or serves as a board member for several charitable and non-profit organizations including board member for the Salvation Army, FCA Tampa Bay, and the USF National Alumni Association. Having orchestrated over $1.1 billion in lending volume during his career, Tony has consistently been ranked as one of the top mortgage loan officers in the industry by the Scotsman’s Guide, Mortgage Executive magazine, and Mortgage Originator magazine.

Episode Summary

In this episode of the Your Financial Pharmacist podcast, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, is joined by Tony Umholtz, a mortgage manager at First Horizon. In this episode, Tim taps into Tony’s 20+ years of experience in the industry to discuss important factors home buyers should understand when evaluating different lending options, the anatomy of a home loan, and when to engage with a lender in the home-buying process. Tony opens the conversation with an update on the state of the lending market, with more interest in buying homes, but the market remains competitive with low inventory. An overview of the different loan types is covered, along with their nuances and situations where each is applicable. First-time home buyers will learn how much of a down payment may be needed based on the current options available, the term options for loans, and when 30, 20, or 15-year mortgages make the most sense. Tony shares his thoughts on lending options outside fixed-rate products and when they can be advantageous. He also explains what points are, how they work, and the importance of understanding how they are baked into introductory rate offers. As the show wraps, listeners will hear a frank exchange, where Tim and Tony discuss the impact of current events and bank uncertainty on financing a home purchase.

Links Mentioned in Today’s Episode

• Learn More About First Horizon’s Pharmacist Home Loan and Start the Pre-Approval Process
• YFP Planning: Financial Planning for Pharmacists
• Schedule a free Discovery Call with YFP Planning
• 5 Steps to Getting a Home Loan
• Apply for the Pharmacist Home Loan
• Your Financial Pharmacist Disclaimer and Disclosures

Episode Transcript

INTRODUCTION

[00:00:00] TIM ULBRICH: Hey, everybody. Tim Ulbrich here, and thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom. 

This week, I welcome back onto the show Tony Umholtz, a Mortgage Loan Officer with First Horizon. During the show, I tap into Tony’s 20-plus years of experience in the industry to discuss the important factors that homebuyers should know when evaluating the different loan options that are available. We discussed the differences in down payment, how credit scores can influence the options available, fixed versus adjustable rate mortgages, and when purchasing points does and does not make sense. 

Make sure to stay with us to the very end of the show where I asked Tony about the impact of current events on financing a home purchase, including the inevitable end of the student loan pause, whenever that may be, and the impact of the bank uncertainty, given the current news with Silicon Valley Bank, Signature Bank, First Republic, and most recently with the UBS purchase of Credit Suisse. 

Now, before we jump into our discussion, I recognize that many listeners may not be aware of what the team at YFP Planning does in working one-on-one with more than 280 households in 40-plus states. YFP Planning offers fee-only, high-touch financial planning that is customized to the pharmacy professional. If you’re interested in learning more about working one-on-one with a fee-only certified financial planner can help you achieve your financial goals, you can book a free discovery call at yfpplanning.com. Whether or not YFP Planning’s financial planning services are a good fit for you, know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom. 

Okay, let’s jump into my interview with Mortgage Loan Officer from First Horizon, Tony Umholtz. 

[INTERVIEW]

[00:01:46] TIM ULBRICH: Does saving 20% for a down payment on a home feel like an uphill battle? It’s no secret that pharmacists have a lot of competing financial priorities, including high student loan debt, meaning that saving 20% for a down payment on a home may take years. We’ve been on a hunt for a solution for pharmacists that are ready to purchase a home loan with a lower down payment and are happy to have found that option with First Horizon. 

First Horizon offers a professional home loan option, a.k.a. doctor or pharmacist home loan, that requires a three percent down payment for a single-family home or townhome for first-time homebuyers, has no PMI, and offers a 30-year fixed-rate mortgage on home loans up to $726,200. The pharmacist home loan is available in all states, except Alaska and Hawaii, and can be used to purchase condos as well. However, rates may be higher, and a condo review has to be completed. 

To check out the requirements for First Horizon’s pharmacist home loan and to start the pre-approval process, visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan. 

Tony, welcome back to the show.

[00:03:01] TONY UMHOLTZ: Tim, good to be here. Thanks for having me.

[00:03:03] TIM ULBRICH: Well, it’s officially the start of spring. So at the time of recording this, yesterday was the first day of spring. Typically, that means it’s prime time for home-buying. Current state of the market, we’d love to hear your thoughts. You shared something with me prior to hitting record about existing home sales being up more than was projected, which to be frank, surprised me a little bit, just given what we’ve been hearing of a lack of inventory that’s out there. So what are you seeing in terms of the current market?

[00:03:33] TONY UMHOLTZ: Well, I think we were in a very slow environment the last few months. When retail or the existing home sales were higher, it was from the month of January. So January was a low month, and I think it was at kind of a bottom level. But economists had predicted like almost 400,000 less units then actually sold. So I think the market is showing some underlying strength that the economists had predicted. 

Frankly speaking, with spring here, we’re busy. I mean, there’s a lot of people reaching out for pre-approvals right now. I mean, rates are certainly higher than they were last year at this time. But we’re seeing a lot of people interested in buying a home. But still, inventory is fairly tight, like we discussed earlier.

[00:04:19] TIM ULBRICH: Tony, for today’s show, I want to focus on prospective homebuyers and what they need to know in order to navigate the mortgage market and to make a decision on ultimately how they’re going to finance that home purchase. The question of why is this important, right? For starters, this is one of the, if not the, biggest financial purchase that they’re going to make. Obviously, they’re going to want to feel comfortable in understanding what their options are or want to feel good about the decision that they’re making from a financing standpoint. 

Second, I often hear from prospective pharmacist homebuyers, especially first-time homebuyers that are confused and overwhelmed about all the options that are out there; conventional VA, FHA, doctor-type loans, points, no points, 15 years, 30 years, fixed rates, ARMs. We want to clear up as much of that as we can, again, with a goal that folks will feel educated and informed as they’re going forward with that home purchase. 

Let’s jump in by dissecting some of the lending options and the features that are associated with those options. So, Tony, at a high level, I mentioned a few of them that are out there. What are the types of loans that are available when people are considering the financing of a home?

[00:05:34] TONY UMHOLTZ: There’s really several loans that are very common that you’ll see in the marketplace. Number one is FHA loans, Federal Housing Administration loans. Also, the Veterans Administration for those that have served in the military, VA loans. So you hear a lot about those. Then, of course, conventional loans, which are basically backed by Fannie Mae and Freddie Mac. So when you hear those two large government-sponsored entities, that’s what conventional loans are. 

There’s also nichey loans, niche loans that are offered. Typically, they’re not mainstream. They’re typically offered through banks, some financial institutions that will offer them for, for example, like the product for pharmacists that’s available for pharmacists, doctors, attorneys. There’s some nichey programs available based on your occupation. A lot of those loans are held on the bank’s balance sheet. So they’re not a program that would be openly sold on the open market. 

You’ll hear a lot about those programs, and each one has its own benefits. It’s important to know where you stand. So when you go through a pre-approval process, it’s a great way to get educated on where you stand. Even before that, you can find some information online. You can learn more about these different programs. 

But, typically, for example, FHA loans are going to have a limit for the market that you’re buying in. Let’s say you’re purchasing Hillsborough County, Florida, for example. They’re going to have a max loan limit of, let’s say, roughly 400,000. You can’t go above that number for FHA on a single-unit property. 

Now multiple units, you can do higher loan amounts. So a four-unit property can be higher. FHA is great for certain things. The one downside of FHA is that it’s permanent PMI, lifetime PMI. You can never get rid of it, although they did reduce it recently. But it’s still a lifetime PMI. You can never get –

[00:07:29] TIM ULBRICH: I learned that one the hard way, unfortunately. 

[00:07:33] TONY UMHOLTZ: Yes. So there is some downsides there. I do like the FHA when credit scores are a little weak because I can get better pricing than I can on a conventional loan. Then conventional, of course, does not have permanent PMI, has a little bit higher loan amounts for the county. Most counties in the US are 726, 200, so a little higher loan amounts. In some counties in the higher cost areas are actually a little bit more than that. 

Conventional has got PMI that only has to be on for two years. Sometimes, you can get it off, pulled off less, if you put more money down during the loan process. It doesn’t have upfront PMI like FHA. So there’s a lot of benefits to conventional. The niche programs, of course, you have to be a pharmacist, doctor, attorney. Those type of programs are going to be more unique to one group. But those are, obviously, going to typically be better and stronger than any of the products you can – the FHA and conventional. When you compare the two, they’re typically going to be stronger. 

But we always look at every option. That’s one thing that we’d love to do is say, okay, let’s compare it and stack rank what the best products are today for this client. We’ll come up with the best solution, and most lenders work that way.

[00:08:47] TIM ULBRICH: I’m glad you brought up the FHA to kick that off because what I see and what I hear from a lot of pharmacists is depending on where they live, and obviously you mentioned the max loan amount, but I think they’re often thinking first-time pharmacist homebuyers, “How do I get into a home and minimize my down payment? Because I’ve got $200,000 student loans. I’m starting a family. I’ve got all these other competing priorities.”

They may end up down an FHA pathway, which maybe is the best option but maybe not, and they may not be aware of an option like a pharmacist home loan that could get them into a home at a reasonable down payment. Obviously, credit score is a factor that we’ll have to consider, and we’ll talk about that again here in a few moments. But allows for that lower down payment, a little bit higher on the purchase price potential, which obviously in today’s market is an important factor but doesn’t carry the PMI, especially the permanent PMI you mentioned with the FHA. 

Take home point that I really hear there, Tony, is when you’re working with an individual such as yourself, working with someone that is looking at what is the best option for you and your personal situation, looking at potential purchase price, looking at down payment that you’re bringing, looking at credit score and really being able to customize the offering for that individual and their own situation. 

I want to break down down payment a little bit further because that is probably the biggest pain point I hear from first-time pharmacist homebuyers, which is maybe they’re familiar with the traditional, “Hey, I’ve got to have 20% down.” Not aware of other options that may be out there. That can be a big overwhelming number when it comes to purchasing a home at 400,000; 500,000; 600,000 dollars. 

So the question of do I need 20% down, you’ve talked about that a little bit already. But talk to us more about why that may not always have to be the case with other options that are available.

[00:10:43] TONY UMHOLTZ: When you’re looking at purchasing a property, 20% down and a great metric because you get out of PMI for a conventional loan. But it’s also a lot of capital, putting a lot of investment into your home. Then that can dilute the returns you get on your own long-term because leverage enhances returns, but it also takes away from savings and everything else. 

So there are programs available. For example, the FHA, I’m going back to FHA, you can put as little as three and a half percent down. Now, you do have heavy PMI. You do have lifetime MI, upfront MI that’s added to the loan amount. There are those other things. But you can get into the home with just three and a half percent. 

The pharmacist product and some conventional products, now some of these conventional products do have PMI. But sometimes, they’re priced pretty well. But you can do three, five percent down. These programs, you’re coming into it with very little, little, little down. PMI in the conventional sense, you will have a PMI premium every month. But the pharmacist product, no PMI at all. 

So you put three percent down, five percent down. That’s impactful because you’re – and you’re allowed to have the seller pay your closing costs and prepaids, if you’re in a bit of a cash-strapped situation, I mean putting three or five percent down and having your closing costs and prepaids taken care of, pretty attractive. So those are available to pharmacists and physicians as well and then even normal everyday folks on the conventional side. Three, five percent down, an ordinary buyer can take advantage of that. 

There are some programs for certain counties if you meet – and most of your audience will be above the median income for the county. But there’s even some programs offered if you’re below the median income, where there’s some additional benefits as well. This is a down payment assistance actually.

[00:12:37] TIM ULBRICH: So for folks who are saying they want to learn more about that pharmacists home loan product, as we mentioned in the introduction, you go to yourfinancialpharmacist.com/home-loan. We’ve got more information about that product with First Horizon, what are the different criteria. There’s an option on there to connect with us, and we can provide you with more information. 

Tony, down payment, as I mentioned, gets the attention because I think that’s often what we’re thinking about or how much cash are we going to have to forego at the time of purchase. But what may not get as much attention or other parts of the loan if we dissect that a little bit further, so things like the term of the loan. I’m thinking about, obviously, fixed rate versus a variable rate, whether or not there’s points. We already talked about the PMI. 

Let’s start with term. 30-year fixed rate I would assume is the most likely option that individuals are pursuing. But there are other options, 15-year term. I know I’ve seen 20-year terms. Are those the three that are typically used, and is the 30 the most common?

[00:13:39] TONY UMHOLTZ: Yes. Those are the three that are most common by far. 30-year is the most common. It gives you the most flexibility too from a payment perspective because you can always add additional principal. These loans, most loans don’t have any prepayment penalties. So you can always put more towards the loan. That typically is a good strategy. That gives you flexibility. 

But the 15-year, the-20 year are – some people do choose them. It also depends on when you choose to retire, right? Or when you – if you think you’re going to hold the home long term. Everybody’s goals are different. Everyone’s circumstances are unique. So we look at their timing. 

I had one client that said, “Hey, I’m going to be retiring in 15 years.” I think he’s like in his mid-40s, and that’s what we ended up doing for him because he wanted that 15-year to hold himself accountable. But I said by far the majority of people are opting for the 30-year. I think that that’s the better strategy because for the rate break you get, the flexibility is great. I just think having that flexibility is the most important thing. Cash flow – 

[00:14:43] TIM ULBRICH: Cash flow. 

[00:14:43] TONY UMHOLTZ: Is important. 

[00:14:44] TIM ULBRICH: Yes. 

