Real-Estate / Podcast

YFP 230: 5 Steps to Get Ready for a Home Purchase

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5 Steps to Get Ready for a Home Purchase

On this episode, sponsored by IBERIABANK/First Horizon, Tony Umholtz talks through five steps for getting ready for a home purchase.

About Today’s Guest

Tony 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 are considering purchasing a home in the next six to twelve months, today’s episode with mortgage manager Tony Umholtz will equip you with the information you need to prepare for this exciting journey. Tony shares his knowledge about the importance of understanding interest rates, where to find the most up-to-date information on those rates, how to determine your home-buying budget without the lender setting it for you, and criteria used by the lender to calculate your maximum loan amount. Tony also shares the best time to get pre-approved and things to look for in a lender when going through the home-buying process. The discussion covers the five key steps to follow to ensure that you are ready to purchase a home including, understanding the landscape, knowing your budget, getting pre-approval, choosing a lender, and knowing which documents you need to provide once the property is under contract. If you have questions about interest rates, the difference between pre-approval and pre-qualification, the various types of lenders that you can work with, the pros and cons of putting a 20% down payment on a home, the 28/36 rule, or anything to do with credit scores, you’ve come to the right place!

Key Points From This Episode

Why now is a good time to buy a home.
Where you can find out the average interest rates in the home loan industry.
Tony explains what discount points are and why you need to understand them.
The importance of reading the fine print.
Know your budget!
How lenders determine how much they are going to lend.
What the 28/36 rule is.
Tony runs through the pros and cons of a 20% down payment.
How savvy investors look at returns.
Comparing pre-approval and pre-qualification.
The value of a credit report.
How lenders work out your credit score, and why this differs from what you will see if you use a monitoring service.
Examples of the different types of lenders that exist.
Information that you will need to provide to the lender you choose once you have a property under contract.

Highlights

“Lenders look at your gross income. We don’t factor in your after-tax income.” — Tony Umholtz [0:09:23]

“I’m a big believer in being diversified.” — Tony Umholtz [0:10:51]

“The higher your credit score, the better your rates tend to be.” — Tony Umholtz [0:23:12]

“There are advantages and disadvantages for every type of lender that’s out there. So, it’s good to know, get some recommendations, and also to compare the products and make sure it’s a fit for you and that you feel comfortable with the group that you’re working with.” — Tony Umholtz [0:27:20]

Links Mentioned in Today’s Episode

Episode Transcript

[00:00:00] TU: Hey everybody, Tim Ulbrick 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 onto the show Tony Umholtz, a mortgage manager for IBERIABANK/First Horizon. During the interview, Tony and I talked through five steps to getting ready for a home purchase. So, for those that are listening and thinking about a home purchase in the next 6 to 12 months, this episode is certainly for you.

On the show, we discuss the importance of understanding interest rates and how you can find the most up-to-date rate information. We also discuss how to determine your home-buying budget and the criteria used by the lender to determine your maximum loan amount. When is the best time to get pre-approved and what is the difference between pre-approval and pre-qualification? And finally, what to look for when shopping around lenders and going through the application process.

Now, 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 fee only, high touch financial planning that is customized for 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, IBERIABANK/First Horizon and then we’ll jump into my interview with Tony.

[SPONSOR MESSAGE]

[00:01:42] SPEAKER: Does saving 20 percent for a down payment on a home feels 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 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 percent down payment for a single family or townhome has no PMI and offers a 30-year fixed rate mortgage on home loans up to $540,250. 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 preapproval process, visit yourfinancialpharmacist.com/homeloan. Again, that’s yourfinancialpharmacist.com/homeloan.

[INTRODUCTION]

[00:02:46] TU: Tony, welcome back to the show.

[00:02:48] TU: Tim, thanks for having me. Always good to be here.

[00:02:51] TU: Excited to jump into this episode, you’ve been a frequent guest on the show. Last episode we had you on was episode 216, where we talked about common credit blunders to avoid when buying a home. We’re going to link to that in the show notes and dig in some more detail on that topic as well during this episode. So Tony, give us the update. What are you seeing out there in the housing market? It’s been a wild year, right?

[00:03:14] TU: It has been a crazy year. It really has been. A lot of the same things we’ve seen before in the past, the inventory levels are still fairly tight and rates are still low. The one thing I will mention is you know is more of a timing thing for the time of year in the season we’re in, is the autumn in the fall is typically – there’s a little bit less buyers out there. We have Thanksgiving and the holidays around Christmas. Typically, there are less buyers, a little bit less competition. So, it’s often a better time to buy because there are less buyers you’re competing with.

