Category: Real-Estate / Podcast

How Much Home Can You Afford?

On this episode, sponsored by First Horizon, Tony Umholtz talks through how to determine how much home you can afford. 

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. Tony has years of experience working with pharmacists all over the country in securing home loans. In this episode, Tim and Tony kick off the discussion by looking at how the real estate market has changed recently and why we are currently in a seller’s market. Tim and Tony discuss rate hikes and inflation, the 28-36 rule, and what that means for a pharmacist as a potential home buyer. Next, they dive into the many factors banks consider when someone applies for a home loan and which are the most important. Tony shares how each home loan situation is different and dependent on individual circumstances. He also discusses insurance and how you can make better choices to save in that area. Then, Tim and Tony dig into the area of tax and how it differs from state to state. Tony shares a brief overview of the First Horizon pharmacist home loan product, the challenges pharmacists may face with this product, and the benefits it can provide for a pharmacist, whether fully qualified and earning a full income or not. 

Key Points From This Episode

• An overview of today’s guest, Tony Umholtz.
• How the real estate purchase market has not slowed down but refinancing has. 
• Why we are in a seller’s market. 
• What rate hikes mean and the impact they have on mortgage rates. 
• The impact inflation will have on rates. 
• Why locking as soon as possible is preferable when purchasing a home. 
• What the 28-36 rule is. 
• What banks consider when you apply for a home loan and what factors are more important.
• How the appraisal gap affects the market. 
• The importance of considering expenses, fixed and variable, other than the loan.
• How insurance changes depending on what part of the USA you are in. 
• The danger of over-committing to personal property insurance.
• The effect of property value on tax and how that changes from state to state.
• An overview of the pharmacist home loan product Tony offers through First Horizon.

Highlights

“The most important [factor] is the ability to repay [your loans.]” — Tony Umholtz [0:10:57]

“Just because the bank says you can afford this, doesn’t mean it’s right for you.” — Tony Umholtz [0:11:24]

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 245: Getting Under Contract in a Competitive Home Buying Market
• Apply for the Pharmacist Home Loan
• Your Financial Pharmacist Disclaimer and Disclosures

Episode Transcript

[INTRODUCTION]

[0:00:00.4] TU: 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 to the show, Tony Umholtz, a mortgage manager for First Horizon, formerly IBERIABANK. During the interview, Tony and I talk through how to determine how much home you can afford, a timely topic, considering the seller’s market we’re in and the rising interest rates that are driving up the cost of owning a home. 

During the show, we talk about the current state of the market, interest rates, and trends Tony has seen through his experiences working with pharmacists across the country. We discuss what formulas lenders use to determine the amount of home they will allow one to purchase, why you and not the bank should establish the budget for buying a home, and we also discuss the total cost of owning a home and things to consider beyond the purchase price. 

Before we hear from today’s sponsor and then jump into 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 240 households in 40 plus states. YFP planning offers free only, high-touch financial planning that is customized for the pharmacy professional. 

If you’re interested in learning more about 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 into my interview with Tony.

[SPONSOR MESSAGE]

[0:01:36.2] TU: Does saving 20 percent 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 percent 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 3 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 on 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 preapproval process, visit yourfinancialpharmacist.com/home-loan. Again, that is yourfinancialpharmacist.com/home-loan.

[INTERVIEW]

[0:02:41.9] TU1: Tony, welcome back to the show.

[0:02:45.3] TU2: Tim, good to be here with you.

[0:02:47.3] TU1: So, we had you last on this show on episode 245 when we talked about getting under contract in a competitive home market. Interest rates at that time were starting to creep a little bit back in March but they have certainly jumped significantly since then. So with interest rates on the rise, Tony, are things slowing down at all in this market?

[0:03:08.6] TU2: You know, it’s interesting Tim, the purchase market has not slowed down, it’s still very healthy. Refinances have, we’ve definitely seen a pullback in refinances are some cash-out refinances where people are taking advantage of their equity position and then something called a delayed cash out because there seems like there’s a lot of people that have money to pay cash for houses so they’re actually coming back to do what’s called delayed cash out. So we’ve been seeing some of those but on average, the refinance are way down as you can imagine with rates coming up.

[0:03:39.5] TU1: Yeah, it wasn’t too long ago you and I were talking about refinancing back at the beginning of the pandemic when rates were in the high twos and low three. Obviously, we’re at a very different point in place but at the end of the day, we still have a supply issue so you know, we see rent prices that are skyrocketing, which I suspect is further in individuals to want to get a new home, supply and demand. 

So it feels like, despite the rate hikes that are happening, you know, recently it feels like for the home buyer, unfortunately, they’re still going to be in a very competitive market that is the seller’s market. Is that what you’re saying as well?

[0:04:11.8] TU2: Yeah, absolutely, Tim. I mean, every market’s different as we’ve discussed but on average, most markets are just not – they don’t have enough inventory and I think clearly, that’s going to push prices higher and if you’re renting and you could go pay equivalent of your rent or even less buying a home and you get appreciation. I think that’s why we have such demands. So yeah, there’s no season and demand out there that I’ve seen so far.

[0:04:36.8] TU1: Tony, I want to pick your brain for a minute, you know, the day we’re recording this, we’re expecting news today of the Fed to hike interest rates, I think we’re expecting 50 basis points, a half a percent but you know, awaiting that news and so is the stock market to see what happens. 

But I always appreciate your perspective economically on what these types of Fed rate hikes mean and the impact that he may have on mortgage rates. So as you’re expecting this news to come up today, whether it’s 50 basis points or it ends up being something a little bit different than that, what are the potential implications that we should be looking for?

[0:05:09.9] TU2: Great question. I mean, the timing is a couple of hours here we’re going to get the announcement but the biggest thing is that the rates have run up so much this year since January, without the fed doing much of anything yet, right? It’s just been talk, it’s been kind of projections and they did raise a quarter already on the Fed funds rate and right now, the outlook is 50 basis points today. 

It could be 76, it might shock the market but let’s say, it’s 50. Really, that’s not what I’m pinpointing as the issue for mortgage rates. It’s not going to be the front end of the curve so that front end of the curve, what we call the fed funds rate is going to affect your credit card rates, your home equity line rates, maybe some auto loans, floating rates, rates that are floating rates on the market. But long-term mortgage rates are more going to be influenced by what the fed says about balance sheet reduction.

Basically during the last couple of years, during the pandemic, they were helping stimulate the economy by basically buying bonds, being the biggest buyer of bonds, mortgage bonds, the treasury bonds and that helped push rates lower. So essentially, that runoff of their balance sheet adds supply to the bond market so that affects rates and it’s going to affect the stock market too I would think but that’s going to be what I’m watching the most for rates, you know, long-term rates and how to advice my clients.

I mean, I’ve been in a complete locking bias since the beginning of the year. I’ve had very few clients that wanted to float but my opinion’s always been lock as soon as you can and I think, today’s going to be, you know, we’ll learn more about the outlook here and what the fed’s going to do. You never want to fight the fed in what you do and the one thing I would say too is, inflation is the thing we have to watch for rates as well. 

If we get any sort of ease and inflation, that can spark a new trend of rates, maybe easing a little bit, maybe capping. So those are the things I’m going to be looking for today, Tim.

[0:07:07.1] TU1: Yeah, and as you and I talk before the – we hit record, if we do find ourselves in a mild type of recession or recessionary period, we would expect the rates to come back down which could have implications as well so certainly, we’re in a volatile time period and to your comment, in case folks aren’t familiar with that terminology in terms of rate locking versus floating.