[00:14:45] TONY UMHOLTZ: Yes. Because the one thing that clients have to understand and buyers have to understand is the shorter that term, there’s even a 10-year fixed, actually, 10 as well. But it’s a heavy payment because it’s amortizing so quickly. Amortizing, essentially, is just your principal pay down, right? It’s how rapidly you’re paying down the mortgage. So a 10-year fixed loan, you only have 120 payments, and that loan is totally paid for. So it’s a heavy monthly payment. 

I think cash flow is really critical for everyone. I think that’s the best way to – because you can always add principal and pay the loan down quicker, right? But you can’t always – you can’t go back and say, “Darn, I wish I didn’t do that 15-year and have to pay that extra 2,000 a month.” You can be putting it into your IRA or somewhere else, paying down other debts. 

[00:15:34] TIM ULBRICH: Yes. I think the options of cash flow. It’s something we hear from a lot of pharmacists, first-time homebuyers. I know it’s something my wife and I have talked about extensively, right, especially when you’re in that transitionary phase, where home prices now are more expensive than they’ve ever been. Rent rates are obviously higher. So those monthly payments, even at a 30-year, are going to be higher than they were just a few years ago, let alone at a 15 or a 10. 

Student loans are coming back online. At some point here in the near future, we’ll talk about that in a little bit. Then just a lot of the expenses that come with that transitionary phase, a lot of folks that may be getting married. They’re having kids, right? They’re moving. So a lot of demands on cash flow. To your point, we can make bigger payments, and you can even automate those over time if you feel like, “Hey, I confidently can make this. I want to pay this down for whatever reason.” Maybe it’s, “Hey, I’m going to save a little bit of interest. I’m averse to the debt or I want to retire early.” 

Whatever the rationale may be, you have that option. But you’re also giving yourself other options in the event that you need to have some of that cash flow, so well said. I think for those reasons, we see many folks go in with a 30 and perhaps some people that are making extra payments along the way. 

What about the rate, Tony? I feel like when I was going through the refinance process pre-pandemic, refinancing a 30-year fixed rate, three percent. Maybe even a little bit lower for some folks at that point in time. Obviously, rates have gone up substantially. But in that moment, it felt like, and for the longest time, fixed rate, fixed rate, fixed rate. Lock it in for as long as you can. I’m curious to hear your thoughts now, given the interest rate environment we’re in. Options on adjustable rate mortgage versus a fixed rate. What are some things that folks should be considering here? As I do know, there are some other products out there that may be marketed towards pharmacist or physicians or other health care providers that aren’t a fixed-rate option. 

[00:17:29] TONY UMHOLTZ: That’s right. Yes. I mean, there are ARM products out there. It’s interesting that they’re not super mainstream. They’re going to be more nichey because Fannie Mae and Freddie Mac, the pricing on ARMs is actually worse than a 30-year right now. There’s just no market for it, a secondary market. 

But banks will retain it. We have some programs where we’ll write ARMs, and we’re appropriate. It’s a good product. It does carry a slightly lower rate than the fixed rates. I think this would be one of those times where I don’t think you would get hurt, potentially. But I think you got to know your risks, though. I mean, that the risks are what do rates do because, typically, the ARMs are structured 5, 7, or 10 years. 

Now, when I first started in the industry, we used to have just outright one-month ARMs. I mean, 20 years ago, you would use ARMs we could write that were adjustable day one. They had some amazing rates made, but they really run with a cycle around BC. I these things move up and down. But I would call them more like a hybrid ARM. They’re fixed for 5, 7, or 10 years. So they do have a fixed-rate component. There’s still a 30-year loan. Some banks offer a balloon, which means you have to like redo the loan at that time. But those are fairly attractive, especially if you think you’re not going to be in the house for 5, 7, or 10 years. I think that’s something to look at. 

The downside of those loans is if you are in the property, and it does start adjusting. The rate market is not favorable, but you’re going to be in a higher market, and rates are going up. It’s going to be harder to refinance. So there is some risks and tail risk there down the line that if you’re there in the home that it can move. So I’ve seen a move down. I’ve seen a move up. 

Where we are in the economic cycle is tough right now. I think the Fed is pretty far into this tightening phase. We can address more of this later, Tim. But I think we could see some volatility in rates for a while, but there is potential for rates to go down, again, at some point. So I think anyone that does an ARM, I think inside of five years, there could be chances to refinance and do a 30-year again. So it’s not necessarily a bad loan if you’re willing to take a little bit of risk.

[00:19:40] TIM ULBRICH: I think understanding that risk, Tony, is really important, as well as being honest with yourself about your risk tolerance and what is that worth, as well as what margin may there or may there not be in the budget. We talked about this with student loans and days gone by when you might refinance from the Federal on the private side, especially if you’re looking at a variable rate over a fixed rate on the student loans. Understanding if that rate does go up or when that goes up. What margin do you have in your budget, and how do you feel about that being a fluid part of your monthly spending plan? 

I think for some pharmacists, maybe many pharmacists, they look at it and say, “I want the known, so I can plan around it.” But I think in the spirit of talking about all the options that are out there and evaluating which one is best for you, it’s worth covering in more detail. 

Tony, points. I’m seeing a lot of confusion out there right now around points. Correct me if I’m wrong, but I think what’s happening is people are going out, and they’re Googling mortgage rates. They’re getting into a sales page, and what they’re seeing are rates that have points embedded. Unless you’re reading the fine print, you’re really not comparing apples to apples as you’re trying to find what might be the best rate out there for the product that you’re looking at. 

So that’s just, I think, an unfortunate part of the practice if you’re not doing your homework. But what are points quickly, and how do they work, and why is it important that folks are understanding how these are baked into these introductory rate offers that they see?

[00:21:10] TONY UMHOLTZ: Yes. That is a great point, Tim. Basically, points are what the – most lenders do when they charge points is essentially just buying the rates down. So they’re offering you a certain rate at a certain – we call it par price, right? So they will say, “So for you to get this rate –” Let’s say it’s six percent today. You would need to pay a half point or one point, right? That can vary by lenders based upon their pricing. So that can vary. 

But the one thing that that’s out there, and I think a lot of people miss this, is like the national headlines like week’s rate by Freddie Mac, right, which is old news anyway, except the last week’s rate. Rates change daily. They almost always include some sort of points in that quote almost every time. 

[00:21:56] TIM ULBRICH: All the news headlines you’re seeing. 

[00:21:58] TONY UMHOLTZ: Yes. 

[00:21:58] TIM ULBRICH: Yes. 

[00:21:59] TONY UMHOLTZ: Yes. If you read the fine print, it might say, “Hey, I had three-quarters of a point, which is point .75 percent of the loan amount.” So fairly expensive, right? Or one percent or one and a quarter. So typically, they quote the rates with some points. My stance on points and the way I typically try to charge them if people really want them is where it’s like upfront interest, so they can write it off on their taxes. 

But in this environment, especially, I’m not a big advocate of points because there’s a good likelihood that rates are better over the next 24 months. I think why pay a premium now? Come in and pay your points when rates are a lot lower. Then you’d really can grab a nice low rate for the long-term. But you’re seeing a lot of quotes out there with points from lenders right now to make themselves look more attractive. A lot of home builder finance companies will do it as well. 

The other thing in these what’s called 2-1 buydowns, which are really, in a lot of ways, a smoke and mirrors because what they’re doing is they’re giving you have a lower rate for the first year or two because you’re paying it all upfront in interest. So you’re paying a couple of points upfront to get that buydown. It’s a worse rate long-term. So that’s another thing. You’re loading up on interest. You’re paying it yourself. You might as well take the higher rates. You’re going to save money. 

So there’s things like that that are out there. It’s just promotional ways, promotional products. But the points, again, it’s not a bad thing to do them because you typically will get a better rate than you would have if you didn’t pay points. But given the environment we’re in, I’m not a huge advocate. I’m just giving that you could save the money, and I think you’ll get it back later.

[00:23:43] TIM ULBRICH: Tony, something you said there has me thinking I want to preface my comments with this a little bit of conjecture, right? We don’t know what rates will or will not do. I agree with your thoughts that likely we’re going to see those come down in the next two years. Certainly, that’s not guaranteed. But my mind is spinning. If that happens, my mind was going down the path of, wow, like a flurry of refinances and people that have bought in this high-interest rate market that are trying to get a better rate. 

But then also like what does that mean for what we started the show talking about that there’s not enough supply? Unless that rate comes down significantly, I don’t think it solves the issue of people that have a home locked in at 2.8, 2.9, 3 percent. If they come down even a point, point and a half, like it feels like that spread is still too significant.

So I don’t know. Maybe I’m being overdramatic, but it feels like we have some challenges ahead of us as it relates to the supply and demand, even though the rates might get better as a homebuyer. I hear that and think, “Great. I’m going to save a little bit on rates.” But that probably means that home prices are going up because demand is going up.

[00:24:49] TONY UMHOLTZ: That’s exactly right. I think we’re going to see that. I think most – not every market is the same. Some markets have more inventory than others. Some are more challenged. But I know just from my experience, and we learned across the country. I had a conversation this morning with a client, and they had to purchase the home without an inspection. It was that competitive. There was just no inventory where they were buying, and it was that competitive. So I think we’re going to go right back into that again. 

I do think lower rates will help move some people because families can grow, right? They outgrow their home. There’s move-up buyers. People have to relocate, and builders will start building more inventory. But the challenge is just there isn’t enough people moving right now and putting their homes up for sale. So you’re exactly right. I think we’re going to start seeing it tighten up again. Prices are going to rise. Maybe not to the extent they were during the COVID boom, but I think you’re going to see prices rise. 

I think the last six months have been a good time to buy. I think still even now is still a pretty good time because there’s still – it’s not everybody’s out there buying –

[00:25:58] TIM ULBRICH: It’s crazy. 

[00:25:59] TONY UMHOLTZ: You could still get sellers. Sellers will listen to you right now. They’re a little spooked, right? If you’re selling, you’re going to be a little more spooked and a little more nervous. But I think there’s going to be a lot more buyers coming in as these rates drop. You’re right. I don’t think we’d see rates go down. I mean, we don’t know for sure. But I don’t see rates going to the high twos again. But they definitely – even coming down into the fours, even five is going to be a significant lift to the market, significant.

[00:26:28] TIM ULBRICH: I hear what you’re saying, right? There are some things that life happens. We’re in a two or three-bedroom home, and we’ve had a few kids. You’re going to push through that despite rates because those factors are that significant or relocation because of family or whatever. 

But a piece we haven’t talked about, which also just hit my mind, is the impact of the remote work transition. I don’t have any stats to back this up, but I would think that that just inherently reduces the number of people that are moving as a result of a job transition or who could stay put and aren’t having to have to relocate, which might put some further pressure on the supply piece as well. 

[00:27:09] TONY UMHOLTZ: Absolutely. 

[00:27:09] TIM ULBRICH: Yes. There’s just a lot of factors, and we’re going to look back at this period one day and say, “Remember when all these things happened at the same time.” So I want to wrap up by picking your brain. I always appreciate, Tony, not only your 20-plus years of experience in this industry and your experience working with many pharmacists that are looking to purchase but also your mind around the economics of this and, of course, what’s going on in the markets right now. We’ve got some unique challenges. 

Two that I want to focus on that I know are top of mind for our listeners right now. One is, hey, these student loans are coming back at some point. What does this mean, and how are lenders going to be looking at that? Then the second, I want to talk about some of the bank uncertainty that we’re living in real-time right now. 

So let’s start with the student loans. We don’t know when yet. The Supreme Court heard the case on the Biden debt cancellation. We’re expecting an announcement. I think all signs are pointing to that’s going to restart payments here at some point. Right now, it’d be no later than the end of August, unless something changes as a result of that decision. 

From a lender standpoint, we now have coming up for graduating classes, Tony, that have yet to have to pay on federal student loans. That also tends to be a group. They are usually first-time homebuyers. So debt-to-income ratios, how student loans are factored in, knowing that that pause is going to be ending, how are lenders thinking about this, especially for folks like our listeners, pharmacists that carry a pretty substantial debt load?

[00:28:46] TONY UMHOLTZ: That’s a great question. I think it’s just one of those things we look back at this time, right? It’s so unique. There’s a couple of ways that lenders look at these student loans. Number one, we look at that minimum payment, right? That minimum income-based repayment that is required. So that’s one way. The other way is we take a factor of that student loan amount, and the factors vary. 

For example, we talked about FHA and conventional earlier. Their factors are pretty high. So it makes it much harder to qualify with those programs. Even though you’re not making a payment, your payment is zero, there’s still an actual factor that’s attached to that loan size. So it’s $200,000. It can be 2,000 a month that the lender is counting against you. So the factor we use for pharmacists on our product is much lower than that, but it’s still used. So that’s basically an internal factor is how banks will look at that typically. 

It’s a tricky time. We don’t know what that outcome is going to be. So I would say right now, we’d be utilizing that factor or that income-based repayment, like what’s that amount going to be if you started paying in September or whatever it might be. But I would probably say for most people in that situation, we’ll be utilizing that factor, Tim, to qualify them.

[00:30:04] TIM ULBRICH: I want to poke a little bit more on that in terms of the factor or an income-driven repayment. Is that a general formula that a bank is using like, “Hey, $200,000 of student loan debt based on our calculation, income-driven repayment plan, would be X.” Or is it looking at the specifics bar to bar, right? Because we do have some of our listeners that might be employing a loan forgiveness strategy, where they’re working hard to lower their AGI to increase the amount that’s forgiven tax-free because it’s dropping down their income-driven repayment now. So they might be below like a generic calculation. How is that determined?

[00:30:42] TONY UMHOLTZ: It hasn’t gotten that far yet. That’s a great question because it’s still looked at like we’ll get a payment letter saying, “Okay, your monthly payment is going to be 400 a month.” That’s what we would use on the income-based from the servicer, from the student loan servicer. They would essentially provide the borrower with that number, what that amount is. 