[00:03:51] TU: I think that may be true for many folks in our community that perhaps we’re shooting for a spring or summer home purchase. Maybe they got delayed because of the inventory issue that is well known that’s out there. So today, we’re going to be digging into five steps that folks can take to get ready for a home purchase. We’re going to be talking through evaluating loan options, finding a lender, saving for a down payment, and running the numbers for your budget. So, if you’re thinking about buying a home in the next 6 to 12 months, this episode is really designed for you. If you think combined is in your future, whether that’s now or down the road, my hope is you’ll be able to pull some tips and lessons away from this episode to help you prepare for that journey.

No need to take notes. You can head on over to yourfinancialpharmacist.com/home-loan. We’ve got an extensive resource at that site. You’ll be able to check out a lot of what we’ve referenced today. So Tony, five steps to get ready for home purchase. Number one, know the landscape. So, before you’ve been shopping around for lenders, it’s helpful to have a general idea of what’s going on in terms of mortgage, interest rates, what the market is. So, what do we generally seeing right now Tony, and knowing these, of course are subject to change, and where can someone go to research those rates?

[00:05:05] TU: Well, it’s a good question here, Tim. The first step, just to kind of get a very broad view of the landscape would be, you can actually go to Freddie Mac, freddiemac.com, and Fannie Mae, they actually post rates, but it’s an average rate. So, it’s an average industry rate. You can also find it like in The Wall Street Journal. Clearly online, you can find it but you would look for the weekly average rate, and by Fannie or Freddie Mac. Freddie Mac quotes typically have points in them. So, you do have to look at the fine print with that, that it’s an average rate, kind of a consensus of the industry to tell you where rates are, like a rough idea of where they are, but they’re often quoted with points. So, keep that in mind, because your lender may quote you something the same or a little higher, but it does not have points. That’s just kind of a good place to start, Tim.

[00:05:58] TU: Tony, I’m looking at those rates right now. So, at the freddiemac.com/pmms, we’ll link that in the show notes. So, showing 30-year 3.14 percent, 15-year 2.37 percent, a five-one-year arm, 2.56. And then what’s neat about this is you can look at the trends over the year, 3 years, 5 years, 10 years. And then also let you know what has changed within the last week or the last year. I didn’t know that about points in terms of how these are reported. Some folks may be looking at these and not thinking about the points or what that means in terms of expenses for them. So, just give us a quick definition of points and why it’s important that folks understand that as they’re trying to compare rates, and perhaps get to that apples to apples comparison.

[00:06:41] TU: Sure. Points are actually called discount points. They’re an upfront fee that the lender will charge and it is often a charge in the form of prepaid interest. And that helps you get a little bit better interest rate. But that is a percentage of the loan amount. So, it can be costly. Let’s say, it’s 0.3 percent of a loan amount, if you’re borrowing $400,000, well, that’s $1,200 in additional fees, you’re going to pay if you were to obtain that loan. So, you do have to be aware of points in fees as that is a big component. And then lenders all have different origination fees. That’s another segment of the costs and those are things that you want to look at too, because not all rates are equal, right? There are a lot of pieces of mail people will get. I’ll just leave it at that. There’s a lot of mailers you get with that will quote these really low rates, but then if you read in the fine print, you’ll see how much fees are charged. So, you really want to be aware of that because your payback period could be so long, and it makes no sense to pay points, and often it doesn’t.

[00:07:49] TU: So that’s number one, know the landscape. Number two, a topic we’ve talked about before when we’ve had you on the show, know your budget, and before thinking about pre-approval, it’s important to know your budget, as well as knowing how a lender is going to determine what they’re going to borrow to you in terms of that home-buying purchase. And those things can be an often perhaps should be different as you evaluate what fits in your budget and the lenders looking at what they’re comfortable in terms of you borrowing. So, down payment isn’t certainly is not the only cost. But Tony, talk to us about lenders, in terms of how they determine how much they can lend to individuals or to couples. And I think here, it’s worth talking about the 28:36 rule.

[00:08:37] TU: Sure. I mean, this step is is critical, right? You clearly want to review your own budget and know what you can and can’t afford, because even if a lender can qualify you for a certain payment, that may not be something you’re comfortable with, so it’s very important to evaluate your own budget. Lenders do look. There is, obviously, the 28:36 rule, and this ties back to what lenders can qualify you for, but often we can qualify people up to a back-end ratio, which is a total debt ratio of 45 percent, sometimes even 50 percent with enough down payment. So clearly, we can often maybe qualify you for more than you want to borrow.