You know, in time periods where we may be expecting a reduction in rates, perhaps something like a float matters but you know, to your point, this year, as we’ve been expecting rates to go up, locking as soon as possible typically seems to be in someone’s advantage as a look they are looking to purchasing a home.

So today, what we’re talking about is how to determine how much one can afford when it comes to home buying and I think this is a really timely topic ass we’ve painted a picture so far. We’re in a seller’s market, we got rising interests rates which of course means more to the home buyer.

We also see that there’s more and more that’s out there in terms of the average loan size. So perhaps someone depending on the part of the country they were living in, you know, maybe a couple of years ago they were looking at a home that was selling at 400,000 and easily that may be north of 500,000, obviously, very different depending on the market.

So escalating home prices, rising interest rates means affordability of home, it’s certainly a timely topic and as we’re often talking about, we need to be considering how this home purchase and how the cost of the home fits in with the rest of the financial plan and the goals that someone is trying to achieve.

So Tony, let’s start with how the bank determines how much they’re willing to lend to an individual? So does the 28-36 rule stilly apply and first, if you could define what that is and talk to us about how that is determined in terms of what one is willing to lend from the institutions?

[0:08:51.1] TU2: Sure, yeah, sure. So the 28-36 rule has been around a long time. It’s a little different nowadays, we look at the multitude of factors which is to kind of go back to define what that is. Basically, the 28 percent is the amount of your monthly income that can be for a housing payment, okay? So basically, we’ll try to make it as simple as we can so let’s say you had a $10,000 a month gross income, the definition would be okay, so $2,800 can be allocated to a housing expense, okay? 

Now, that is not how it’s underwritten today but historically, that was something that we looked at. It’s still looked at to some degree but we look at it a little bit differently now. It’s more your total debt, right? Your total debt ratio and that’s with a 36 percent looked at so they’d say, “Well, if you make 10,000 a month gross income, we could allocate $3,600 a month to debt” so that might be your housing expense, your car loan, credit cards.

One thing that banks do not look at is like, your auto insurance, cellphone bills, we typically don’t look at any of that in your expenses, it’s just creditor debt. So credit cards, student loans, things like that. So historically, that was a metric, especially when we did FHA loans years ago but nowadays, it’s more viewed on the total debt ratio. So we typically like to stay at 43 percent of your total debt or better.

That could be like, if you have no debt and you have a $10,000 a month gross income, household income and you are buying a home that requires a $4,300 a month payment. So that’s your total payment, it’s your principal interest, taxes, and assurance, you could still qualify because you have no other debts, right? So that’s going to be a fairly large house but you could still qualify given that there’s metrics. So that’s kind of the significance of it.

So these are called debt to income ratios is what the terminology is and that’s a very important metric for lenders. In fact, it’s one of the most important metrics. Like credit score obviously is important, reserves can be in certain products but the most important is the ability to repay. Banks are required by law to prove that. 

That’s why income, if anyone’s gotten a loan anytime in the recent future, at least in the last 10 years in the recent past is you had to give a lot of documentation to the lender because we have to document the income because we have to prove you have the ability to repay. It’s called the ATR rule, so that’s the reason for these ratios.

Just because the bank says you can afford this, doesn’t mean it’s right for you, you know? So, everybody’s different, everyone’s situation is different, so it doesn’t mean it’s right for you. Now, the other side of it too and I’ll mention this is depending on the product, depending on the individual, we can go up to higher debt to income ratios, above 43 and that’s generally when you’re putting 20 percent down and you have a compensating factor. 

So we do see that as well, that does occur as well. I know it’s kind of a broad scope but I wanted to kind of include because everyone’s situation is different. It’s not like a one size fits all.

[0:12:03.2] TU1: Yeah and that’s great, Tony, because I think for many pharmacists, even the numbers you use, so $10,000 a month of gross income, you know, pharmacists, you divide that by 1,200, $120,000 a year, pretty close to what we thread that comes to a national average and obviously people can do the math if there’s more than one income but I think that’s a good point of reference. 

Just to reiterate what you said, you’re talking there about when we were refer to percentage that can be allocated in the housing expenses, we’re referring to the principle interest taxes and insurance, which is important. So folks are looking on Zillow or Red Fin or Realtor, we’re looking at homes that they’re looking at all those expenses that would be combined. 

I want to come back Tony, and just dig a little bit deeper, you know, you mentioned a few things, if I heard you correctly that that will factor into this decision whether it’s a number lower than 43 percent or perhaps higher than 43 percent You mentioned down payment and the amount that’s down, you mention reserves. I heard you mention credit score as well.

So talk to us more about, in addition to just the income that one is making or obviously you have to produce W2s or income source as a part of the lending application, how do those other things factor in? So if I’m someone that’s got substantial reserves and I can bring more down but perhaps I don’t have as high of a credit score like how will that impact or do some of these weigh more heavily than others?

[0:13:20.5] TU2: It does. I mean, there’s different types of products out there so everything, there is different programs we have, different loan sizes, all sorts of things, so everyone’s different. So for example, we have loans for lower credit score, people with lower credit scores. I mean, FHA loans for example, which is a government backed loan, we can get pretty low credit scores approved for that with just three and a half percent down.

Now, there is high PMI with those loans, right? There’s very high PMI and then rates can be affected by your credit scores as well and then, we have loans for people that have lots of money and don’t show income, which is fairly common with business owners, right? They have sold the business or I had a couple of pro-athletes that I’ve worked with over the years that in between contracts and they’ve made a lot of money but they don’t have an employer right now.

So and there’s programs available for them. So not to get into too much of the granular but there is different options out there for different people. I would say the key though is the ability to repay. So it’s hard to say now, for example, the product we offer to pharmacist, we have minimum credit score of 700. I really can’t deviate from that because that’s a program guideline for that particular product but a conventional loan through Fannie Mae and Freddie Mac has, I mean, I can go down and do a 620-credit score with that which is pretty low.

But if your rates are going to be affected by that, you’re going to – may have to put more down than you would like to and there is going to be a give and take. So it’s viewed a little differently, depending on situations.

[0:14:50.4] TU1: Yeah and I think you just highlighted there why this is not a cookie-cutter approach, right? I mean, everyone’s credit situation’s going to be different or income’s going to be different, obviously, the area in which they’re buying a home is going to be different, what to bring down, the reserves, the type of loan product name to pursue could be different so I think really have any good understanding of those and working with a wonder that can walk you through those really important, because it needs to be a custom decision to your personal situation.

Tony, I want to talk for a moment, you mentioned obviously the idea that yes, you know, what the bank approves is one variable but also, you know, that may or may not mean that it fits in with the other financial goals and I think that’s really important but you and I have talked about this before in the show but the bank isn’t’ considering one’s list of financial goals in the home buying decision, right? They may not be thinking about, “Well, are you on track for retirement or are you not? You know, how are we addressing the student loan repayment plan?”

So obviously is a part of the broader financial plan, we need to be thinking about that overall monthly budget, that overall housing expense and how that fits in and allows us or does not allow us to be able to progress and achieve with other financial goals. So again, we’re going to have to play by the rules of the bank of course but ultimately, we need to be setting our own budget. So with that in mind, I want to talk through other costs that folks need to consider.

So we mentioned already principle, interests, taxes and insurance. So those are four things that we need to be thinking about but in this market that we’re in right now, one of the things that I’m going to talk about is just the amount that someone might have to be bringing to the table and yes, down payment is going to be one part of that but I know in our area, we’re seeing a lot of waving of appraisal gaps which could mean that more cash needs to be brought to the table by the buyer.

So can you talk to us about what is that in terms of the appraisal gap waver and why we’re seeing that play out in the market that it is and how that can obviously impact how much money somebody has to bring to the table.