Now, the factors is used on the lump sum of student loans. You brought up a good point. Will it get there? I mean, FHA and conventional have a certain way of looking at things and Fannie Mae. I don’t know if that’s going to change. That could change. I think it should change based on that Supreme Court outcome. So that could affect those type of programs. 

The more nichey bank programs, I think those would follow suit. They are more lenient, though, than Fannie and Freddie are and FHA as far as how much they would count. So like, for example, FHA, one percent, right? So $200,000, right, 2,000 a month. That’s a big hurdle to qualify in. 

[00:31:40] TIM ULBRICH: Makes sense. 

[00:31:40] TONY UMHOLTZ: That’s a big monthly payment. If your total debt ratio is 43%, that’s income to qualify. It makes it hard to afford a home. So that’s why these nichey programs are important for clients with big student loans.

[00:31:54] TIM ULBRICH: Yes, median debt load of a pharmacist today about 160. I think we’re going to see that drop maybe a little bit, just because of the pause on interest to credit while people are in school. But we have many clients, many folks we talk with on the regular that, sure, making a great income. But they’ve got 200,000; 250,000; 300,000 dollars of debt or maybe a household debt of 400,000 if you have two pharmacists together. 

The second thing I wanted to pick your brain on and we don’t have to go into the weeds on the background of how we got to this point with the bank uncertainty. But if anyone’s been following the news at a high level, it’s been a tumultuous time, right? We saw what happened with Silicon Valley Bank in California a couple of weeks ago, followed by Signature Bank in New York. First Republic, at the time, what we know at this recording, was propped up with a $30 billion cash infusion from some other banks, still struggling after that infusion. UBS buying one of the major banks in Switzerland. 

I hear all this, Tony. As a pharmacist, you might be buying a home and wondering, “What is the impact for me and this purchase that I’m trying to make? Is there a hesitancy to lend because of all that’s going on with the uncertainty, and what should I be aware of as a buyer?”

[00:33:09] TONY UMHOLTZ: Well, great questions. There is a lot going on, guys. There really is. I’ll try to unpack it as simply as I can. But to answer that question, I do think there are going to be challenges with lending. Some banks may be more cautious to lend, especially on portfolio products, these nichey products, if they’re in a challenging deposit situation. So you could see some challenges. 

I did have one client. It was a physician that mentioned that the bank they were working with had stopped doing physician loans. So there are, I think, some banks that will pull back a little bit on lending. But for the most part, FHA, Fannie Mae, I mean, these loans are all backed by the government. There’s no liquidity issues there at all. The vast majority of banks are not going to have a challenge lending. 

In these cases, and again we’re in a time very – there’s a lot of question marks with a lot of uncertainty because the Federal Reserve is aggressively raising rates. So these several banks you mentioned, Silicon Valley Bank, for example, was a risk management issue to some extent. I mean, they essentially were – not to get too far in the weeds, but they were a large regional bank. They serviced tech companies in Silicon Valley in California. So they were very nichey in the venture capital world. 

It was basically a classic run on the bank in a more modern time, where they took their assets, their capital, and they invested it in treasury bonds, which are the safest bonds out there, right? The regulators allow that because they’re safe. You’re going to get paid back. But what they didn’t account for is the duration risk and the interest rate risk of holding long-term bonds. So basically, what happened is roughly $100 billion portfolio treasury bond is suddenly worth 70 billion or possibly a little less because of that hit to it with rates going up. When they had the demand for their deposits back, they couldn’t pay the depositors.

The other issue with that too is what’s called uninsured deposits. They had a vast amount of uninsured deposits where FDIC, which ensures a $250,000 deposit, they had a lot of tech institutions, venture capital funds that had a lot more money on balance that was not insured. It was basically that classic run. So that was Silicon Valley. Fairly similar with Signature Bank, just more in the New York real estate market, these are very nichey banks. 

But I think there’s a lot of banks that are going to be affected. I just don’t think – we don’t know the extent of it yet. We don’t know what the Fed is going to do. But a lot of this is just risk management per institution and the fact that the Fed has just raised rates so quickly. I mean, it’s that simple, right? It’s reducing the liquidity in the system. 

For your listeners and your viewers, it’s not going to impact you. There could be some nichey banks that pull back on their products, so you do have to watch that. But for the most part, it’s going to be business as usual for the vast majority of people out there.

[00:36:18] TIM ULBRICH: I think what’s worth watching is the ripple effect or the potential ripple effect, right? You mentioned not only of these banks but also what’s the Fed going to do going forward. How are they going to continue to fight inflation, while dealing with some of this uncertainty? We’re going to find out a little bit this week. 

[00:36:32] TONY UMHOLTZ: Yes, we will. 

[00:36:34] TIM ULBRICH: I think while these are niche banks, they’re not small institutions by any means. I think our listeners may be most familiar with First Republic of the group that’s listed. So while me and Ohio may not be actively putting money in a Silicon Valley Bank, and that seems like a niche far-off bank, there’s definitely a ripple effect that can happen. That is causing a lot of the anxiety and concern right now.

But also, these aren’t small institutions. So we’ll see kind of where things go forward, and stay tuned, and we’ll do our best job to bring this information to the community to make sure that they feel confident understanding what’s going on. But most importantly, how this impacts the decisions they’re making, like purchasing a home as we’re talking about here today. 

Tony, as always, I appreciate your expertise, the value that you bring to the YFP community. We’ll mention and include in the show notes information where folks can connect with you. They can go to yourfinancialpharmacist.com/home-loan. Get more information on the pharmacist home loan product offered by First Horizon and looking forward to more conversations throughout the year as well. So thanks for your time and for your expertise.

[00:37:47] TONY UMHOLTZ: Tim, always good to be with you. I always have fun. So thanks for having me.

[00:37:51] TIM ULBRICH: Before we wrap up today’s show, I want to, again, thank this week’s sponsor of the Your Financial Pharmacist Podcast, First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home. A lot of pharmacists in the YFP community have taken advantage of First Horizon’s pharmacist home loan, which requires a three percent down payment for a single-family home or townhome for first-time homebuyers and has no PMI on a 30-year fixed-rate mortgage. 

To learn more about the requirements for First Horizon’s pharmacist home loan and to get started with the pre-approval process, you can visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan. 

[END OF INTERVIEW]

[00:38:35] TONY UMHOLTZ: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. 

Furthermore, the information contained in our archived newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist, unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward-looking statements that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. 

Thank you, again, for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week. 

[END]

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On this episode, sponsored by The Real Estate RPh, Nate Hedrick, PharmD, The Real Estate RPh and co-host of the YFP Real Estate Investing Podcast, discusses home buying for pharmacists, how to determine if you are ready, how to find an agent, and much more.

Episode Summary

This week on the YFP Podcast, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, has a chat with Nate Hedrick, The Real Estate RPh and co-host of the YFP Real Estate Investing Podcast, about home buying for pharmacists and the many considerations that should be taken into account when pursuing home ownership. With a focus on first-time home buyers, Tim and Nate cover knowing when you are ready to buy a home. They share the importance of having a solid financial foundation so that when you purchase your home, it doesn’t become an additional stressor on your financial picture. Nate shares his checklist for home-buying readiness, including tackling bad debt, having an emergency fund, building a down payment fund, and understanding why you want to buy a home. With many pharmacists impacted by the student loan pause, there is a discussion on preparedness for when that ends and how home buyers will have to plan for that change to the financial plan, including changes in the affordability of home buying. Nate touches on additional costs of home ownership that first-time buyers should be aware of and plan for, taxes, utilities, maintenance, and capital expenditures. First-time home buyers should also consider assembling a team for the home-buying process, starting with an accountability partner, a lender, and a real estate agent. Listeners will hear about lending options and words of wisdom from Nate on the real estate landscape in early 2023. 

Links Mentioned in Today’s Episode

• Real Estate RPh
• YFP Real Estate Concierge Service
• Book Your Free Jumpstart Call
• Three Strategies for Buying a House with Student Loans
• Email Nate Hedrick: [email protected]
• YFP Real Estate Investing Podcast
• Homebuying Resources
• Your Financial Pharmacist Disclaimer and Disclosures

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hello and welcome to the YFP Podcast. I’m Tim Ulbrich, and it’s great to have you here, as we strive to inspire and encourage you on your path towards achieving financial freedom. 

Today, I’m excited to welcome back a friend of YFP, pharmacist, real estate agent, and real estate investor, Nate Hedrick, aka the Real Estate RPH. In this episode, we’re going to delve into the world of home buying for pharmacists. We’ll discuss what you need to know, how to determine if you’re ready, considerations for balancing a home purchase for student loans, the differences between lending options, and the various members to consider on your home buying team. Stay with us until the end of the show when Nate and I talk about the current economic environment that first-time homebuyers find themselves in and what to expect going forward. 

Are you planning to buy a home in the next year or two? With the state of current home prices and mortgage rates, the home buying process can feel overwhelming. But what if you can leverage the knowledge and ongoing support of someone who has worked with dozens of other pharmacists through their home buying journey all at no cost to you? I’m talking about Nate Hedrick at the Real Estate RPH. 

Nate is a pharmacist who has been a partner of YFP for many years now and offers a home buying concierge service that can help you find a high quality agent in your area and support you throughout the entire process. So head on over to realestaterph.com or click on the link in the show notes to schedule your free 30-minute jumpstart planning session with Nate. 

[INTERVIEW]

[00:01:32] TU: Nate, welcome back to the show. 

[00:01:33] NH: Hey, Tim. Always great to be here.

[00:01:35] TU: So today, we’re going to focus specifically on first-time homebuyers. Few areas we’re going to cover, how to determine when you’re ready, including rent versus buy, how to potentially balance a home purchase with student loans. I think, Nate, this is a timely topic, although we’ve addressed it in the past. We’re getting ready to come out of this freeze period. So I have a sense that this is going to be a topic that is top of mind for many folks again. Then we’ll also talk about the key differences between some of the lending options, a common question that we get. Hey, I’m looking to buy a home, looking for an agent. What are the loan options that are available? So we’ll tackle that as well. 

Nate, we have covered this topic before. But you and I talked and really thought this is worth bringing back for a couple reasons. One, first-time homebuyers, we recognize that at the time we publish that content previously, they may not have been in a position to buy at that point. So we wanted to reach them in this moment. But also, there are just some factors right now that are unique. I mentioned one with the student loans coming back on board, waiting to find out when that will be and then also just the reality of the market. 

We felt like this was worth coming back to, and I think that we want to make sure that we’re covering this topic well, especially for those folks that are looking to buy for the first time.

[00:02:47] NH: Yes. There’s been a lot of changes, just in the last six months, in market conditions and interest rates. Like pharmacy, right? It’s a dynamic space, real estate. So you can’t just set it once and forget it.

[00:03:00] TU: So let’s start with the elephant in the room, I think, when we talk about first-time homebuyers, especially relevant to today’s market. Should I rent? Should I buy? I think this is timely, not only because of interest rates, but also because of rising rent rates. I think that this is a topic we know we hear often from our community. So my question for you is in today’s market, how do you advise someone to think through this question, should I rent, should I buy, and really to keep the home purchase within the context of the rest of the financial plan?

[00:03:34] NH: Yes. You hit the nail on the head right there, Tim. I mean, this is such a – like any financial decision, you’re not going to make it based on one factor, right? You have to look at a number of factors. So things like how long do I plan to be in this area might be just one piece of this bigger picture of, well, is it worth it to buy here because I’m only going to be here for two years of residency or whatever. 

Other questions become what is the local rent rate. Like you said, the rents have been going up just about everywhere, to the point where now mortgages are looking a lot more attractive. But you’ve also got this higher interest rate you have to deal with. Things are just getting pricier. So I think there are lots of different pieces that go into that financial decision, and it’s not just a one-size-fits-all. But really taking a step back and truly evaluating it.

I think the one thing that I see more often than not is people just kind of put a feeling into it and say, “Well, it’s probably cheaper to buy. So I’ll just do that.” Or, “It’s probably better for me to rent right now. So I’ll just do that.” But I really encourage clients and anyone I talked to to take a minute, sit down, figure it out. Look at actual numbers and then help make the decision using that information, rather than just kind of a gut check.

[00:04:39] TU: Yes. I love that, Nate. You and I have talked about this before, but I think there’s a underlying tone of like rent is bad. Buying a home, equity is good. We’ll talk about all the costs involved. But I think what you’re saying is really astute, which is like, hey, let’s put some numbers to that, that feeling, and that statement. Maybe that ends up shaking out to be true. Maybe it doesn’t, based on how loans are structured, based on how much we’re putting down, based on what else is going on in the financial plan. 

Sometimes, it does make sense to stay where you’re at renting-wise. Especially, we see this in higher cost of living areas. We have a chance to work with a lot of fellowship programs, folks that are based out of Boston and the northeast. Buying a home is not a possibility as they’re getting started. Or if it is, they might be giving up, “Hey, I’m going to have to move an hour, hour and a half out, and then commute in.” So everyone’s situation is different. An important piece to keep that in mind. 

What would you say makes your checklist? So if I’m talking with you, Nate, help me out, first-time homebuyer. I want to make sure I do this in a way that is wise, considering the rest of my financial plan. You’ve been through this. You get the chance to talk with prospective homebuyers all the time. What is that checklist that says, “I’m ready to buy a home.”?

[00:05:48] NH: Yes. It’s a great question. Like anything else, this is going to differ by person. But I think there’s kind of a core set of things that you should be looking at before you say, “Okay, yes. We’re ready to start down this road of buying.” The first thing I would look at is looking at “your bad debt,” right? So making sure that if you’ve got a lot of credit card debt or other bad debt sitting out there, don’t let that rule your financial plan, right? Don’t try to work around that to buy a home. It’s going to be a lot more difficult, and you can set yourself up for a lot more success if you get that bad debt going first. So that’s kind of an easy – I say easy, but it’s a good first step, at least, to get started. 