The other component to this too, that’s very important to know is that lenders look at your gross income. We don’t factor in your after-tax income. So, that’s another method that we all look at in our industry. We use your your gross income that you report on your W-2, or the gross income before taxation. Same thing if you’re self-employed, we look at your gross income prior to to income tax. So, that helps people buy homes and afford homes, but it is a factor to consider when you’re running your budget. But historically, those numbers, we do go a little higher. Nowadays, instead of 36 which is – I think, let me just dive into what that means.

So, the 28 percent is called the housing ratio. That’s the total amount of your monthly income that is allocated to a home payment, like a mortgage payment on a home. And that mortgage payment includes your principal and interest, and your taxes and insurance, and any other HOA expenses you might have. So, when you buy a home, you had your principal and interest payment on the mortgage, you have property taxes, that you typically pay 1/12, so a monthly amount of the total amount of property taxes on a monthly basis, and then your insurance. So your homeowners insurance.

And then some communities have what are called homeowner’s association fees, that might be $100 a month or $100 a quarter, just depends on where you live. And those are all part of the housing expense. So, when Tim referenced the 28 percent, what that means is your total income, so let’s say you made it just for round numbers, let’s say you made 10,000 gross income as a household per month, we would use 2,800 as your housing expense. I’m not saying that that’s what you need to do. You can actually go a little higher, and of course, you can go lower. But that’s kind of the metric that historically lenders have looked at.

And then the back-end ratio means your total debt. So, that’s going to be the aggregate of all your other debts. So, your car payments, if you have auto payments, on auto loans, student loan payments, we take your student loan payment, any credit card payments you might have, and any other installment loans you may have. It does not include car insurance. Auto insurance, or cell phone bills, things like that, utilities, it does not include those at this juncture. So, we don’t look at those expenses. But that is going to be the aggregate of all of your debts and you cannot exceed that. We call it the debt to income ratio. So, that’s a very critical metric that lenders look at when they’re evaluating you for your pre-approval. That’s kind of a high level of what we would look at.

[00:12:10] TU: Tony relevant to our audience, if I zoom out for a moment, we’ve seen somewhat of a stagnation of pharmacist’s salaries, obviously, that’s very dependent upon the field and someone’s career trajectory. While we’ve seen a significant bump up in home prices, as well, as you know, I just read an article the other day in the journal about home insurance, homeowners insurance costs going up. So, if we think about what’s involved in that 28 to 36, rule 28 percent, again, being maximum monthly housing expenses, 36 percent would be maximum monthly gross income going to all debts, as you alluded to, and of course, student loan debt, has been going up, as our listeners know, too well.

So, these do have implications for our audience, in terms of understanding these rules, what’s involved and to your comment, just to reinforce it, the number that gets spit out by the lender, may or may not be in line with the budget and the rest of the goals. So, we’ve got to take a step back and determine what makes sense in the bigger picture.

Tony, one of the most common questions we get is 20 percent down, yay or nay? What are the pros and cons of putting 20 percent down? I think the reason it’s top of mind for many is just the amount of time and savings it can take to put 20 percent down. So, if I’m buying a $400,000 home, I stay true to that rule of thumb of 20 percent, looking at $80,000, I’ve got $200,000 of student loan debt, I’ve got other competing priorities. That takes time, to be able to do that. From your perspective, what are some of the things that you think about in terms of the pros and cons of that 20 percent down payment?

[00:13:46] TU: Well, you’re exactly right. It can take a long time to save 20 percent. This is a question that comes up a lot. Let’s start with the pro. Let’s look at the pros first. I mean, clearly, you’re going to owe less on your mortgage if you put 20 percent down. So, your payment would be slightly lower. But it’s not that much lower because interest rates are so low. So, that additional 20 percent is really not buying you much of a lower payment. It might be, maybe $100 a month, or something to that effect, maybe $200 depending on the price of the home, but it’s not going to be a substantial amount for the amount you’re putting down. So, that’s one pro clear, I’m going back to the pros, is you owe less.