[0:16:46.6] TU2: Yeah, absolutely. So, let’s address that and we could talk a little bit more about how things may evolve here but I think the appraisal gap, you know, we’re still seeing that in many markets around the country. I mean, there’s a lot of high demand markets and we haven’t built enough homes the last 10 to 15 years, so that’s why we’re in this position that we’re in and builders can’t keep up with because of obviously the tight supply chain, it’s taking longer to build and it’s harder to build. 

So the appraisal gap is tricky because, if you agree to this, right? I’m going to bring this, you basically, have to have the catch, right? To fill the gap, so if the price of the home is $400,000 and you have this waver and it appraises for 350, well, the bank’s going to use a 350, right? 350 value. The lender has to uses the appraised value and you know, let’s say we’re going to lend you 5 percent down. It was a 400, now it’s 5 percent down and 350, so you’re putting 5 percent down off 350, plus, the 50,000 gap that you agreed to with the seller. 

So you really have to plan ahead and look at how much cash you have if you agree to that situation. Now sometimes, it will appraise in that you don’t know, it may come in okay but I would definitely heed your realtor’s advice if they think they may not, right? Because there could be a change. You know, one of the things that we’re looking and at every market’s different so you can’t speak to every single city in the country but on average, there’s a lot of this happening around the country but a little bit of a pause with help, right? 

I think if we could get, you know, instead of seeing double-digit price increases for homes, if we got mid-single digits would be healthy right? You know, if you got a 5 percent, 6 percent appreciation on your home and you are putting 5 percent down, you’re getting an unbelievable return on your money and you are getting – you are not in such a bidding war crisis that we’re in now but I am hoping that will kind of happen and will normalize a little bit. 

But I would just be really careful about what you agreed to when you are buying now. I am very cautious about waving inspections and things like that. I just think if you can get anything in, plugged in, it just protects you and you have your eyes open and if there is, if you have to agree to something like a waiver, just make sure you have enough time to get your inspections done so you know every – at least you know the house is in good shape. 

There is nothing to worry about there and if there is a little bit of a value change then I hate to say it, but the reason you are agreeing to that is there’s other buyers out there waiting to buy it too. So there is going to be a lot of demand for real estate for quite some time until you see inventory levels rise.

[0:19:23.6] TU1: Yeah and I think that’s the concern, right? You’re set and done, I am not in the market you know, for a home in the moment but especially for first time home buyers it’s an exciting, it’s an emotional process and in a seller’s market where we are seeing a lot of bidding wars, I think there is just caution that we need to use when you look at waiving appraisal gaps, waiving of inspections and some of that as well because ultimately again, you know as we talk about often on the show, you know home buying is a really important part of the financial plan but it is one piece of the puzzle, right? 

So we got to make sure that we can enter that home, we can enter that situation with confidence that we’re able to move our other financial goals forward. We were just talking before the show, I mentioned that Tim Baker and I were looking at property here in the area that it was listed around 530 and it ended up selling for an all cash offer at 650 and that was an example where appraisal is going to come in around that 530 points. 

So that means in that case, that’s someone is going to be bringing in over a $100,000 of cash to the table. So that is another thing is we talk about affordability of home, if you find yourself in that position even if it’s a smaller amount, right? Five or $10,000, we got to factor that in on top of the down payment and on top of the other expenses that relate to purchasing that home. 

[0:20:39.8] TU2: Absolutely. You have to run your numbers on your reserves and how much cash you have if you agree to something to that effect. 

[0:20:46.8] TU1: Tony, I think it’s interesting the trickledown effect of this economically, right? We’re seeing rent prices here in Columbus, which I think is happening nationwide are going through the roof and obviously that presents a challenge for many folks. The other thing I am seeing recently, actually I heard an ad this morning, it was a window company here in Columbus that was running an ad basically playing on this saying, “Hey, instead of moving because of the market that we’re in, now is a great time to upgrade your home” right? 

So you know, I think that we’re seeing this rising level of cost, some people are thinking about making an upgrade or finishes to their home, windows, remodel their kitchens, basements, whatever and again with the supply chain issues, I mean it is really hitting people I think in all different areas. So certainly a challenging time and yes, there’s appreciation there but having to see that offset by some cash flow pinches that can happen in the moment. 

[0:21:34.9] TU2: Right, yeah absolutely. 

[0:21:37.1] TU1: Tony, I want to go a little bit deeper into, you know, we talked about principle interest taxes and insurance. So again, as we think about affordability of the home, we talked about the percent down and that may need to be more because of the market that we’re in especially, we find ourselves in a waving of an appraisal gap situation and so the other thing I want to hit on here is that assuming somebody chooses a fixed loan and we’ll talk about the pharmacist home loan product here in a moment. 

You know, that principle and interest is going to be fixed over the life of the loan but one of the things that they need to consider and I’ve lived this firsthand is that taxes and insurance are not fixed, right? So we need to be thinking also about what is variable going into the future and I don’t know markets where taxes are going down. So our taxes are going up, my home owner’s insurance has gone up overtime. 

So you know, hopefully, we have income increases that will go up overtime but we’re not always seeing that for pharmacists. So we need to be thinking about other expenses that could rise overtime and it’s not just in this moment, what’s the percentage of my take home pay that I am going to allocate to my home but how might that go up overtime as taxes increases, an insurance increases and then obviously, there’s other things to consider like HOA fees or upkeep or maintenance of the property. 

All types of things that again, home investment is a great thing but we want to make sure that we are entering into that with financial confidence. 

[0:22:59.3] TU2: Absolutely and that is a really good point. I mean so let’s say, we obviously fixed the rating, we fixed the payments in for principle and interest on the note but there is that variable nature of taxes and insurance and depending on what part of the country you live in, insurance can move quite a bit. If you are in Southern Texas or Florida, taxes or insurance can be a wild card sometimes. 

But I would say this, I mean, I think it’s important that you check on insurance maybe every year, right? Whether it is your auto insurance and the home owners, just see what’s out there because there is new carriers coming to market and sometimes they will give you discounts for your policies and one other thing too that I see banks and mortgage companies require a certain amount of coverage. 

That way your house is covered if it were to burn down or tornado damage or whatever it might be but one thing I do see, sometimes people overcommit on personal property. So make sure your insuring what you need. If you have a lot of personal property, clearly you can make sure you have the coverage but lenders don’t care about that. You could put it to zero and that wouldn’t be an issue for a lender. 

So if you are really trying to reduce your cost, that’s one way to do it too is look at like the personal property terms in your insurance policy and your house insurance policy. 

[0:24:15.0] TU1: That is a great call Tony. I would encourage folks if they haven’t done this in a while, you mentioned kind of looking at this regularly and even just pulling out the policy and looking at the line items, making sure you understand what those things are and I went through this recently. One of the challenges out there if you are trying to shop around policies is getting the apples-to-apples comparison.

So what I found to be helpful was as I was getting policy quotes, I basically provided the coverage amounts based on my current policy and what the categories were to try to get as close of a comparison as I possibly could and then that’s also true on auto insurance as you are looking at different carriers and options but great suggestion, a reminder to make sure that we’re taking a fresh look at that over time. 

[0:24:54.9] TU2: Yeah and I think that could help maybe to some degree alleviate some of that movement but clearly over time insurance costs are going to go up, especially with inflation. You know that’s affecting insurance premiums because it costs more to replace property, right? So that’s going to affect the cost of insurance. Property taxes, you know with property values going up overtime, in some states they’re capped, in some states they’re not, right? 