From there, you really want to make sure you’ve got an emergency fund. This is more important now, more so than ever, because the way that the economy has been changing, the way the market has been changing, there’s a potential for more disruption, right? More chances for either a layoff or changes in hours or all the things that can happen that constitute an emergency. Those expound when you buy a house, right? You might have a furnace go out or a roof that needs to be replaced. There are lots of different things that can pop up. So making sure you’ve got that emergency fund as kind of your core, and it’s separate from your down payment fund, which is kind of the next step. But making sure that emergency fund is there first, and then start saving separately for down payment. 

This is where I get the most resistance from people that I talk to is, “Well, that’s so much money to save up, Nate. You’re talking about maybe a $20,000 emergency fund and then another $50,000 down payment. How am I supposed to do that? I want a house now.” But truly, to really make sure that you’re ready, making sure those pieces are in place ahead of time is a key to success. 

Then ultimately, once you’ve done all that and started down figuring those pieces out. Throughout that, you should be keeping your why behind buying in mind, right? This is not a decision, like I said before, that you can take in a silo. It shouldn’t just be, “Well, I want a house, so let’s go buy it.” Figure out what that why is. We want to set ourselves up for financial success. We want to rent this house out in the future. We want to be in this area for 10 more years. So it makes a lot of sense. What is that why? Then allow that to support all those other pieces before you ever start clicking through Zillow and looking at pictures.

[00:07:58] TU: Yes. You and I both know, right? Well, once that point comes, like we may say, “Hey, we’re going to buy in 6 to 12 months, 12 to 24 months.” Start looking on Redfin, Zillow, realtor.com, whatever. Man, three days later, we’re looking at homes, putting in offers. What just happened? 

What I really hear there, Nate, is a theme of having a strong base, having a strong foundation so that when you move into a home, right? We’ll talk about additional costs here in a moment, but things will happen. Things will pop up, whether it’s unexpected costs, expenses, remodels, additional furnishing, or just life changing. We don’t want the home to become another stressor exactly of the financial plan. 

So, yes, this takes discipline. We’re not suggesting that every penny of debt needs to be gone. We’ll talk about how to balance this with student loans. We’ll talk about different down payments that may exist. All of those are nuances and details that are really important. But more than anything, we want to be able to move into the home, have peace of mind. Let’s be frank. That’s becoming challenging in today’s market, right? Home prices are going up, which means down payments are going up accordingly. Interest rates are going up, which means monthly payments are going up. So we recognize the challenge with this. 

But we’ve seen it in our own situations. We’ve seen it with thousands of pharmacists we’ve talked with and worked with, is that if we can keep this home purchase in check and in consideration with the rest of the financial plan, it’s going to give us a lot. Not only a peace of mind but also breathing room, as we look at accomplishing other goals. You said something earlier that I want to come back to in this checklist, which is potential timeline of being in the home. I underestimated that. I suspect this is common for first-time homebuyers. We look at a home. We say, “Yes, I think we’ll be here forever.” Then job opportunities come. Kids come into the equation. Things shift or change. 

Really, when you look at the profitability, if you will, or the return on investment of the home, it really comes with a long time period of being in that home. So what advice would you have for folks that are thinking about the timeline, knowing every market is different? But is it five years? Is it seven years? What might be that timeframe when we think about closing costs and other things, that transition if it does happen isn’t going to set us back financially? 

[00:10:17] NH: Yes. It’s, like you said, very specific, based on location, right, that there’s a common phrase? Real estate is local. So it definitely matters where you’re buying. I think the average in the United States is something like 2.8 or three years, something like that, is the break-even point, right? If you can stay in that house longer than three years, you’re good. If it’s less than three years, you’ve probably lost a little bit money. 

That totally gets thrown out the window, though, when the market shifts like it has, right? If you bought at the beginning of 2021 and sold at the beginning of 2022, just a year later, you probably made bank, right? Appreciation was going through the roof, and so you did fine. Similarly, you might buy today and have to sell in six months, and you might lose 10% of value, right? There’s no way for us to know. 

So you can prepare. You can plan. But as you said before, things are going to change, right? You might find a new job in two years that you had never anticipated. Now, you’re moving across the country for that, right? So you can try to set this up as best you can. Definitely look and use what information you have to make that decision. But don’t get so hung up on we have to plan to be here for five years. If we don’t, it’s not worth it, right? Because that’s just going to make the decision more stressful. Plan with the information that you have and then kind of roll with the rest.

[00:11:28] TU: I think this is another vote in the bucket of making sure that we’ve got a solid savings plan and solid emergency fund, additional savings. Because from personal experience, when you move, it’s not just the closing costs. It’s not just, obviously, the fees that are associated. But it’s the physical move. It’s the, “Okay, we’re in a new home. We want to make some updates. We need some new furniture.” Depending on the size of the property and so forth, taxes may change. Insurance policies may change. 

That takes me to my next question for you, which is around some of the additional costs of homeownership that I think, speaking from personal experience, when you’re going in this as a first-time homebuyer, you tend to overlook these because there’s so much excitement around getting in the home. Personal finance, author, speaker, podcaster, Ramit Sethi, talks about estimating an additional 40 to 50 percent of the mortgage payment for these additional homeownership costs, things that he calls phantom costs, right? Taxes, insurance, maintenance, furnishing, utilities, lawn equipment, et cetera. What are your thoughts on that number, and what folks need to be thinking about here?

[00:12:32] NH: Yes. That’s probably not far off. I mean, if you look at the average mortgage payment, just the mortgage payment by itself, it’s right around 25 to 28 percent of the typical American’s income. That’s what they spend on just their mortgage payment. If you look at what they’ve spent on housing expenses, it’s closer to a full like third or more of their full income is going toward their housing expenses. So there’s a big chunk of that other stuff that’s not just in a net mortgage payment. 

I know when I was buying my first home, the things I missed, just because, I don’t know, I didn’t know what to look for, were the simple stuff like property taxes, right? I never paid property taxes in my life. I’ve rented forever. Now, I’m 22 years old or whatever, buying a home. All of a sudden, I have this every six-month bill I have to deal with, right? I didn’t expect that. Something simple like utilities too. Those might be baked into your rental costs today, right? You might have to cover sewer or water or trash or electric. Or maybe you’re just paying for Internet today, right? All those utilities become yours. 

Then the biggest thing, maybe the most obvious but also the most expensive is the maintenance and capital expenditures. So this is the regular everyday stuff that breaks and you have to replace, but also the big ticket items, right? The roof, the driveway, the furnace, all these larger dollar expenses that can pop up. I’ll give you an example from our own life. We were sitting having dinner the other day. Our like sort of dining room/kitchen area has this big, gorgeous window that looks onto our backyard. It’s like five-foot by four-foot, this huge window. In the bottom left corner, I saw a crack in the window, like in the actual glass itself. I’m like, “Oh, my gosh. We need to look at that.” 

So then the next morning, we get up and the crack is clear to the middle of the window. It’s like, “Oh, shoot.” So we were like, “Okay. Well, I guess we have to replace this window,” which I hadn’t done in our house before. We got a couple of different options. One person that wants to replace the glass, somebody else that wants to take out the whole window and install new windows, right? All these different things. It’s anywhere from like 1,000 to 3,000 dollars, depending on what thing we pick. 

It’s like, “Whoa.” Okay, this just went from a small crack we noticed at dinner to, “Here’s $3,000 expense, potentially.” So those are the kinds of things that can spiral. If you’re not planning for it, it can really make or break your budget every month.

[00:14:41] TU: That’s such a great example. Sorry, you guys had to go through that. But that is the things that just happen, right? I think we think about objectively looking at the numbers. Speaking from personal experience, when we made that decision to go from rent to buy, I looked at the mortgage payment. I looked at the interest. I looked at the taxes. I looked at the insurance, which is a good start. But I vastly underestimated all these other things that we’re talking about. 

Some of them are things that we just have to expect are going to happen, right? You mentioned the big ones; the roof, the furnace, et cetera. But then there’s just kind of the normal wear and tear or, “Hey, we want to make some updates and upgrades.” As much as we tell ourselves like, “Hey, this is the home as is. It’s our forever home,” like human behavior is you’re going to want to make some updates. You’re going to want to make some changes. So if we can plan for these and have margin in the budget, going from a rent to buy situation. 

Does the budget not only allow for the principal, the interest, the taxes, and the insurance? But does a budget also allow for some of these other expenses and planning for these things along the way? Again, we want to be in the home, enjoying that large biggest purchase we’re going to make without having the additional stress of like, “Ah, cracked a window. This is now a headache.” 

[00:15:57] NH: Something we stole from Tim Baker, actually, and that has been really helpful for us is we have a bucket in our ally accounts. One of our ally accounts is just for home stuff. There’s something powerful about seeing that money go in there and seeing that fund kind of increase and then ultimately decrease when you have to fix something. That makes it more realistic. If you just kind of roll those expenses into your budget every month, it’s easy to overlook them. But if you can plan ahead and actually see those dollars going in and out, it makes it a lot more real.

[00:16:23] TU: Yes, absolutely. All right. So we’ve talked about the expense associated with the home purchase, some of those that are obvious. Maybe some of those are not as obvious. We’ve talked about the readiness to buy, evaluating that rent versus buy. Let’s talk about putting together a team, Nate. I think this is a piece that we get on. We start driving around neighborhoods. We start looking on websites and looking at homes. All of a sudden, we’re off and running. We may not take the time to step back and say not only what is the why, right? What’s the big picture? What are we trying to accomplish? But who do I need on my team before I get too far in the process, and things kind of take off?

When you think about assembling a home buying team, why is it important to have that team in place? Ultimately, who is on that team? Who are the members that are part of that?

[00:17:11] NH: Yes. This is something that I know when I bought my first house, I sort of overlooked or kind of ignored. Probably because even though it was being recommended to me like, “Hey, Nate. Make sure you assemble your team before you get started,” that just sounds overwhelming. It sounds like it’s something I don’t know how to do. What I do know how to do is go on Zillow, see a house that I like, and show up at an open house, right? That’s easy. I can do that. 

But what I encourage and what I talk to a lot of my clients about is try to build this mini team in advance, and it will just make the whole process that much easier and smoother. It doesn’t have to be a big ordeal, right? Start with just an accountability partner, right? That’s the first member of your team. This could be a spouse. This could be a parent. This could be a sibling. Somebody that maybe either is or is not involved in the transaction that can be that accountability piece. 

I told the story before. But when my wife and I bought our first house, one of the first houses that we really liked was this gorgeous property on like 15 acres, right up, backing up against Cuyahoga Valley National Park here in Cleveland, just absolutely gorgeous property. We fell in love with it. It was way outside our budget. The house was literally falling down. Until we brought our parents out to come like see it for a second showing, and they clearly thought we were insane, we couldn’t see it, right? It was just too easy to get enamored by the vision that we had rather than the reality. So get that accountability partner first because that can really make decision making easier and get you back on track. 

From there, the biggest pieces you need from there are really a lender and a real estate agent. I typically recommend people get one or the other first. Then you can kind of expand from there. Good agents are going to know good lenders. Good lenders are going to know good agents. But the agent is the one you’re going to be working with on a daily basis. So if you have to pick one, I generally recommend going with the agent first, and then letting them recommend several lenders and shopping around for that. 

That’s typically where the team starts. Then you can expand with needs beyond that, right? You might need a financial planner. You might need a lawyer. You might need a tax professional. All of those people are people you can add on to the mix. But for truly the initial process of buying a home, start with that agent, get that lender, and then start to expand the team from there.

[00:19:16] TU: Nate, I love what you share here with starting with an accountability partner, whether that’s someone involved in the process or not, right? Because I think that reinforces what you’re saying earlier about defining the why, someone who can really help ask good questions, get you thinking more about that. But that also maybe can be a little bit prodding where needed about, “Hey, we’re looking at this beautiful property in Cuyahoga Falls. Yes, the land is perfect. We have this amazing vision. Hey, Nate and Kristen. Have you guys thought about like what it’s going to take the managers to repair it, remodel it? What does this mean for the rest of the financial plan?” 

We had a very similar experience. We looked at a property up in Northeast Ohio. I remember vividly. Jess and I walked in. It was kind of a huge lodge type of property, really open. As many warts as there were and the costs that it was going to take to get it up and running, of which we have no – not only that financial means. We have no handiness in any bone of our body, let alone wanting to kind of manage that and take the time. But we just went in eyes wide open of like what this could be. 

Thankfully, we kind of eventually got off that ledge and looked at something that was a little bit more reasonable. But I think that speaks to some of the emotional sides, especially on the first-time homebuyer, and how important it is to have that partner. That, once you then define the framework of, “Okay. What are we looking for? What’s the budget? What’s the game plan? How does this fit within the financial plan? Okay. Now, let’s move forward with selecting an agent. Let’s move forward to looking at lending options.” 

Because I think we see this over and over and over again because of good marketing practices and other things. Someone is often running with a bank. We have to remember that that bank, that institution, as nice of a person as they are, they aren’t asking you all the questions about how is this best going to fit in with your long-term financial plan, your long-term goals. Sure, you might get approved. We’ll talk about lending options here in a moment. But that doesn’t necessarily mean it’s a good fit for your personal situation and the overall financial plan. I can’t say enough about the team and making sure you’ve got that accountability partner and that the folks are there that are going to help you ensure that this lines up with your long-term plan. 