The other thing is if you’re not a, for example, pharmacists, we have some programs that you can avoid PMI, which we can address later. But if you’re not, let’s say you’re in my role, you I don’t have a PMI option for my career path. So, 20 percent down would help a lot of people avoid PMI. So, clearly that’s a pro. And then, the other thing you owe less on your mortgage so you have a little bit more margin there. Those would be some of the pros. You can also maybe afford more home, because your payments lower, or you’re allowed a higher debt to income ratio, because I did reference earlier, we can often even get approvals up to 50 percent. Well, if you put 20 percent down, there’s going to be no constraints from the MI company or the lender’s underwriting, for example, they may allow you to go to a higher level, because 20 percent down frees you up. If you have great credit, and you’re putting a nice down payment, you can actually get a higher debt to income ratio, often, approved.

So, those would be some of the pros, Tim, of putting 20 percent down. Some of the cons, clearly, one is just how long it takes to save the funds, and that plays into a whole bunch of other things, too, that I see quite often. Number one, you could use that, those proceeds to pay off higher interest rate debt, because mortgage rates are low plus, the mortgage interest is often tax deductible as well. So, you’re really not even paying the actual note rate you’re paying in many cases, so you could use that extra money to pay off other higher interest rate debt, whether it’s auto loans, student loans or credit cards.

The other thing is home repairs, upgrades, if you’re looking to remodel, it’s very common right now. People will say, “Hey, I want to redo the flooring in the kitchen.” And that gives them greater margin to do that. They’ll have their own money, they can actually get into the home, acquire it with less money down. And then of course, they can do all those things they want to do the house which creates value. One thing just to address with like investment, a home is more of a lifestyle to place to live. It’s an alternative to renting, but if we do work with some savvy investors, too. I have referenced before on this climb. I’m doing this for 20 years. I’m getting kind of old. I have quite a few investor clients. And I’ve noticed over the years that some of the savvier investors look at their returns differently than a lot of us would, right?

For example, just think about this. I mean, the average appreciation, let’s take out the last few years it’s been way above this. But normally it’s like 3.5 percent to 5 percent a year, is kind of historical, average appreciation for homes over time. If you were to find a home, let’s say you bought a 400,000 home, and you put 5 percent down such that’s going to be a $20,000 down payment. Okay. Well, let’s say that house, the following year is worth 420. Well, you just made 100 percent return on your investment. You only put 20,000 down to secure the home. And now your home’s worth 420, you just made 100 percent return in one year. I mean, it’s an incredible return, right?

Where if you put 20 percent down, you would have made roughly a 25 percent return, right? So, it’s still a good return, but not the same return. That’s how a lot of the investors that are out there, look at their returns on real estate. So, institutional investors look at it that way. But even us we can look at that way, you know, because that’s what we invested truly, and we put down $20,000 to buy that 400,000 home. And now we’ve made 20,000 in equity. So, we’ve doubled our investment in that case. Versus if we put 80,000 down, which would be 20 percent down, and we made 20,000 and we got a 25 percent return.

So clearly, the con is you don’t get the same returns, right? Your return is not as high. I think I’ll add one more thing to that with returns is, you could also use it for other investments. For example, the team at YFP, IRAs, Roth IRAs, there’s a lot of other alternatives out there to diversify, instead of putting all your money into real estate. I’m a big believer in being diversified. So, I think, clearly a con, if that’s a lot of your net worth that 20 percent, you’re putting it all into one asset may not be the wisest thing. So, those are just some cons there, Tim, to consider. And I guess, as we compare those options.

[00:19:09] TU: Tony, you’re alluding to two really important concepts that tie into the financial plan, which is leverage and opportunity costs, right? Any purchase and financial decision we make, there’s an opportunity costs or an evaluation of an opportunity cost. Here we’re talking about putting more money into a home that might be used elsewhere. I think that for many of our folks, this is a time to do some self-reflection evaluation as you look at risk tolerance, as you look at other goals that you have, looking at student loan debt, looking at your long-term investment retirement picture. That’s one of the things I think the team at YFP Planning does so well with the financial planning clients is help them look at a decision like a home purchase decision, have these conversations about appropriate amounts of leverage and the other goals that they’re trying to achieve, and then help coach through that decision making while looking at home buying in the context of the rest of the financial plan.