So you have – we got to be careful about this too Tim because every place is different but like for example in Florida, you have the homestead exemption and the save our homes cap, which essentially caps how much your tax basis value can go up every year and that really helps preserve the tax that you are paying every year. It can only go up a little bit so it is not a big deal in owner-occupied homes. 

Now, if it is not owner-occupied, second home investment property, it’s free lunch basically. You know the county could do whatever it needs to do but every place is a little bit different. Some other states have similar measures and that can help kind of keep in check how much your taxes go up every year and generally taxes are going to rise with the property values increasing. 

Now, the flipside is, I remember in ’08 and ’09 when my property values went down, my taxes went down, which is – you know, that was one benefit I guess of that side although I don’t want to relive it but you know that was a – you know, taxes generally go down if the county assesses your property at a lower amount and the other thing that I find too is that many of the municipalities are very, very generous in how they value your property. 

Because I will see some of the tax bills and they are coming in well under the market value and their tax estimate is well under. So it may not be the same everywhere in the country and every state has different varying degrees of taxes. So I’ll just say one thing like our audience in New York, taxes are really high there, right? Even in Florida, they’re pretty high but you know I have seen some other states where they’re not bad at all. So just different states can vary on how much those taxes are. 

[0:26:50.9] TU1: Good call out Tony that it is different everywhere as well as obviously there is a situation where it may go down and I am coming from the bias of only living in a period I’ve bought my first home in 2009 and you know, didn’t have a home when that happened and events were all fine.

[0:27:06.5] TU2: You bought at a good time. 

[0:27:08.0] TU1: Yeah, that’s right. I’ve been spoiled by only living in a state of appreciation on the home side. So I want to shift gears and talk about the pharmacist home loan product that you offer through First Horizon. You know, anytime we do a webinar presentation that includes home buying Tony, this continues to be the most common question, the number of questions I get in terms of volume around the pharmacist home loan product. 

I think it is becoming even more timely, it’s always been timely but more timely because as we see a rise in the purchase price, if folks are thinking, “Do I need 20 percent down?” or something traditional like that obviously, that becomes more of a barrier as the market does what it’s doing. So talk to us about the pharmacist home loan product offered by First Horizon. You already mentioned the minimum credit score of 700, who is this for? Who is not for? What does it mean in terms of down payment, purchase price of a home? Give us the overview. 

[0:28:02.2] TU2: So as we discussed, 700 is that minimum credit score. You know clearly, you have to be a licensed pharmacist. We couldn’t give it to just anybody. You know, some of the attributes of the product is you just don’t have to put much down and if you are a first-time home buyer, you are looking at putting 3 percent down. You’re eligible to put 3 percent down. If you have owned before, you only have to put 5 percent down. 

There is no mortgage insurance, so that is a really big driver to benefit as you have no MI and I find that with 5 percent down, the rates are every bit as good as someone came to me that was not a pharmacist for 20 percent down and sometimes better actually, an eighth better. So you get it sometimes a little bit better rate as well and the waiver of the PMI is a big thing. There is a loan cap, those ties-wise. 

We won’t go above 647, 200 as far as loan size. I have had a lot of pharmacists come to me with purchase prices of like 680 and they put 5 percent down and they’re fine. You know, they are within that guidelines there. So it still gives you a good bandwidth of price but sometimes in more expensive markets like California, it can be tougher sometimes to meet that guideline. We only offer a 30-year fixed on the product. 

So it is a 30-year fixed only, which I find is popular and then the other thing that’s a nice feature is there is no reserve requirement. You know, a lot of programs like this require that you have six months reserves for loans for specialist and this one does not have that and that’s a nice thing, no prepayment penalties. So it is a very clean loan. It doesn’t have a lot of concerns about it. 

The other thing too is generally with student loans, it will use a lower factor than a normal conventional loan will if you don’t have an income base repayment plan in place already. 

[0:29:46.3] TU1: Okay. 

[0:29:46.9] TU2: So if we don’t know what your payments are, it will actually use a lower factor than like if we were to get it through Fannie Mae or something to that effect or FHA. That’s another attribute. I’ve noticed though Tim, most of the pharmacists that are applying, we’ve had a lot this year, a lot in the last few years seemed to have a payment in place. There is only a few here and there that don’t. 

Yeah, so I find that kind of income base repayment is usually the driver or we just get a letter of what the payments are going to be and that tends to be the best way to handle things because those payments are generally a fraction of the balance now. 

[0:30:20.9] TU1: That was my question Tony, you beat me to it especially because we’re still in this Federal administrative forbearance where there’s been a price on Federal loan payments now for over two years that’s going to continue through the end of August, if not extended further. So for folks that are listening that I would suspect many are not making payments, is that the case then you kind of projected out what the payment would be?

[0:30:39.9] TU2: Normally that’s the best way if they have an expense, a challenge, you know, if it’s close qualifying otherwise we use a factor of the balances that can sometimes cause the debt ratios to get out of line but sometimes it’s fine. So we use that factor too sometimes if there is not a payment being made but normally we just get that letter projecting what the payments will be and I found that that’s normally what we see. 

But most people that come to us are already in that position but not everyone. We do have some that we use the factor onto. 

[0:31:08.9] TU1: The most common question I get is, “Hey, tell me more what is the pharmacy home loan product? Why is it different, why might it be an advantage?” you obviously highlighted the points there. The second most common question I get, which you already addressed is, “Hey, that all sounds great but am I going to pay a higher rate?” and you kind of alluded to of course, for everyone’s situation it’s different. 

But given the minimum credit threshold of 700 here and depending on the percent down, you know certainly it sounds like it can be competitive, in some cases it could be better. The third question I often get is, “Hey Tim, I am a resident. I am a fellow, I am a pharmacist but I am not yet earning that full income and so is this product eligible for me?” and I think, correct me if I am wrong, I think the answer is yes, you’re a pharmacist but you’re obviously going to run into some potential issues with that percentages because of that lower-income, is that correct? 

[0:31:56.7] TU2: Yeah, that is going to be a real challenge to buy that level. You know, we typically because the income level is not where it needs to be unless you’re married and your spouse is earning a good living already and whatever field they might be in and that can change things, you know? I’ve had where the spouses of PA, a physician assistant or an attorney and they’re having a good income stream while the pharmacist is in training that can be. 

So everyone is different through our point Tim but yeah, that would be a case where that probably qualifying for a loan, they’d have the ability to do it in that case but normally I find it is better to kind of wait fpr your training and you have that state license where you are going to be practicing in place. 

[0:32:37.4] TU1: Tony, knowing that we’re at the time of year, so those that are doing residency fellowship that are wrapping up, you know typically they’re ending end of June, so they’re in this transitionary phase and I suspect many might be listening. So for those that are making the transition out where they’re going to be going from a resident or fellow income to that full pharmacist income where obviously things will improve financially, general rules of thumb in terms of like how many months do we like to see from a lending perspective where they are in that higher income state, so they evaluate potential timing of a home purchase. 

[0:33:08.6] TU2: Tim, really month one we could help them. If they have an agreement and they are getting a W2 income, month one, we can help them. So they could close in month one, so right out the gate, you know, in July 1st if that is their first day, they could close. So they’d have the ability to close right away. So this product is not quite as flexible as our doctor products, which we’ll create. 

Sometimes they’ll go out like over five months if you have a contract and stuff like that from your start date but – 

[0:33:38.1] TU1: Oh really? Before. 

[0:33:39.5] TU2: Yeah but it’s a little different program. This one, it will still allow you to close on day one. So they really could get under contract knowing where they’re going to start and be able to close right when they transition in.