Nate, let’s talk about the loan piece. I think for many pharmacists, this is where we’re itching to get started. We want to know what’s the best rate, how much do I have to put down. Conventional approach is 20% down, which allows for no PMI, no private mortgage insurance, a healthy cushion in terms of equity in the home, if for whatever reason the home drops in value, or you end up moving, needing to tap into equity. But it feels like more and more borrowers are seeking an option that is less than 20% down. I suspect this is coming from a few different areas. 

One, the desire to buy a home. We’ve talked about that, right? To get out of a rental situation. The second, I think, is that because of rising home costs, that means that if we hold true to that 20%, that’s going to take more to save for that down payment. It’s going to take longer. Then the third is, I think, for many pharmacists, first-time homebuyers, student loans are eating away at their ability to be able to save for that down payment. So home prices are going up, 20% takes longer to save. Because I have these pesky student loans, it’s harder to save for that down payment. So would you agree? Is this a trend that you’re seeing in terms of a shift away from that conventional 20% down?

[00:22:38] NH: Yes. I do see quite a bit that he’ll move in that direction. Some of it is simply because, like you mentioned, the rising depreciation we saw over the last two, two and a half years completely outpaced people’s ability to save. I mean, if you were – let’s say you were saving $1,000 a month, right? That’s a really nice chunk of change you’re setting aside every single month for a down payment. 

But home prices are appreciating at 20% a year in 2021 and about 22% a year in 2022. Unless you’re adding another $200, another $200 every single year on top of those monthly payments, you’re not going to catch up. You’re actually losing money toward your down payment, just by appreciation outpacing you. So that alone is forcing a lot of people in all buying points, at all price points to say, “Well, what other options do I have? Can I spend less upfront and then just ride the monthly payments out over the long period?” Yes, we’re absolutely seeing that, and people are just looking for new options.

[00:23:38] TU: Let’s get to that here in a moment. What are those options? What might be the pros, the cons? What do we want to be thinking about? But I want to first address the student loans. This has become – prior to the pandemic, I would say this is an issue we’ve heard over and over and over again. Hey, I’m itching to getting a home. I’m looking to buy a home. But the student loans are really a big barrier to allowing myself to either fit this into the budget or be able to save for that down payment.” 

That tone has shifted because of the pause now for three years. Obviously, that’s going to be ending here in the foreseeable future, unless something changes, which it could. But I want to talk about this balance. You wrote a blog article on this topic, balancing student loans with the home purchase. We’ll link to that in the show notes. But what advice at a high level would you have for our listeners, as they evaluate their options with buying a home with student loans, also knowing that we might have folks that haven’t been used to making payments for the past three years that are now going to be entering back into those payments?

[00:24:35] NH: It’s actually something that I’m worried is the wrong word but I’m concerned about because there are so many people out there today that either have bought a home, where they have entered into a rental situation sometime in the last three years and have not taken stock up their loan payments or what they’re going to be. I think if there’s one thing that people are missing more than anything right now, it’s that they’re pretending those don’t exist because they don’t exist today. I think that’s really dangerous. 

If you look at how the lenders were handling these over the last couple of years, most lenders were basically taking your loan balance. Let’s say you have $100,000 in loans. They were saying, well, one percent of that is going to be your payment, right? We’ll just guess one percent. Some lenders were guessing half a percent, and they didn’t even look at what your actual payment was. They just guessed, right? They just picked a number and rolled with it. 

Again, I think that if you’re not paying attention to that and then you suddenly restart, you could find yourself very, very house poor or just in a situation where you’re not prepared for that level of financial strain. So if there’s one thing you can do in terms of the loans right now, it’s look at what your actual payment is going to be, figure out what that number is, and build it into your budget. If you really want to stress yourself out and stress the finances a little bit before you make that home purchase, put that money that that loan payment is going to be into account that you that you can’t touch, right? Just throw it into a new ally account or a new bucket, and pretend you can’t touch it at all. 

Make sure everything still works without you being able to touch that because it’s coming back, right? Just banking on the fact that it’s going to go away is not going to set you up for success. So that is definitely an important piece to keep in mind.

[00:26:07] TU: Yes. We got to build that muscle right now, right? I think what’s happened is it’s been an incredible benefit. Zero dollar payments, zero percent interest has been incredible, if we’ve been allocating those dollars to other parts of the plan, expecting it to come back at some point, budgeting accordingly. But I think the unintended consequence has been with multiple extensions of the pause. With each one, it’s becoming more and more, as you alluded to, like pretending that they may not be there. 

This is the moment to start building that muscle back up if we haven’t been. For those that are looking, I think there’s the consideration for those that are in a home, that bought a home when the pause was happening. Then I think there’s a consideration for those that are looking to buy a home and have yet to have their student loans start back up or start for the first time as well. What you’re saying is just such a classic example of trying to avoid the trap of looking at any one part of a financial plan in a silo, right? So we’re looking at the overall budget. We’re looking at the impact of the student loan payment. How do we address those student loans, right?

Someone who pursues a loan forgiveness strategy, income-driven repayment plan, what they may or may not be able to do on a home is very different than someone who’s looking at an aggressive debt payoff period. So how you tackle your student loans and the repayment plan you choose is going to have big implications on what that means to the budget, which, of course, connects to what you’re going to be able to afford and look at on the side of the home buying. Great reminder. We’ll link to that article again in the show notes. I think it’s really relevant, as folks start preparing for this pause to pick back up. 

[00:27:42] NH: Yes. Keep in mind, something – I don’t want to sound all doom and gloom, right? You can absolutely purchase a home with student loans. Just don’t ignore them, right? We bought our first house and had tons of student loan debt still. It’s absolutely doable. What I’m concerned about is people that are ignoring it and pretending that it’s not coming back. That’s where you can fall into a trap.

[00:28:00] TU: Yes. We got to look at the numbers, right? Look at the budget. Kind of objectively see what’s there. So at a broad level, Nate, define the different types of loans that are available. We talked about conventional 20% down, no private mortgage insurance. But again, we see more and more folks are pivoting away from that. So that certainly is one option. What other options are out there that individuals should consider before they kind of get off and running with any one individual lending institution?

[00:28:27] NH: Yes. I think, typically, when I’m talking about loans, I break them down into three types. Obviously, not a lender, right? Real estate agent and pharmacist but not a lender. But the three basic types that you’re going to deal with are what we call conventional loans. This is typically your 20% down, maybe 10% with PMI. But these are kind of your good credit score, run of the mill. Every bank has them type of loans, right? Conventional loans, and they’re backed by Fannie and Freddie Mae or Freddie Mac and Fannie Mae. Excuse me. Those are going to be just, again, standard underwriting practice, right? 

You’ve also got government-backed loans. These are those that are attached to some sort of government-backed program. Either these are FHA loans, or these are USDA loans or VA loans. But there’s some sort of government-backed entity with these, and you might need to qualify for those, in the case of like a VA loan. Or you might just be able to offer this up through a certain type of lender. So those are available. Typically, the advantage of these loans is a lot lower down payment. But you might have different terms and a higher interest rate. Or you’re paying private mortgage insurance or things like that. 

Then the third type is kind of a hybrid. Really, it’s closer to a conventional loan, but that is a professional loan. We’ve got lots of different types of these. The ones that most of our audience would be dealing with as a pharmacist is home loan, but they’re also called physicians’ loans or doctors’ loans. The idea is that you’re taking the conventional loan product, and you’re underwriting it using the fact that the person buying the home is going to be a physician or a pharmacist, right? There’s a lot more earning potential there, a lot more stability in their career, a lot more income-earning potential down the road. So they underwrite those a little bit differently. 

Typically, what that means is that you can get the lower down payment of a government-backed loan, but you get the conventional terms that come with a conventional loan. So you get no PMI, for example. Or you get the lower interest rate that others are getting. So there are some advantages there. Each one of those loans has an advantage and a disadvantage in certain situations. It’s really on the individual to evaluate those with somebody that knows what they’re doing to make sure that you’re finding what the right product is for you.

[00:30:28] TU: Which comes back to the advocate or an agent like yourself that really has a good look into these different types of options. It can be a third party to have you thought about this because there’s really, you said earlier, the suggestion of looking at multiple lenders, which I certainly would agree with. I would add on to that looking at multiple lending options with multiple lenders, right? 

We’re talking about conventional loans, government-backed loans, pharmacist home, doctor type loans. All of those differ, as you alluded to, in terms of down payment, potentially the interest rates, the nature of loans, it fixes a variable, and then, obviously, credit scores, other factors as well. So I think what I’m trying to advocate for is to really do that homework. Work with someone that can help you understand those options. Do your research because once you’re running off with a lender, at that point, you’re starting to really kind of box yourself into one option. So making sure you’re looking at the full spectrum of options before you move forward.

[00:31:28] NH: This is where a really good agent can start the conversation in the right direction too, right? As real estate agents, we are not lending experts. But we know a ton of lending experts, right? So if a client comes to me and says, “Hey, Nate. I’m thinking about buying a home. I’ve only saved up $10,000 for my down payment, and my credit score is not that great,” well, that’s fine. Let’s see if we can make that work. I’m going to get you in touch with three of my favorite FHA lenders. Talk with each one of them, explain your situation, and let’s see what that looks like, right? We can guide people to the right individuals to get that information, rather than having them just guess and start Googling things. 

A good agent, if you’re not sure what the lending process or not sure which the next step is, start with a really good agent. Explain your situation. While they are not going to be able to give you all the answers themselves, they’re going to know the right people to talk to so that you can get those answers from the right individual.

[00:32:16] TU: For folks that are going through this right now or looking to get started here in the near future, as we mentioned on the introduction, Nate can really be that advocate for you. So we built through the home buying concierge service. Nate can connect you with an agent all across the country. So you don’t have to live just in Northeast Ohio to be able to tap into Nate’s expertise. Regardless of where you’re buying a home across the country, he’s vetted agents in certain areas is there to be alongside of you in that journey to talk about lending options, to answer questions that you have, and to be the advocate that he talked about earlier. 

We’ll link to the page. You can get in contact with Nate in the show notes. You can also email him directly. We’ll link to his email address. I think that’s a great first step for folks that are getting started on this journey. Or as we talked about before, even if you’re thinking, hey, six months out, 12 months out, we know that timeline can collapse. So it can’t hurt to start the conversation now as well. 

Nate, let’s wrap up by talking about some current trends, right? The past couple of years, since the pandemic, I would say is an understatement, have been a whirlwind, limited supply, high demand. You talked about the appreciation rates, rising interest rates. I think this creates an overwhelming situation for many first-time homebuyers. Here today, we’re recording today. We’re expecting an announcement on a jobs report, which the Fed is looking at, based on that what they’re going to do to be more or less aggressive on interest rate hikes. 

There’s news that’s coming out daily that I think for first-time homebuyers, it’s like, geez, not only is the price going up. The interest rates are going up. We’re talking about student loans starting. So my question is if you had to look at your crystal ball, we won’t hold you to it, what is the outlook potentially? I’m a first-time homebuyer. I’m listening. I’m looking maybe this spring, this summer, next fall. What words of wisdom would you have for them, as they look at this pursuit of buying a home?

[00:34:05] NH: Yes. Like you said, no crystal ball, but at least the pulse that I’m getting. David and I on the YFP Real Estate Investing Podcast are lucky enough to talk to individuals from all over the country in all different walks of life, and understanding the lending and the markets and different agents from different locations. So that helps to give us a better perspective on kind of nationally what’s happening. 

What we’re seeing right now is that most markets in the last three to six months have pulled back in their valuations. Some have been flat. Like here in Cleveland, we’re actually flat to up. I think we’re up like two percent year over year or something like that. So we’re very, very small increase year over year. But then there are some markets like Houston who pulled back 20% or more. It’s just incredible. 

So a lot of that, again, goes back to what I said earlier about real estate is local. So understanding your local market can help you make a decision moving forward. What we’re seeing right now is that pullback or that flattening is making it a little bit more affordable, as the people save up more money and the appreciation isn’t outpacing them nearly as much. It’s making it a little bit more affordable to buy. But there is still a supply issue. We’re still dealing with a lot of people that aren’t ready to sell because if they sell, they have to go buy something else with a higher interest rate. 

We talked about this on the show before, you and I, about if you had a three percent mortgage today, and you switch to a six percent mortgage somewhere else, you could have a much, much less expensive home but the exact same monthly payment, right?

[00:35:32] TU: Yes. There has to be a really compelling reason to move, right? When you’re going for – yeah.

[00:35:35] NH: Exactly. That’s hurting supply a little bit. I don’t think I see that getting considerably better until the end of the year. So what we’re seeing right now, and again it varies based on location, is that houses are still coming on the market. They’re a little more affordable, just because their prices have not continued to skyrocket. But the limited supply is still creating competition out there. I wish I could say it’s 100% better than it was last year. It’s better and it’s still not a bad time to buy. But the competition is still out there.

I mean, I offered on a house yesterday with a pharmacist. It came on the market two days ago. We put an offer in. There was a three o’clock deadline. We were almost six percent over listing price on our escalation clause, and we still lost it to somebody else who waived inspections. So like that’s still happening. It’s still out there. It’s getting better, but we’re not quite there yet.

[00:36:25] TU: Yes. I’m glad, again, to your point. Everything’s local. But that one example really highlights, I think, something important for folks that are on the front end of this journey as you’re looking. I’ve almost now, Nate, as I just observe homes and kind of keep an eye on what’s in the market, whatever I see is the list price, I just increase in my mind, right? I think that maybe that’s true in some markets, more so than others. But what I’m getting at is there can be a very creepy and effective looking of, “Here, our budget’s 300. Well, why don’t we put the search range like up to 350?” Then we go see the home that’s 350. Really, it’s going to take 380, 400 to get that home, right? All of a sudden, we’re $100,000 off what we had budgeted. 

Again, I think finding someone on your team that can really help you understand the local market, what is happening in terms of putting together competitive offers, how far above our homes typically go into value, and then working that in your plan to make sure you’ve got a realistic view of what it’s going to take as you make that purchase. 

[00:37:21] NH: There are opportunities out there too. I mean, we’re still seeing deals where a house is sitting on the market for a couple of weeks because maybe they overpriced it to begin with. It loses that initial flurry of activity. I mean, we as agents know that the first three weeks of listing a home are the most important, right? If you don’t sell in that first three weeks, right now anyway, your chances of selling it list price go down dramatically, and they just drop and drop. 

If you’re someone out there looking for a home and you’ve not had success so far, and again this is going to vary by location, but what I’m encouraging some of my clients to do is look at those houses that have been in the market for two months. Those are the ones where you can potentially go find a deal because they initially overpriced it. They thought they were going to sell in a week. Now, it’s eight weeks, right? That’s where you can come in and make a deal. 

I’ve had success with clients offering on those properties and actually getting quite a bit off of that listing price. So it’s softening, but it’s not anywhere near where we want it to be yet for the buyers that we’re working with.

[00:38:13] TU: So stay tuned. We’ll have Nate back on the show this year as well. Again, we’ll link to his information in the show notes, his email address. You can go to yourfinancialpharmacist.com. You can click on home buying. You can get to Nate that way as well. 

Nate, as always, great stuff, and I appreciate the perspective you bring on this important topic to our community.

[00:38:31] NH: Yes. Thanks for having me on, Tim. 

[00:38:33] TU: Nate and I have covered a ton of information in this podcast. So imagine working with Nate one-on-one through your home buying journey and having his support to give you much needed peace of mind. We know many pharmacists want to feel confident about big financial decisions, including a home purchase. So if you have fears of being house poor, concerns about the impact a home purchase might have on your other financial goals, Nate and his home buying concierge service can help, all at no cost to you. You can visit realestaterph.com or click on the link in the show notes to schedule your free 30-minute jumpstart planning session with Nate. 

[END OF INTERVIEW]

[00:39:12] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. 

Furthermore, the information contained in our archived newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist, unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward-looking statements that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. 

Thank you, again, for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week. 

[END]

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On this episode sponsored by First Horizon, Tony Umholtz talks through the current state of the home buying market and interest rates, how to navigate the home buying loan options available, considerations for all types of buyers, and unique lending considerations.

About Today’s Guest

Tony Umholtz graduated Cum Laude from the University of South Florida with a B.S. in Finance from the Muma College of Business. He then went on to complete his MBA. While at USF, Tony was part of the inaugural football team in 1997. He earned both Academic and AP All-American Honors during his collegiate career. After college, Tony had the opportunity to sign contracts with several NFL teams including the Tennessee Titans, New York Giants, and the New England Patriots. Being active in the community is also important to Tony. He has served or serves as a board member for several charitable and non-profit organizations including board member for the Salvation Army, FCA Tampa Bay, and the USF National Alumni Association. Having orchestrated over $1.1 billion in lending volume during his career, Tony has consistently been ranked as one of the top mortgage loan officers in the industry by the Scotsman’s Guide, Mortgage Executive magazine, and Mortgage Originator magazine.

Episode Summary

This week, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, welcomes Tony Umholtz, a mortgage manager for First Horizon, back to the show to discuss cracking the code on home-buying loan options. In their discussion, Tony and Tim talk through the current state of the home buying market and interest rates, how to navigate options available to all types of buyers, as well as some unique lending considerations based on commonly asked questions from home buyers. After a discussion on the current state of the market, Tony shares his comparison of the current state to where we were at the start of 2022 and makes some predictions for the rate and refinancing markets in the coming year based on the surprising results of the 2022 Consumer Price Index. The discussion then moves into the myriad of financing options available when making a home purchase and how to evaluate all of the options available. Tony shares a straightforward three-step process for home buying and then dives deep into the intricacies of home-buying loan options, their pros and cons, and which products are best suited to each situation. Tony shares various loan types and the down payment requirements for each. Tony also covers a general overview of the Pharmacist Home Loan product from First Horizon and addresses considerations for unique lending home purchases above the conventional lending thresholds, buying land or building a home, and house hacking.

Links Mentioned in Today’s Episode

• Learn More About First Horizon’s Pharmacist Home Loan and Start the Pre-Approval Process
• YFP Planning: Financial Planning for Pharmacists
• Schedule a free Discovery Call with YFP Planning
• YFP 130: House Hacking Your Way to Financial Freedom
• 5 Steps to Getting a Home Loan
• YFP 271: Financing a Home Purchase FAQ
• Your Financial Pharmacist Disclaimer and Disclosures

Episode Transcript

[INTRODUCTION]

[00:00:00] T. ULBRICH: Hey, everybody. Tim Ulbrich here, and thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom. 

This week, I had a chance to welcome back on the show Tony Umholtz, a mortgage manager for First Horizon, formerly IBERIABANK. During the show, Tony and I’ll talk through the current state of the home buying market and interest rates, how to navigate the numerous lending options that are available to purchase a home, and some of the unique lending considerations, including those home purchases that are above the conventional lending thresholds, those that are buying land or building a home, and those that are looking to house hack, occupying one unit and renting out the rest.

Now, before we hear from today’s sponsor and jump in on the show, I recognize that many listeners may not be aware of what the team at YFP Planning does in working one on one with more than 250 households in 40-plus states. YFP Planning offers fee-only high-touch financial planning that is customized to the pharmacy professional. If you’re interested in learning more about how working one on one with a certified financial planner may help you achieve your financial goals, you can book a free discovery call at yfpplanning.com. Whether or not YFP Planning’s financial planning services are a good fit for you, know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom. 

Okay, let’s hear from today’s sponsor, and then we’ll jump on to my interview with Tony Umholtz. 

Does saving 20% for a down payment on a home feel like an uphill battle? It’s no secret that pharmacists have a lot of competing financial priorities, including high student loan debt, meaning that saving 20% for a down payment on a home may take years. We’ve been on the hunt for a solution for pharmacists that are ready to purchase a home with a lower down payment and are happy to have found that option with First Horizon, previously IBERIABANK/First Horizon. 

First Horizon offers a professional home loan option, aka a doctor or pharmacist home loan, that requires a three percent down payment for a single-family home or townhome, has no PMI, and offers a 30-year fixed rate mortgage on home loans up to $647,200. The pharmacist home loan is available in all states, except Alaska and Hawaii, and can be used to purchase condos as well. However, rates may be higher, and a condo review has to be completed. 

To check out the requirements for First Horizon’s pharmacist home loan and to start the pre-approval process, visit yourfinancialpharmacist.com/homeloan. Again, that’s yourfinancialpharmacist.com/homeloan. 

[INTERVIEW]

[00:02:34] T. ULBRICH: Tony, welcome back to the show.

[00:02:36] T. UMHOLTZ: Hey, Tim. Good to see you. Thanks for having me.

[00:02:39] T. ULBRICH: Really excited to have you as always. Really appreciate your perspective and your insights on the home buying market, on financing, on lending, and really supporting our community with the many questions that often come around this very important topic. So here we are, towards the end of 2022. It’s been a wild year, wild year all around, but especially in the home buying market. Hard to predict this one, right?

[00:03:03] T. UMHOLTZ: This was a tough one. Yeah. This has been a wild year, for sure. It really has. Interesting year. It really is. 

[00:03:09] T. ULBRICH: What are some of the trends? Obviously, our listeners are very well aware of what’s happening with interest rates. Right now, on the climb, obviously, there’s some uncertainty economically. A different day brings different headlines of what we may expect. Obviously, we just went through an election. That had some potential impacts as well. What are you seeing on the ground, as we get ready to wrap up 2022 and some of the trends heading into ‘23?

[00:03:34] T. UMHOLTZ: Well, we went – From the beginning of the year, we saw record low interest rates, and the Fed was determined, obviously, we’ve talked about this in previous podcasts, to stop inflation. That was the key driver of cycle is to kill inflation. By killing inflation, you got to slow the economy down, and that’s definitely slowed housing. There was record demand for housing. We still see good demand, and it’s interesting, though. We may have seen something shift. 

So last week, we did have the election. But the bigger data point for the economy may have been the CPI report, okay? So the Consumer Price Index came out last Thursday, and that reading was lower than economists had expected. Okay. Big shock, right? When we saw the stock market rally, we saw bonds rally, rates have improved since Thursday. We’re giving a little bit back today, but I think we could be in a trip now. 

One report does not mean, “Hey. We’re out of the woods, guys. We’re already out of the woods. It’s ready to go. Everything’s going to rip more going up.” But I do think if we continue to see this trend into 2023, rates are going to slowly fall, and we’re going to see better times ahead for the rate market. I really believe that, and we have a lot of demand on the sidelines. I’ve gotten a lot of clients reaching out to us. “Hey, we decided to rent the beginning the year because we didn’t want to get in a bidding war. We want to buy next spring.” I mean, as rates get better, you’re going to see more people come back to the housing market.

[00:05:06] T. ULBRICH: That’s what I’m interested in seeing, Tony. It feels like there’s naturally some pent up demand, and people that have been sitting on the sidelines, both on the buyer and the seller, right? You think about people who maybe they didn’t have to move but would like to move, and they’re sitting on a three percent, high twos, low threes rate, and they’re like, “Hey, I really don’t want to trade that for high sixes, sevens, wherever rates may be.” So I think there’s some pent up demand on the seller side, obviously, the buyer side. So it’ll be interesting to see where that shift is.

Our listeners know all too well the impact of those rates. Many people listening to this show, first time homebuyers or perhaps second home as well. But just a year ago, we are sitting at rates, 30-year fixed rates, hovering around three percent. Obviously, we’re now hovering closer to seven percent, a little bit north than that. Just for some round numbers, what that means is today, you can buy a $300,000 home for approximately the same monthly payment, principal and interest, that you could get a $500,000 home about this time last year. 

So a lot of people, of course, because of other financial priorities, are looking at what that monthly payment would be, and many of our listeners also looking at student loan payments perhaps starting back up in the New Year. At least lease, that’s what we know now. There’s a lot of activity in that space as well. So those are going to get folded back into the monthly budget. There’s just a lot of intersecting things coming together at one. So it’ll be interesting to see where things head into ’23. 

Tony, what makes me think, though, that if we do see and, again, obviously, we can only predict so much of what will happen, and we’ll all keep an eye on this. But if we do see rates come down some in ‘23, maybe even perhaps in the second half of ’23, I got to believe that the refinance market may pick up again. Is that fair for everyone that’s been buying here over the last six to nine months?

[00:07:02] T. UMHOLTZ: Oh, absolutely. Yeah. I anticipate we’re going to see quite a few people who have bought in the last six months be in a position where they can. I think you’re going to see rates trending better. It’s hard to say exactly where they’ll fall. But it wouldn’t surprise me by the end of next year if we see that 30-year fix closer to five percent. So if you bought a home and you’re at seven, I mean, you’re going to be able to get a two percent spread on that. I think we’ll know more as we go into the year. 

There are, and I guess some of the news here, I mean, consider one sector that’s been getting hit a lot of job cuts is the tech sector, right? It really did well during the boom there, and you’re seeing a lot of job cuts, a lot of layoffs. My industry has had a lot of layoffs. I mean, some publicly traded mortgage companies have cut like half of their staff. It’s amazing. So it’s been very tough in the real estate and mortgage industry. But at the same time, I hate to hear job losses, but those are the things that if we get into recessionary environment, the Fed will have to let off a little bit. 

The other interesting thing to look at is I’ve seen four inverted yield curves in my career. So this is 20 years I’ve been in the lending business, and we have a nice wide inverted yield curve. What that means is short-term treasury bonds or short-term bonds are yielding more than a long-term bond. So if you go to the Treasury site to buy a Treasury bond, for one year, you’re going to get 4.5 or greater today, and your Treasury is about a half point below that, maybe even more for a 10-year bond, right? It doesn’t always make sense to lock your money up longer with a lower rate. So typically, when I’ve seen that, again, nothing’s for sure. But you typically see lower rates in the future when you see that type of curve. I think that that’s going to lead to better things to come. 

But when the Fed is raising rates, and they still have a couple more – They’re going to be aggressive. We got to see what these reports come out to be because we could still see 200 basis points two percent % move higher in the Fed funds rate. What that may do, though, is widen that. Widen that inversion more. So we will see more Fed rate hikes and just what’s going to happen on the long end of the curve, and that’s where mortgages are priced. It’s more on the long end of the curve. 

I’ll add one more thing, just because some people may want to understand this. But we also have record spreads right now of mortgage bonds above treasuries. What that means is the spread that historically has been there is higher than normal. So if the 10-year Treasury is four percent, and mortgage rates are seven, they really should be [inaudible 00:09:49] to six, right? But a spread involved because the servicing value in a mortgage is no longer there. So if you’re faster, you’re not going to say, “I’m not going to pay for this right now because the odds are it’s going to refinance off my books,” right? 

So the market is dealing not only with higher rates but higher spreads. Once this stuff all comes down, we’ll get it more normalized.

[00:10:15] T. ULBRICH: Yeah. It’s interesting. Thinking a year ago, as we had a similar conversation, I don’t think either one of us would have predicted that, hey, we might see people refinancing in ‘23 at five percent, right? I mean, it’s just kind of crazy. We, obviously, saw historically low rates. Because of rates where they went up, the refi market largely dried up, and I think it’s going to be an interesting trend to watch in 2023. 