[0:33:52.9] TU1: Okay, let me point our listeners too, we’ve got a page. If you go to yourfinancialpharmacist.com/home-loan, we’ll link to that in the show notes. Again, yourfinancialpharmacist.com/home-loan. We have a lot of information, five steps to getting a home loan. We go into a lot more detail about what we talked about here today and then from there, you can get more information in terms of applying for the pharmacist home loan product and getting in touch with Tony as well. 

So Tony, thank you so much. As always, always appreciate the conversation and the expertise that you bring to the YFP community. So thank you so much for joining. 

[0:34:28.5] TU2: Thanks for having me Tim. It’s always good hanging out with you here so I enjoyed it. Thank you. 

[0:34:32.5] TU1: Thanks Tony. 

[END OF INTERVIEW]

[0:34:33.9] TU1: Before we wrap up today’s show, I want to again thank this week’s sponsor of Your Financial Pharmacist Podcast, First Horizon, previously IBERIABANK/ First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20 percent for a down payment on a home. A lot of pharmacists in the community have taken advantage of First Horizon’s pharmacist home loan; which requires a 3 percent down payment for a single-family home or a townhome 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 preapproval process, you can visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan.

[DISCLAIMER]

[0:35:14.3] TU1: 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 it is not intended to provide and should not be relied on for investment or any other advice. Information of 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 analysis 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, which 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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Getting Under Contract in a Competitive Home Buying Market

On this episode, sponsored by First Horizon, mortgage manager, Tony Umholtz, discusses getting under contract in a competitive home buying market.

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

If you’re looking to buy a home shortly in an area with a competitive market, this episode is for you. Today we welcome Tony Umholtz back to the show, a mortgage manager for First Horizon, formerly IBERIABANK. In this episode, Your Financial Pharmacist Co-Founder & CEO, Tim Ulbrich, PharmD, sits down with Tony to talk through the tips for securing a home purchase contract in a competitive housing market, the current state of the housing market, the current housing shortage, and reasons behind that shortage. Tim and Tony discuss interest rates and trends Tony has seen through his experiences working with pharmacists across the country. Hear why the lender and agent you choose to purchase a home through matters, why the type of loan you choose to get matters, top advice for first-time homebuyers looking for a low down payment, and the pros and cons of various strategies to make an offer stand out. Tony also shares information on how to get out of your contract if necessary without losing your earnest money. From escalation clauses, and appraisal gap clauses, to waving inspection contingencies, this episode breaks down everything you need to know as a pharmacist trying to secure a home in the current real estate market.

Key Points From This Episode

• Hear about Tony’s background and the work he’s doing right now with First Horizon.
• How we’re still at historically low-interest rates, even with the recent rise we’re seeing. 
• Some context on the current market and why we currently have a housing shortage.
• Tony shares why it matters what type of loan you get.
• Important factors to consider when evaluating and considering the lender that you choose. 
• What an escalation clause is and some of the potential pros or cons to look out for.
• Tony comments on the recent trend of waving inspection contingency.
• Whether the earnest dollar amount is going up in this market and if offering more makes a difference.
• The three pieces that will allow you to get out of the contract and not lose your earnest dollars. 
• Some advice on what to do if you’re looking for an option with a lower down-payment.
• Why there are so many cash offers out there at the moment.
• We talk about some great strategies to help out with the seller cost.

Highlights

“We’ve had the lowest interest rates we’ve ever seen as a country the last couple of years during the pandemic. Now they’re just slowly going back up again and we’re still at historic lows, even with the move higher that we’ve seen in the last six, seven months.” — Tony Umholtz [0:04:47]

“I think having a very good realtor who is trusted in the market and has a good reputation can really help you get a contract right now. That’s a big thing, a big deal.” — Tony Umholtz [0:15:00]

“We have the housing shortage and rents are escalating at a faster pace than appreciation on housing is, so that is why owning real estate is valuable right now.” — Tony Umholtz [0:26:26]

“Learning as much as you can about the seller and the situation can help you in getting that under contract.” — Tony Umholtz [0:29:15]

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 136: The Ins and Outs of a Pharmacist Home Loan
• YFP 154: Getting a Home Loan in a Pandemic
• YFP 169: Helpful Tips for Getting a Mortgage
• YFP 191: 10 Common Mortgage Mistakes to Avoid
• YFP 204: The Current State of Buying, Selling, and Refinancing a Home
• YFP 216: Common Credit Blunders to Avoid When Buying a Home
• YFP 230: 5 Steps to Get Ready for a Home Purchase
• Apply for Pharmacist Home Loan
• Schedule a Free Call with Nate Hedrick
• YFP Concierge Service
• Homebuying Resources
• Your Financial Pharmacist Disclaimer and Disclosures

Episode Transcript

[INTRODUCTION]

[0:00:00.4] TU1: 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 to the show, Tony Umholtz, a mortgage manager for First Horizon, formerly IBERIABANK. During the interview, Tony and I talked about some tips for securing a home purchase contract in a competitive housing market. If you’re looking to buy a home in the near future and live in an area that has a competitive market, this episode is for you. 

During the show, we talk about the current state of the housing market interest rates and trends Tony has seen through his experiences working with pharmacists across the country, why the lender and agent you choose to purchase a home matters, and the pros and cons of various strategies to make an offer stand out, including escalation clauses, appraisal gap clauses and waving inspection contingencies.

Before we hear from today’s sponsor and then jump into 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 240 households in 40 plus states. YFP planning offers free only, high-touch financial planning that is customized for the pharmacy professional. If you’re interested in learning more about 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, First Horizon, and then we’ll jump into my interview with Tony.

[SPONSOR MESSAGE]

[0:01:38.0] TU: Does saving 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 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 IBERIABANK/First Horizon. IBERIABANK/First Horizon offers a professional home loan option, AKA, a doctor or pharmacist home loan that requires a 3% down payment for a single-family or townhome, has no PMI, and offers a 30-year fixed-rate mortgage on home loans up to $548,250.

The Pharmacist home loan is available in all states except Alaska and Hawaii. To check out the requirements for IBERIABANK/First Horizon’s pharmacist home loan and to start the pre-approval process, visit yourfinancialpharmacist.com/homeloan. 

[INTERVIEW]

[0:02:42.2] TU1: Tony, welcome back to the show.

[0:02:44.0] TU2: Tim, thanks for having me, always good to be here with you.

[0:02:46.4] TU1: Really looking forward to this, our first recording together in 2022. We’ve had you on the show many other times before, we’ll link to those in the show notes for folks that are looking for guidance in the midst of that home buying process. We’ve talked before about the professional home loan option, the pharmacist home loan and we’ll get to that at the end as well but if folks want other references and resources on that, we’ll certainly link to those previous conversations in the show notes.

Tony, I don’t want to assume that all of our audience knows who you are and so if you just take a moment to give us some background on yourself and the work that you’re doing with First Horizon.

[0:03:21.5] TU2: Sure, well, I’m a mortgage banker and I’ve been doing mortgage lending now for almost 20 years I’m afraid to say, it would be 20 years in October but we handle residential lending and I run a team here, we’re based in Florida but we lend all over the country, we are actually in 48 states. The lower 48 we’re licensed in and we handle the residential financing both purchase loans, purchase money, and refinancing but it’s been a lot of fun, I’ve had a lot of fun in my career. We’re in a very interesting time now, Tim.

[0:03:53.4] TU1: We are and I appreciate you as always, sharing your expertise, and today, we’re going to be talking about some tips and strategies for getting under contract in a competitive home buying market, I would say that’s a timely topic for sure. Tony, we’ve been talking over the last few years and it seems like each season we talk, it’s just a wild time to be buying a home, the home market as a whole. 