So today, we’re going to focus on the myriad of financing options that are available when making a home purchase to make sure that we’re evaluating all of our options. Of course, being informed as a buyer so that we make sure we’re getting the most bang for our buck. So I want to walk through, Tony, how you tend to think about the home buying process and getting to that point of the right loan for the right buying situation. I think this is really important, as we’ll talk about throughout the discussion whether it be rates, whether it relate to credit score, amount of down payment type of purchase decision. At the end of the day, we want to make sure we’re working with a lender that’s helping to identify and has our best interests in mind to identify a solution that’s the best fit for us. 

Step number one is we have to first know what’s the timing for the home purchase, and what’s the projected budget for the home purchase, right? So before we open up the box of the lending options and begin to work with a lender, when are we looking to potentially purchase, and what’s the budget, right? Because that’s going to help us inform what are the options that are available, of course, but also percent down payment, as we get into the different lending options, and, of course, how this fits in with the rest of the financial plan. 

Once we do that, and we’ve talked about that before on the show, so we’re not going to go into a whole lot of detail there, then we move to step number two, which is getting pre-approved. That’s the process we want to make sure that we’re, obviously, going to be eligible for a lending solution for that purchase. Tony, I think this is a place where we see folks get confused about prequalification, pre-approval, when to do this. So just tell us a little bit more, if folks are navigating this for the first time, what is pre-approval, and how is that different from the qualification process?

[00:12:27] T. UMHOLTZ: Sure. So there’s – You’ve heard of the pre-approval and the prequalification. Basically, the prequalification is just a basic – We’re running numbers, right, just based on your income level. Okay. I say proposed because we haven’t validated them with a credit report. So a prequalification is very easy. Let’s say you make $5,000 a month, and your current expenses, your car payments and your student loans, are $1,000 a month, well, then that’s your current income and debts. Now, you add the mortgage in there, and let’s say it’s 2,000 a month. Well, in that scenario, your debt-to-income ratio would be too high anyway because you’re 50% of your income. Okay. 

So a prequalification does not validate income with documentation or credit with credit report. A pre-approval is going to be – We’re going to validate your income with a pay stub or a tax return, and we’re also going to review your credit report. What mortgage lenders do is we run what’s called a tri-merge report. So a lot of consumers will say, “Hey, I’ve got a Credit Karma account, and I can see my experience score.” Well, that doesn’t always show or reflect what a lender will see, okay? So lenders pull all three bureaus, TransUnion, Equifax, Experian, and they look at all three, and they use the median score, okay? So a pre-approval is going to have your median score. We’re going to use that. We’re going to review all your debts and liabilities on the credit report to validate your income. 

It carries a lot more weight than a prequalification, and a lot of these realtors know that, and they oftentimes will not let you sometimes see the house or work with you until they have that in hand.

[00:14:06] T. ULBRICH: Typically, a pre-approval lasts for how long, as people are thinking about, “Is this something I should get?” Now, even though I might not be looking seriously for another 15, 30 days, how long does that pre-approval typically last?

[00:14:18] T. UMHOLTZ: Typically about 90 days, 90 to 120 days. One other thing too that we’re starting to do, and I think some others in the industry are doing, is we’re doing some soft polls on credit, where they don’t have a hard inquiry. So that’s something else, if it takes longer to – 

The one thing I do, and I just had this conversation this morning actually with a client, is it’s just such a big decision. I wouldn’t leave it to chance. When you’ve got a lot riding on, you slam dunk, and there’s no issues, and you have margin in your life, margin between what you’ve taken as income and what your liabilities are. It’s probably fine. But in this case that I had this morning, it was tighter than it should be, right? You should definitely make sure it’s worth the inquiry to have peace of mind and know what direction you’re going.

[00:15:07] T. ULBRICH: So at a high level, Tony, prequalification, essentially, self-reported data, pre-approval is validated information based on submitted income, paychecks, credit scores, and so forth. Okay. So if we assume that someone has done the diligence to know what the budget is and that it fits within the context of the rest of the financial plan, I always encourage folks, on the pre-approval, sometimes, especially first-time homebuyers that have been in this situation, you go from, hey, I’m just browsing to like I’m really serious. That can happen very quickly, right? I mean, it’s an exciting time. It can be an emotional time. So if you feel like there’s a high likelihood that that transition could happen quickly, then the pre-approval really allows you to be in that position to make an offer and be competitive in the market. 

Okay. So once we evaluate the purchase at the budget, then we get pre-approval. Step number three, Tony, is then we find the best loan. This is where I think folks may have heard of terms such as conventional loans, versus FHA loans, versus jumbo loans, lots of different options and solutions out there. The end of the day, though, it’s about working with the lender to determine which of these is the best fit for you based on perhaps credit score, based on down payment, based on rate. So help us understand at a high level what these options are and then, ultimately, how you as a lender are working with someone to determine what the best solution is for them.

[00:16:34] T. UMHOLTZ: Sure. So everyone’s situation is unique, right? Every application is unique. That’s one thing about lending is there’s really not too many cookie-cutter scenarios. I mean, there’s a few but there’s very – Everything has some sort of detail we have to work through. So let’s say we do the pre-approval, Tim. Once we go through the pre-approval, we’re going to determine is it – Look, are they trying to buy a jumbo loan? Do they need a jumbo loan? Are they a pharmacist or a physician or an attorney? Something that will allow us to do a unique product. First-time homebuyer program, how much cash do they have to put down? We look at all of those things, and we’re going to recommend the best product. 

When we evaluate that pre-approval, we’ll give the client, “Hey, here’s your best options based on a payment rate and down payment,” because everyone has a certain threshold. Some people, it’s, “Hey, I want the least amount of down product to avoid PMI.” Or your credit score might be in a situation where you don’t qualify for all the products, but you can – There’s another option out there that fits your needs. Then some people say, “Hey, I have all this cash to put down. I just want the best rate available.” So that’s part of the analysis of the pre-approval. We’re going to work through that, and we’re going to determine what is the best option. 

I can talk a little bit about some of the programs that are out there. There are – A lot of people have heard of FHA loans. There’s conventional loans, which are through Fannie Mae and Freddie Mac. FHA and VA loans are through the government. They’re also called Ginnie Mae loans and GNMA. Those loans are backed by the federal government. Conventional loans are also backed to some decree by the government because Fannie Mae and Freddie Mac are basically nationalized entities. Government-sponsored entities is what they’re called, and those loans are backed as well by the government. 

Then we have what’s called portfolio loans, which can be unique to a bank. Portfolio loans just mean that the bank holds that loan on its balance sheet as an investment. It’s not being backed by a government entity. So those are really the main types of loans that are out there. We look at – Again, nothing’s a bad loan. It’s just every – It’s whatever is the best match for that client need.

[00:18:50] T. ULBRICH: I think that’s just a really important point, Tony, because I think as folks are finding the right fit and solution of the lender they’re going to be working with, to me, this is a really important discussion of what are the options that are out there. What’s the best option available for me and that we’re not just necessarily looking at one option, whether it be because of that’s what they’re familiar with or because of how fees may be assessed on that product. But are they really understanding me as a pharmacist with this credit score, with this purchase price in mind, with this option to put down. Okay, with those chips on the table, what’s the best fit for me? Then let’s work with that, so I can get the best rate. Obviously, depending on the desire for how much they want to put down, make sure there’s alignment there. 

Now, I think one of the things I hear a lot, Tony, is pharmacists, especially first-time homebuyer pharmacists, are often leaning in an FHA loan or think that may be the best option for them. I think that’s typically because of either a lower percent down or, in some cases, they may have a lower credit score. I think that probably is a less likely scenario for pharmacists. But it may be certainly for some. But it’s typically the low down payment that they attribute to an FHA loan that they think that might be the best option. So tell us a little bit more about what are the down payment requirements and why that product typically might draw the attention of pharmacists. Perhaps it’s a fit for some. But many, it may not be the best option, despite them thinking it is. 

00:20:21 T. UMHOLTZ: That’s right. So FHA loans are extremely popular with first-time homebuyers and clients that are seeking less money down. It’s been – I’ve wrote hundreds of them in my career, and there are good programs, nothing bad about the product. I would say that most lenders, that’s what they’re going to offer, right? If they don’t have a loan like, for example, our company does because with less down, it’s not FHA. But FHA loans are excellent for no money down because it allows 3.5%, and you can get in with very little down. Rates are usually pretty good, and it’s also flexible on credit score. So for a credit score, it might be a little bumpy. It’s going to have some flexibility there and will be a good fit for some people. 

The other thing where I’ve used FHA quite a bit this year is for clients buying a multifamily. I want to touch on a few things with this. But like for a three or four-unit property, the specific county – Now, FHA loans have loan amount maxes, so there are maximum loan amounts on a county-by-county basis, and that’s throughout our country. So loan amounts are determined by that in metro area. That MSA, for example, okay? Around New York City, it’s going to have a higher four-unit threshold than maybe Columbus, Ohio, right? But you’re going to – But every area is going to be different. 

Now, so I’ll give you an example. This client bought a four-unit property. I think they spent 660,000, and they put 3.5% down and lived in one unit, okay?

[00:21:55] T. ULBRICH: Rented out three. Yeah.

[00:21:57] T. UMHOLTZ: Yeah. They had great credit. They could have qualified. But see, to do a conventional loan, right, you have to put 20% down. Okay. Now, they did have PMI. But they took 3.5% down on a four-unit property. So that’s where FHA is a great tool, right? The downsides of FHA that I find is that you’re typically dealing with PMI that can never be pulled off, okay? The loan is going to have PMI for life. That PMI is high too. So no matter what that rate is on FHA, it’s a big premium added to the monthly payment. 

The other thing is a loan limits, right. Some counties, the loan limits are going to be below. It might be 380, and you’re trying to buy a house for 475. So it’s going to limit you in what you can purchase. So those are the downsides of FHA, and that’s why we always look at the whole situation because conventional loans or it’s HomeStart loan through Freddie Mac, there’s all sorts of things that we look at. Of course, if you’re a pharmacist professional, you’re going to have options with no MI with three percent down. So there’s going to be more flexibility there in that product.

[00:23:07] T. ULBRICH: That was really my hope with this episode is that personal experience, I kind of went down this path, and I see a lot of folks come to us with questions that I think they’re often thinking conventional 20% down or FHA 3.5% down. Maybe there’s an awareness of the PMI, and maybe there’s not. But that those are the only two options that are out there, and that’s really the take home point of this episode is often there are more options, especially for pharmacists that are listening or depending on the loan size, and there may be some limitations. Yes, that low down payment of FHA loan is attractive. 

But, Tony, as you said, and I live this firsthand, our first home we bought with an FHA loan, for the exact reason that we’re talking about here, first-time home purchase. We were itching to kind of get into that home, weren’t at a place to save up to that 20%, saw the 3.5% option that was presented to us by the lender as the preferred option. I did know a PMI and what it was, but I did not know it was PMI that could not go away. I specifically remember getting a loan-to-value ratio. I think we’re – As we started to pay it off after five, six, seven years, we got that down into the mid-70s, 75%. 

I remember calling the lender of like, “Hey, all right. Time to get rid of PMI,” and it was like not so much. By the way, you paid the PMI upfront, and I was like, “Oh, okay.” So lesson learned, but I think that’s a really important takeaway that not all PMI, private mortgage insurance, is the same. Of course, the PMI rates can be different. Correct me if I’m wrong, on a conventional loan, if someone doesn’t put down 20% and they have PMI, there is an option for that PMI to fall off, but not an FHA loan, correct?

[00:24:52] T. UMHOLTZ: That’s right. Yeah. Conventional is very flexible. So if you’ve paid it for two years, you can actually have your house reappraised. If you think it appreciated and you paid down the equity, you can get the PMI pulled off. The other interesting thing too is let’s say you were to use a conventional loan and you put five percent down, you have PMI, but you sell your home, let’s say, and you get 15%, or you have additional equity, and you can put that down that same year, you can a lot of times get it pulled off immediately. There’s a lot more flexibility with conventional mortgages, for sure. Yeah. 

[00:25:28] T. ULBRICH: Just quick definition on PMI, for those that are going through this for the first time, so PMI, private mortgage insurance, is essentially allowing the lender to feel – You’re paying an insurance premium as what I’ve always interpreted as a foreclosure risk, right? So if I only have 3, 5, 7 percent down, it’s not a full 20% that you’d see in a conventional loan, then I’m a higher risk to the lender, if something were to happen that we were unable to make a payment, that I’m going to have to pay insurance for not having a larger down payment. Is that accurate, Tony?

[00:26:02] T. UMHOLTZ: That’s exactly right. Yeah. So there’s a set – Like conventional mortgages, for example, they have a set amount that the lender is – So up to 80% LTV, as an example. But above that, that additional equity is uninsured. So the lender could lose that, right? The investor can lose that. That’s why they have IP. 

With FHA, it’s a government-pooled program, but they collect that premium to pay for it. Frankly, they have some of the most highest losses in the industry. So that’s why that premium is charged to help keep the program going.

[00:26:38] T. ULBRICH: The other thing, Tony, I don’t know if this is just my experience, but we’re going to go sell our home, our first home, and we made the move to Columbus. We did it for sale by owner. I’m not sure I’d ever do that again, by the way. The buyer was using an FHA product, and it felt like the inspection requirements. I remember specifically the person who’s doing the inspection, and they wanted to come back and look at something. They referenced the fact that because it was an FHA loan, it was a more rigorous inspection requirement, and that was kind of annoying to deal with as a seller. 

So number one, is that an accurate statement? Two, is that a potential barrier for a buyer in a competitive market? If I’m selling a home, and I’ve got five competitive offers, and four of those are not an FHA loan, and one of those are, that I would rather deal with one of the non-FHA loans.

[00:27:29] T. UMHOLTZ: That’s a great point, Tim, and that’s exactly right. FHA loans are definitely more stringent on the inspection. But the appraisal is much more in depth. The other thing too, if you’re a seller, this is great for sellers, is that report on that appraisal. So let’s say your buyer applied for an FHA loan and he decides, “You know what? I’m not going to buy this house.” The appraisal that was done, that case number that was opened, any other client that comes to buy, any sort of potential buyer that comes to buy, they have to use that appraisal for six months.

[00:28:05] T. ULBRICH: So you know it.

[00:28:06] T. UMHOLTZ: Yeah. There are some things that get – FHA does have some downsides. VA can be even more stringent, veteran administration loans. As far as protecting the veteran, there’s some closing costs called non-allowables that the veteran cannot pay. So if you’re a seller, these are just things you should know and ask your real estate agents about. But also, the roof has to be in very good condition, government–backed loans. So there’s little nuances like that as a seller that you have –

[00:28:34] T. ULBRICH: Yeah. Certainly, not to say there’s not a place for FHA loans. You mentioned you’ve written many of them. I think I’m harping on it because it’s one that I experienced that I didn’t know there was other options out there like a pharmacist home loan, and it’s a question we commonly get. So I want to make sure that folks are aware of the options. 

It’s interesting, you mentioned one of the more strategic uses of that loan, which we’ve heard of as well, which is when it comes to buying something like a triplex or a quad, someone who’s looking at doing a little bit of real estate investing, while also living in that triplex or quad, that you can use an FHA loan. Get into an investment property with as little as 3.5% down. We’ve talked about that before, that concept of house hacking on the podcast. I would point people to episode 130. We had Craig Curelop on from BiggerPockets. I think that’s a really interesting concept for many pharmacists, they might want to consider. 

Tony, let’s talk about the pharmacists home loan product because despite the work that we’ve done over the last few years, I still find a lot of folks that are maybe not familiar with what that is, or they hear the terms doctor loans that are out there and have searched for those and come to find out that pharmacists are excluded from that product. So what is the pharmacist home loan product that is offered through First Horizon in terms of who’s eligible down payment and how it differs from the options we were just talking about?

[00:30:01] T. UMHOLTZ: Sure. So the product for pharmacists is – In a loan amount, it will likely change a little bit. Currently, right now, we’re writing them up to about 700,000. But that that could change in the New Year. But that’s currently where we’re writing up to. So it’s not something you could go buy a $2 million house on, but it does give you some bandwidth there. But basically, it’s a limited down payment option, still with strong rates. If you’re a first-time homebuyer, a pharmacist could put three percent down and have no PMI. If you’ve owned a home before, you can put five percent down. That program is allowed on single-family homes, townhomes, and condominiums. It’s able to finance across the property types that are out there, even do a duplex up to – It’ll do 15% down on a two-unit duplex, and it’s typically 20% down for a three or a fourplex. That’s why that FHA loan can be better for someone that’s looking to buy a multifamily. 

The other thing that I find that’s unique about it is a lot of times, my clients are putting 20% down who are not pharmacists, get a little worse rate than 5% down pharmacists. So anyway, that’s not to say rates change all the time. I mean, you are very cautious about talking about rates. But that is one trend I find as pricing still very good. There is no prepayment penalty as well. So if the market does shift, and it’s in a more favorable position in a year or two, you can always refinance without a penalty. 

Also, there’s not steep reserve requirements, and that’s significant because a lot of these programs out there for doctors, attorneys, professionals, they require you have reserves, and not having reserves is a big piece. So you could – If you have your five percent down payment and just enough for closing costs, you really don’t need to have a steep amount of reserves on hand to qualify, where some programs require six months of mortgage payments, which is pretty hefty.

[00:32:05] T. ULBRICH: So three percent down, no PMI, first-time homebuyer. Five percent down, no PMI, if they’re not a first-time homebuyer. I like to think about this, Tony, as kind of the best of both worlds of an FHA and a conventional loan, in terms of not having to put 20% down but trying to get rates that are competitive. If you were – Or you mentioned in some cases may even be more competitive and currently available in all states, except Hawaii and Alaska still, correct?

[00:32:34] T. UMHOLTZ: That’s right. That’s right. Haven’t spun for the licensing area. 

[00:32:38] T. ULBRICH: We’ll get there. 

[00:32:39] T. UMHOLTZ: Maybe soon.

[00:32:41] T. ULBRICH: Credit score is one thing we didn’t mention. Minimum credit score is 700. Or has that changed?

[00:32:45] T. UMHOLTZ: It’s still 700. That’s correct. That’s correct.

[00:32:48] T. ULBRICH: Again, another option here to put in the mix. Many pharmacists we see, obviously, as you mentioned, there is a maximum loan amount. So if you’re looking at a million, 2 million dollar home, obviously, this product may not be the right fit. But I would say for the vast majority of pharmacist homebuyers, often wanting to get into the home, maybe aren’t yet at that point of 20% down, I would highly encourage you to check out this product. You can go to yourfinancialpharmacist.com/home-loan. Again, yourfinancialpharmacist.com/home-loan. You’ll see more information there, where you can learn more and get connected with us, and we’ll make sure you get in touch with Tony. 

All right, let’s shift gears and wrap up by talking about specific scenarios or I guess some of the common questions that we get, where folks may be wondering, well, what about this, right? Once of those is coming off the pharmacist homeowners, “Hey, Tony. I’m a pharmacist interested in that pharmacists home loan product, but I’m looking at a purchase price that’s north of 700, 715, whatever that requirement may be at.” So at that point, what options are you typically evaluating for pharmacists that are above that lending threshold?

[00:33:56] T. UMHOLTZ: Great question. Again, everybody’s situation is different. So we’ve had – There’s a myriad of programs available for loans above that threshold, and some have as little as 10% down, which can be a good fit. I find that a lot of – It’s interesting right now, Tim. A lot of the contracts I’m getting have been above a million lately. It used to be split and I don’t – We seem to be getting quite a few of those. 

Now, a lot of those folks have money to put down, so a lot of them are doing 20% down. But there are options with 10%. For medical doctors, will do nothing down to a million five. So it just depends on who you are and what your occupation is. But just for someone that doesn’t have a – Let’s say they’re a pharmacist or just a business owner. We could still do 10% down, typically up to $2 million. So options out there for that. 

The other thing too is depending on where you’re buying, the Fannie Mae loan limits, for example, Freddie Mac loan limits, in different parts of the country vary. So there are some areas that are almost $900,000 for three, five percent down right. Conventionally, that was mostly in California, New York City area. There’s that, but Northern Virginia. But you’re getting a – We always look at the loan limits because there could be just normal conventional products that can be a fit. 

But we have quite a few jumbo programs. We have jumbo programs we hold on a balance sheet, and that’s a bank, right? So where banks who can hold – We do have jumbo loans [inaudible 00:35:29] balance sheet. Then we have loans through other institutions too, mortgage REITs that we can write as well. So there’s a lot of different options out there.

[00:35:38] T. ULBRICH: Again, another example of kind of find that lender that will help you look at multiple options that are available. Tony, next question I think that may be coming up is I’m looking at the current market of interest rates. We had a discussion at the beginning of the show of perhaps we see those come down in 2023. So some folks might be thinking about does this time period warrant looking at an adjustable rate mortgage. I think that when rates were where they were a year ago, this may not have made a whole lot of sense. But is this option becoming more viable? What is an ARM product, if you could explain that a little bit further, and how folks can evaluate this?

[00:36:20] T. UMHOLTZ: Sure, sure. So right now, with this inverted yield curve, ARMs are making more sense. Now, ARMs are – ARM programs, I’ll talk about this, and I’ll talk about qualifying for them. So the most common ARMs that you have out there are really, truly hybrid ARMs. They’re not adjusting to the market right now. Most funds we offer doing are not – You’re not in the market, adjusting on a monthly basis right now. You are actually fixed for 3, 5, 7, or 10 years. Those are typically the most common in the industry, and that’s what we offer. So a 3-year ARM, 5-year ARM, 7-year ARM, 10-year ARM. 

What that means by 3, 5, 7, and 10 is that the rate is fixed for that period of time. So a three-year ARM is rate fixed rate for three years, and then it can adjust after that, and it’s still a 30-year loan. These are all 30-year loans with a 30-year amortization. But they’re going to adjust after that fixed period. So typically, a 3-year ARM will have a better rate than a 10-year ARM because you’re only locking for 3 years to 10 years. 

These loans are great because I think most buyers are not in their home 30 years anyway. Especially in the 10-year, it gives you flexibility. The rates are better than fixed rates. So there’s a lot of good things with the ARMs right now, and we are seeing an influx of them. We’re writing. Especially on the higher-end buyers, I find that a lot of them want the ARMs versus a fixed. The downsides of the ARMs are they typically aren’t going to be available through any conventional product, right? So Fannie Mae, Freddie Mac, FHA, VA, there’s no ARM to speak of. The secondary market has shut them off. So the only way to get an ARM product is typically through a bank. They’re going to hold on their balance sheet. Okay. So you’re not going to be able to get that through a government sponsor. But ARMs are great. I really do like them. 

Now, I will say – I’m going to mention this because no one knows for sure in the future, right? There’s a lot of people floating out there, this 2-1 buydown. If you really pull this 2-1 buydown apart, you’re paying for all this buydown interest. So you’re paying for it. There’s a good chance you can refinance anyway, and long-term fixed rate is higher than what you could get if you just locked in a fixed rate. So you got to be really careful and understand the fine print that’s out there. So I’m seeing a lot of those out there right now.

[00:38:46] T. ULBRICH: Can you explain that one a little bit further, Tony, the 2-1 buydown?

[00:38:49] T. UMHOLTZ: Yes. So what’s happening now is a lot of lenders are offering what’s called a 2-1 buydown. So let’s say they offer you a 30-year fixed rate at 7%. But what they’ll do is they’ll charge you interest to buy the rate down by two percentage points. Let’s say you’re paying 5% year one. Year two, you’re paying 6%. Then the life of the loan after that, you’re paying seven. But you’re paying the interest, right? Either they charge it – Most of the time that I see it, it’s being charged to the client directly. The other times, oh, the seller will pay it. Well, you’re still paying it, right? The seller would lower the price of the home if you ask them. 

That’s usually how it’s worked. I’m not a huge fan of it because you can probably get 6.625 on a 30-year fixed versus seven, if you just lock the 30-year in for life. The only reason I say this is what if rates don’t go down? You never know. We think and based upon history. It looks like it’s going to happen. But what if it’s stubborn, right? Inflation goes back up. It takes a few more years or whatever. That would be the benefit to that, and that’s good to have the fixed rate. So just something to consider. The 2-1 buydown is very common out there right now. It’s marketed a lot by mortgage companies, and you just have to understand the fine print.

[00:40:09] T. ULBRICH: Great stuff. Thanks for the explanation. Then finally, anything unique. So if somebody is thinking about building a home or buying land to eventually build a home on, any unique considerations from a lending perspective that they need to be thinking about?

[00:40:24] T. UMHOLTZ: Yeah, definitely. So there’s a couple ways that works when you’re building a home. You either go buy a lot that a builder owns, and you sign a contract with the builder, you give them a deposit, and they build it, and you close when the home is completed, right? So a lot of the national builders, that’s how they work. You give them a 10% deposit, and you get a loan approval. I just issued one this morning for a client. They’re going to take nine months to build. They’re going to put 10% down, and we’re going to write a higher loan to value, and they’re going to actually going to get some of that money back when they close. 

That is a typical – That’s called as an end loan, right? The builder will build it on their credit line, and then you just close when the home is completed. Okay. That’s the first option. The second option is what’s called a construction to permanent loan. What that is, you’re actually building the home. You’re constructing the home with a loan. This is a much more complex transaction. It requires a much stronger borrower because, typically, you’re putting down at least 20% down in that scenario, and you’re buying the land, and you’re building. 

Sometimes, you buy the land first, you got to get a lot loan, and then you have your plans and specs and your agreement with the builder. You’re combining both of those together to build a home, and that’s called a construction to permanent home loan. It’s typically the only way to build a custom home on a lot that you picked out or you own, okay? So that’s something that is much more complex, but it’s something that we do a fair amount of it. It’s just a – So basically, in that situation, Tim, you’re going to pay incremental interest on draws paid to the builder, okay? So if the builder says, “I’m going to need five draws to build your home,” each time the lender pays a draw to the builder, there’s going to be interest calculated, simple At the end, you just convert to your permanent loan. 

We lock the rate up front. Some lenders do. Some don’t. But that’s basically the premise of how it works, and you want a construction to permanent loan because it’s a single one-time close. 

[00:42:25] T. ULBRICH: Tony, another example of where the value of the relationship comes in with the lender and, obviously, someone who’s been down whatever path you’re going down. I think that’s what excites me so much about our collaboration and relationship over the last few years. If you’ve worked at a lot of pharmacists and a lot of scenarios, first-time home buy, non-first-time home buy, investment property, house hacking, buying land, building their own property. It’s someone that we can put a face to a name, and we have an opportunity to connect with and ask questions, which I know many of our listeners do. 

So super grateful, as always, for your time and your contribution to the community. Again, folks can learn more about First Horizon, our collaboration, and get in touch with you by going to yourfinancialpharmacist.com/home-loan. I would also point people, we’ll link to this in the show notes, just a couple of months ago, Tony and I did an FAQ episode on financing options, commonly asked questions. That was episode 271, for those that are going to be going through this process here in the near future. 

Tony, as always, thanks so much. I really appreciate your time.

[00:43:29] T. UMHOLTZ: Yeah. Thanks for having me, Tim. Great being with you. Have a good one.

[00:43:33] T. ULBRICH: Thank you. 

[END OF INTERVIEW]

[00:43:34] T. ULBRICH: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. 

Furthermore, the information contained in our archived newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist, unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward-looking statements that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. 

Thank you, again, for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week. 

[END]

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