Here we are in another time period, I think there’s some uncertainty, we see some changes that are happening to interest rates, for those especially, they are first time home buyers, I think it right to be a little bit anxious about the process and the competitive nature of what’s out there. From your viewpoint of working with pharmacists and others all across the country, just give us a quick summary of what you’re seeing as we really get into the beginning of spring of 2022. 

[0:04:41.6] TU2: Sure, Tim, you’re exactly right, the market has been changing here this year. We had some of the lowest interest rates – the lowest interest rates we’ve ever seen as a country the last couple of years during the pandemic. Now, they are just slowly going back up again and we’re still at historic lows, even with the move higher that we’ve seen in the last six, seven months. We’re still near very historic lows. 

Back when I started in the industry, 7% for 30-year fixed was actually not bad, it’s trended lower during that time frame but it’s – we’re in this time right now where we have a housing shortage throughout most of the country and a lot of that happened post the downturn of ‘08 and ‘09, we just didn’t build enough homes and apartments for the population growth. We saw people moving in together, builders couldn’t get financing for a number of years so we went through a decade of underbuilding and now, this is the consequence. 

We don’t have enough housing inventory and housing stock and what’s caused the further delay is that builders can’t build as quickly as they like to because we have supply chain issues. Builders can’t – I work with builders as well and they’ll tell me, “You know, it’s taking me six months to get roof trusses” and different things, different components of the building process are constrained. 

They can’t output the number of units for demand and I think that’s a good thing over time, I mean, they’re going to catch up eventually and it will normalize but we’re going to be in this type of market for the foreseeable future until they can catch up.

[0:06:19.1] TU1: Naturally, Tony, what we see then is, and of course, we’re generalizing across the country, certainly different in parts of the country, different markets but that means, home prices going up significantly, supply and demand, more people that are looking for homes. And we’re hearing from our community, as to be expected, whether it’s their first home, second home or third home, that they’ll be on the pinch, right? 

For many pharmacists, we see salaries – great salaries coming out of school but are relatively flat over the course of one’s career. Obviously facing many folks is significant student loan debt that first decade or so of their career and now, we’ve got rising home prices that are layered on top of that and so, all the more reason that we’ve got to be thinking about the home buying decision and the context of the rest of the financial plan. 

Before we go into individual tips or strategies for getting under contract in a competitive home buying market, I’d be remiss if I didn’t first say that we need to make sure that we’re not losing perspective on the budget for buying a home and how that fits into the rest of the financial plan, right? As we say many times in the show, we can’t look at any financial decision in a silo, and if the end goal is to get under contract but we do that in a way that significantly disrupts the rest of the financial plan, we’ve got to obviously put that in check.

Really taking a step back, what is your home buying budget, what is your personal situation as it relates to investing and saving for the future, other debts that you have incurred and are paying off, and how can we make sure we’re purchasing a home in a way that also allows us to thrive with the rest of the financial plan?

Tony, first question I have for you as it relates to getting under contract in a competitive market is, does it matter what type of loan someone may have? If I’m a seller and I’ve got 10 offers that are on the table and some folks are coming with maybe an FHA loan, a VA loan, a conventional loan, perhaps something like a doctor loan, a pharmacist home loan product, that does that really matter in terms of what type of loan someone is bringing to the table as they’re trying to bring that competitive offer forward?

[0:08:18.6] TU2: Well, it certainly does. I think it’s a really good question because when you get an FHA or a VA pre-approval letter, if you’re a seller and if you had experience with that, there’s typically a much stricter appraisal that’s done on your property versus maybe a conventional loan or like a special pharmacy or doctor product. It’s going to be a much more stringent appraisal and it’s just because those loans, FHA and VA loans are federally backed loans that are backed by what’s called Ginnie Mae, which – anyway, not to get into the complexities of the mortgage market and everything else, they’ve got sets of guidelines for these products. 

Now, they’re good programs, they have opportunities for individuals to qualify for different things but as a seller, you’re going to probably, if all things being equal, right? If that price is the same, you’ll probably going to want to avoid those offers just because they do come with some extra sets of eyes. And the other thing too that both these types of loans, if you get the home appraised and that appraisal comes back lower or whatever it might be, that’s attached to the home for quite a while.

[0:09:31.1] TU1: Yup.

[0:09:31.3] TU2: That seller cannot – if another buyer comes in, they have to use the appraisal that was done on your unit. It’s – there is some overlays to those two products so that will probably put you in a more inferior position.

[0:09:44.6] TU1: One tangible story I have here, Tony, personal experience, we were selling, my wife Jess and I are selling our home up in Northeast Ohio before we moved to Colombus and the buyer had FHA loan and I remember during the inspection process, this was my delinquency as the homeowner, I think one of our boys had pulled the railing off the wall or just something normal that happens in our house with four boys.

I was in the process of kind of getting that back up of the rail going up to the stairs and at the time when they came out to the inspection and there wasn’t a whole lot of notice, they take a bunch of pictures and whatnot and they had requested that that be put back on and they had to come back out to see that it was put back on. This was in the pre-pandemic time period so maybe now they allow for photos or other things but that time gap could be significant, right? 

If you’ve got multiple offers and things that are going on and if folks again are looking for ease of closing and they’ve got options of different buyers with loans that may not be astringent, it certainly could be something that can come into play.

[0:10:41.6] TU2: Absolutely, there’s no question, it happens all the time. When we do approvals for – we do FHA and VA loans too and when we have them, I have listing agents call me and tell me these things. This is just from experience and – but there’s no question that can put you at a disadvantage but again, those programs are there to serve a purpose. They’re not bad loan programs for different people, they have pros and cons. 

I don’t want to downplay it but they certainly, if you are qualified with you, those products are going to put you in an inferior position going into getting the offer, for sure, and to getting it accepted, the contract accepted.

[0:11:15.6] TU1: Next thing Tony, I want to ask you about is the who on your team. Specifically, first, I want to talk about from a lending standpoint and then second, from the agent standpoint and really highlighting that not all options are created equally. And I think when it comes from a lending perspective, speaking from personal experience as a former first-time home buyer, I was very fixated on getting the best rate, right? 

That was something that had been drilled into me that you’re looking at something over 30 years on a 300, 400, $500,000 purchase, 0.1% or whatever would be the difference, can be significant. But not stopping there, of course, a competitive rate really matters but other things, communication, timing to close, accessibility of that individual during the process, so important to bringing a competitive offer for it. 

Tell us more about how we can really evaluate and consider the lender that we’re using.

[0:12:07.9] TU2: Yeah, another good point, Tim. I mean, during this time where everything’s so competitive, most markets around the country have less than two months of inventories, that’s very much a seller’s market and very competitive. We had a situation happen this weekend with my team and we had a borrower that said, “Hey, I’m going to go in at this set purchase price for a home.” And they actually had to pay quite a bit more and the seller was going to go with them but they didn’t have a letter stating that, and they were approved for that amount and even more than that. But they thought like a negotiating tactic would be, “Hey, let’s go in at this, what my offer price is going to be.” Which was under value.

They almost didn’t get the contract. Fortunately, a member of my team was able to send them the updated pre-approval letter this weekend so they could get the house under contract. Communication is really important and especially during this time. And I will say also that the listing agents call us, and we don’t disclose anything personal and we don’t – we can’t do that but a lot of them will want to know, “Hey, can you close on time? Can you get this done, can you get an appraiser out there and have an appraisal done in a meaningful matter of time?” 

And also, the commitment letter deadline, a lot of contracts call it commitment letter, which is basically a formal underwriting approval where you’ve been through underwriting formally, a lot of orders are done within a few days and other lenders, some other lenders may be like this too, but having it done quickly is so important. And being able to get underwritten quickly and having open communication is critical with the lender in this time because it’s – I always tell people, you can go with certain lenders if you’re just refinancing, if it takes 90 to 120 days, it’s okay, it might cause some stress a little bit for you but it’s just a refinance, right?

On a purchase, you have to hit these deadlines, you have to hit these timelines or you could be out of contract, and not only lose the contract but also lose your earnest money too. Yeah, it’s very important. And I would also say with the agents too, your real estate is very important that you have a good real estate agent that knows the market and I’ve seen just from my years of experience, I’ve gotten feedback where listing agents would call me and say, “Hey, this buyer’s represented by so and so,” we’ll call it Mr. Smith, “Everything he brings me has been over the years has been great.”

“He’s always transparent with me about his buyers, he keeps things together and I have these six offers but I think all things being equal, he’s always treated me right so I’m going to go with him.” I’ve heard that, just because they feel all things being equal, right? All these other buyers’ kind of equal pricing, whatever else, I know that he, what he’s telling me from experience is going to happen. I think having a very good realtor who is trusted in the market and has a good reputation can really help you get a contract right now. That’s a big thing, a big deal.

[0:15:12.3] TU1: Yeah, it’s the second or third time Tony, you’ve mentioned, with all things being equal, right? I think that’s worth highlighting, that you can have the best lender and the best agent but if you’re not bringing a competitive offer for it, brother, that’s not going to help you. But I would argue, a good lender that’s a partner and a good agent who really knows the market, assuming it’s within your budget and other goals and whatnot, they’re going to help you put forward a competitive offer, right? 

Those things I think do go hand in hand. Shout out here to Nate Hedrick, a friend of YFP who does our home buying, concierge service who helps connect pharmacists with agents in their area, that are certainly going to be coming forward as someone who is reputable and able to take someone through that deal. We’ve got a home buying page where folks that are looking to get connected with an agent, looking to learn more about the First Horizon professional home loan option, if you go to yourfinancialpharmacist.com and then click on home buying, you’ll see all that information and can read through that further.

Tony, one of the things that I’m hearing a lot in this competitive market is escalation clauses and why it’s potentially valuable to have an escalation clause built into the contract? What is an escalation clause and what are some of the potential pros or cons that people need to be on the lookout for?

[0:16:26.0] TU2: Well, the escalation clause are essentially saying, we’re going to pay – we’re going to stay in this bidding war, right? We’re going to stay at this bidding war for this property and we’ll go up X amount. I have seen these happen where you’re putting in your offer and you’re willing to go X amount higher than just to keep up with the next guy, right? Whatever that number might be, $10,000, $5,000, 10% or 5% and you’re escalating above the sales price essentially and we’re seeing that happen, right? 

There is a bidding, a bid up of housing. You know, the pros and cons, clearly the pros are you can stay in the transaction and maybe it will help you secure the home. The cons are you may be bidding at more than it’s worth and when we have that appraisal done, you are going to have an appraised value that might be at the original sales price where they started. 

Now, you are paying, let’s say $10,000 more than where you started because you participated in the escalation clause and now when we get that appraisal, you’re $10,000 under the value. So lenders can only lend off the original appraised value and if you owe $10,000 more, because if you want the property that’s what you are going to have to do because there is other buyers that are willing to do it too, then you’re going to be bringing your down payment plus the $10,000. 

That’s the risk, Tim, is that you’re getting in a situation where it may not appraise and you are having to bring more money to the table than you anticipated in the beginning. 

[0:18:13.5] TU1: Yeah and I think this is a very natural feeling in the moment, right? Where people are living in areas where they are hearing of 30 showings in a weekend and 25 offers that are on the home. And so you come in maybe asking a little bit more and then you put these clauses that go up another 20 or $30,000, but then the risk, as you mentioned, which is part of just the reality of the market, but also one that somebody has to plan for is, what happens when you have to bring more cash to close? 

Are you ready for that, right? What does that mean for the rest of the financial plan? Is that coming out of savings? Is that putting you behind on their goals or is that something you can cash flow without causing too much headache or concern? Tony, the other thing I am hearing a lot, of course again, as we are talking about just a competitive market, is waving an inspection contingency, and that one gives me a little bit of heartburn but I didn’t buy a home in the chaos that is today’s market. Has this become a norm, what is this all about? 

[0:19:11.4] TU2: Well, I never recommend it so I come in the same boat as you. You know, I’ve had a few of my clients ask me this, and you just never know what you’re getting into and you want to know, “Is my roof going to last? Is there another major issue, a foundation problem or whatever it might be?” I always think you get an inspection and then you know what you are getting into, and so I am not a big believer in that. But I do know some clients have waved it especially if they are familiar with the property and if they have been looking at it for a number of years. 

I had someone that had – it was a property they had been in before, someone that they knew they lived there and they wanted it and they knew it was good and sound. I think I would not be in a case where I would not wave it personally and I do not recommend it. But you know, that would be my opinion. But again, it happens and as lenders, we don’t look at the inspection. We look at our appraisal but we don’t look at the inspection, so we don’t need it. 

We don’t require it, so anyway, that is just some feedback from us. And I would say that I am a big believer in getting an inspection though. 

[0:20:19.4] TU1: Yeah, just to define this further for those that are first-time home buyers. Inspection contingency meaning that the offer would be contingent upon the completion of an inspection and that inspection often would allow folks for an out if something significant would come up. And so, by waving that, you are essentially waving the contingency of that result of an inspection. 

[0:20:41.4] TU2: That’s right. 

[0:20:42.1] TU1: You either have a really good understanding of the home or you are taking on that risk that there might be something there. 

[0:20:48.2] TU2: Or what happens too, Tim, if they wave their inspection rights and they decide not to buy the home and they put $5,000 in earnest money to secure the contract, they walk away from the contract, they lose the $5,000. 

[0:21:00.0] TU1: Yeah. 

[0:21:00.6] TU2: That’s what’s happening and I’ve had people call the listing agent and say, “Hey look, we’ve got two offers but they’re waving their inspection contingency.” And you know in that case, what it is is, if they put their earnest money up, they’ll lose it. They can still get an inspection but if they walk away from the contract, they are going to lose their money. 

[0:21:24.7] TU1: Got it, good clarification, thank you. Since you brought up earnest money Tony, let me ask about that. Maybe I am dating myself, the last time we bought a home 2018 would have been, I feel like the earnest money was more than the house in dollar range. You just mentioned five, is that something that we have seen go up in terms of earnest money that folks need to be planning for? Hopefully they would be able to re-coop those dollars but you give an example where that maybe wouldn’t happen. 

Is that earnest dollar amount going up in this competitive market and does offering more earnest money make a difference? 

[0:21:58.7] TU2: Well, I normally see a couple of things here. I think I normally see Tim, earnest money is more tied to the price of the home. If it is a larger contract, usually a bit more earnest money versus a smaller purchase price. I think on average that there’s earnest money – earnest money has gone up a bit but I haven’t – you know, I would say on average it has, but I definitely believe the more you put up, the stronger your offer is going to look. 

If there, again, all things being equal, you have the same price and one person puts up a thousand dollars in earnest money and the other puts $5,000 and all things are equal, well, if I am the seller, I am taking the $5,000 because I have a little bit more if something goes wrong, right? In this transaction. I think a larger earnest money deposit definitely puts you in a better position. 

Again, you want to have some – typically in the contract, there is going to be an inspection contingency and appraisal contingency and a financing contingency. Those are the three main pieces and if you have those in place in the contract and one of those things falls through, you have the ability to get out of the contract and not lose your earnest money, so that is what the importance of having those pieces in the contracts. 

Again, all things being equal, I think the more you can put down, the stronger you’re going to represent yourself to the seller but then again, a lot of these programs we offer don’t require a lot of money down.

[0:23:26.7] TU1: That’s right, you can ask that, yeah, exactly. 

[0:23:29.3] TU2: Yeah, so I will say this, there’s another program, I had a builder call me and said, “Hey, we require 10% to build the house for this client and I see that your approval letters is 95% financing, so are they basically going to get 5% back at closing?” And I said, “Yes because they advanced money to you to build the home, and then when we do the loan at the end, we are going to give 95% financing so 5% of their earnest money will come back.”

So different situations but clearly, everyone is different in how much they can put up and I think in speaking with their realtor so they can get a better idea what’s a good offer. 

[0:24:10.8] TU1: Tony to that point, you know I would imagine if someone is selling a home and there is, I don’t know, 10, 12, 15 offers, I would expect we are seeing more cash offers that maybe are out there. If I am a first-time home buyer and I am looking at an option that has a lower down-payment, I am wondering, do I even have a shot in that market? In terms of competing with cash offers or even offers that have more earnest money down, what advice, what thought would you have there? 

[0:24:37.9] TU2: In that case, I mean there are all sorts of sellers out there and you’re right Tim, a lot of cash offers. Typically cash offers are lower-ball offers, a little bit lower than the market, right? Most of them do that because “Hey, if I am paying cash I want a better value.” They are going to ask a seller to sell it for it less. A lot of times, people with financing will pay a little bit more and that’s how you are able to secure it above them, because you are paying a little bit more than the lower-ball cash offer. 

Now the other thing with cash is, not all but a lot of them are investors, right? They are investors, it might not even be people. It might be corporations that are buying rental properties and some sellers, I mean not everyone but some sellers, if you have raised your family in a home or your kids have been in this house and your family has been in this house, you kind of like the idea of another family moving in, right? Or another owner occupant moving in. 

Not necessarily a family but just someone that is going to live in my house and take care of it like we did, you know? That is the mentality that some sellers have versus some investor coming in, right? I think that that sometimes can connect with people too and you know, you might have to write a letter or say, “Hey, this is who we are.” And again, I am just giving an idea here but I think that can hold value.

All things being equal, if I have a pre-approved person, they are going to pay $5,000 more than the 10 cash offers are, “Hey, I am going to live in your house and this is where we are living and I own it.” Owner-occupied versus those 10 cash offers where 90% of them are investors, right? I think that is a good way to kind of position yourself differently. And I think we are talking about all of these things, guys, and it sounds scary and it does this like, “Why would you want to compete with and deal with this?”

Well, the reason there’s all these cash offers is, we have the housing shortage and rents are escalating at a faster pace than appreciation on housing is, so that is why owning real estate is valuable right now. Because rental, the rental market is going up faster than the percent appreciation. But I guess all things being said, any connection you can have with the seller can help you in this market and help you compete with cash but naturally, you are going to have to typically pay a little bit more than cash normally to get the home. 

[0:26:59.1] TU1: Yeah, a good clarification that often cash offers might, generally speaking, might be a little bit lower and also might have a greater pool of folks that are looking at that as an investment property. Again, if somebody was selling this owner-occupied and they want to maintain that as an owner-occupied unit, that could be good, be able to communicate that to the seller.

[0:27:17.0] TU2: That’s right. 

[0:27:17.9] TU1: Tony, other strategies out there. I know there is a myriad of things that I have heard different folk use in terms of helping out with seller cost. It could be moving expenses, it could be having some flexibility to seller align and to stay in the home longer. Other strategies that you are seeing or recommending that seemed to be working in terms of again, getting under contract in this competitive market?

[0:27:42.0] TU2: Well again, we mentioned the seller. I did see, I have another contract that came in where some folks connected with the seller and that seller stayed with them, even though they could have gone and got a higher price on the market if they listed it. So that connection with the seller anyway is important. Now, what they did do, I will say this, they are letting them stay in the house 60 days after close so they can move all their stuff out and take their time because their place won’t be ready until then. 

Clearly, any sort of connection with the seller on some other variables is going to help you get the contract. And if you allow them to stay in the house, now you got to be careful with post-occupancy agreements because meaning that the seller is going to rent back from you or stay in the house a set amount of time after you purchase it, because most buyers that are listing are buying to owner-occupy the property. 

If you are essentially buying it and letting them lease from you for a period greater than 60 days, it can be looked at as a problem with the lender. So you do have to keep that in mind when you are allowing someone to stay, but I think flexibility is really an important way to help you look stronger in the eyes of seller, just meeting them on other terms that aren’t just financial, you know, giving them that extra time. 

Because a lot of sellers are maybe moving into a new condo or they’re downsizing into a new community where it’s being built. And then the builder is taking a little bit longer to build a property, so there is always these other variables. I think learning as much as you can about the seller and the situation can help you in getting that under contract. 

[0:29:23.0] TU1: Great stuff Tony. As always, I appreciate your insights from your experiences each and every day talking with pharmacists and others across the country looking to purchase a home. I think this is a good segue and transition to talking more about the pharmacist home loan product that is offered by First Horizon formerly IBERIABANK. And we’ve got lots more information, educational information. 

You can learn more about this product and other information related to purchasing a home, at yourfinancialpharmacist.com/home-loan. Tony, give us some of the highlights, some of the key facts as it relates to the First Horizon pharmacist home loan product, down payment, how that works with PMI, maximum loan amount and then we’ll reference folks to more information from there. 

[0:30:06.0] TU2: Sure, so we will allow up to 97% financing if you are a first-time home buyer with 3% down and then if you have owned a home before, it is 95% financing, so 5% down. As Tim mentioned, there is no PMI insurance, which is the most compelling piece of this and we do have a minimum credit score of 700, a maximum loan amount currently of $647,200, which serves plenty of markets at that size. 

Then we do offer a 30-year fixed mortgage and the rates tend to be every bit as good as if you put 20% down for a normal buyer so that’s what’s been compelling too as you are not getting penalized to put less money down. And there are no prepayment penalties, so it’s got a lot of flexibility for those that are in this occupation. And we can write it, as Tim mentioned, in 48 states. Alaska and Hawaii are the only two I can’t write it, so we haven’t gone that far yet. 

[0:31:02.9] TU1: Yeah, that was really a big part of, when we formed the collaboration a few years back, was a national option for pharmacists that were looking to make that home purchase, right? You mentioned the lower 48, obviously, we’ve got a community of pharmacists all across the country, so really grateful for your insight and the contributions you made to the YFP community. 

Again, if folks want to learn more about that product, you can go to yourfinancialpharmacist.com/home-loan. Tony, great stuff as always, and looking forward to continuing the conversation as we go throughout the rest of 2022. 

[0:31:37.4] TU2: Thanks again Tim, I enjoyed being with you today. 

[END OF INTERVIEW]

[0:31:39.8] TU: Before we wrap up the show, I want to again thank this week’s sponsor of Your Financial Pharmacist Podcast, IBERIABANK/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 IBERIABANK/First Horizon’s pharmacist home loan, which requires a 3% down payment for a single family home or townhome and has no PMI on a 30-year fixed-rate mortgage. 

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

[DISCLAIMER]

[0:32:21.8] 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 it is not intended to provide and should not be relied on for investment or any other advice. Information of 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 post and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analysis 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, which 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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