I think this is a good place, Tony, that we just remind folks, that down payment, of course, is not the only expense we need to be thinking about, right? We’ve talked about this on the show before, you know, earnest money, closing costs. So, what you’re going to need in some to come at the table to close, but then also, beyond just the ongoing monthly payment, which you mentioned, the PITI concept. So, principal, interest, taxes and insurance, what about everything else associated with that home purchase? So, whether that’s maintenance, and upkeep, and things that you expect, remodeling, finishes, landscaping, equipment that you need for the home, now that you have that home purchase. Really taking a step back, especially for those that might be currently in a renting situation to say, “What’s the total cost? And are we ready financially to make this decision?”

So, that’s number two, is knowing the budget. Number three is getting prepared -approved. So, once you’ve done some research to understand rates, created a budget, safer down payment and some of the other costs I just mentioned, next up is getting pre-approved. Tony, why is the pre-approval process so important? What is it? And how is that different from pre-qualification?

[00:21:09] TU: Well, the pre-qualification is typically a very easy thing that can be done. But unfortunately, this doesn’t carry a lot of weight. So, the key differences are, an actual pre-approval is going to be when a lender looks at your credit report, and then also looks at your income. So, it’s not just looking at credit, it’s actually asking for a pay stub, for example, and we verified your pay stub. Where pre-qualification, you don’t even run credit, you just put in what your expenses are, and tell the lender what your income is, and say, “Okay, great, you’re pre-qualified”, that doesn’t carry a lot of weight in the real estate community.

We talked to a lot of realtors, they call us a lot of times on offers, the listing agents do when they receive an offer and the buyer will include our letter, our pre-approval letter and ask some – they want to know that the client is qualified because it’s a competitive marketplace, and they don’t want their properties being tied up. So, the key difference is the lender has run credit, has reviewed your income. Those are the key differences there between the two.

The other thing that the pre-approval, I mean, that really brings value that I’ve seen over the years is the credit report. I want to bring this up, because a lot of us follow our credit scores, whether it’s Credit Karma, or a lot of these other monitoring services that are out there. But they don’t truly give an accurate reading of what a creditor sees. They’ll give you a kind of a good idea of what your scores are doing, and like if they’re moving higher, then the trend is probably good for you. But they can often be 20 to 30 points, 40 points even lower than what a lender sees. Because we run all three bureaus, we don’t follow one.

So, the mortgage community runs a report that has all three bureaus, TransUnion, Equifax, and Experian and we use the median score. So, we use the median score of the three to determine your credit score. And the value that I think can come here is, clearly, you know your score, which can determine if you qualify, but also your interest rate, right? So, the higher your credit score, the better your rates tend to be. And some lenders, and not all lenders can do this, but some lenders have the ability to help you with rescoring.

Basically, they have a program where they can tell you what you can do to improve your score. And that’s been invaluable for many people that are home shopping right now that we’ve been able to get them either qualified or into a better program by telling them, “Hey, by the way, if you pay down this credit card, for example, your score will go up 20 points.” Or “If you consolidate this loan or whatever it might be, you can improve your credit by this much.” So, that’s been something that’s been helpful during the pre-approval process, Tim, that I’ve seen lately.

[00:23:56] TU: And that’s a good connection back to Episode 216, Tony, when you and I talked about common credit blunders to avoid when buying a home. Again, we’ll link to that in the show notes, but credit is such an important part of the home buying process for the reasons that you mentioned. So, really looking at any due to shore up credit and making sure that you’re understanding your credit scores and using the right tools, so that you’re not surprised when you get into that pre-approval process.

So, that’s number three, get pre-approved. Number four is comparing lenders. Tony, we know that not all lenders are created equal. Ultimately, we’ve got to make this decision of what lender am I going to work with? What type of loan am I going to pursue? I think sometimes these are recommendations that might come from an agent, might be recommendations that come from a family or a friend or coworker, might be a random internet search. So, I think it’s worth talking about what are some of the things that folks should look for in a lender?

Now, of course here, Tony, you’re representing IBERIABANK/First Horizon, and we’re talking about the pharmacist home loan products. So of course, there’s a vested interest in folks evaluating that option. But from your viewpoint, what are some of the things that folks should be looking for when choosing that lender?

[00:25:06] TU: Well, there’s quite a few different types of lenders out there, and all of them have varying pros and cons to working with. So, I could kind give you guys an idea of some of the lenders that are out there, you have what are called mortgage brokers who are true, almost like a middleman between lenders, and there’s pros and cons with working with those types of lenders, because they do have a lot of options where like a larger bank may not have as many options as a mortgage broker. But mortgage brokers tend to be more expensive. I find that they’re typically better when you have a really more tough case, whether it’s a credit score issue or some other issue, they can be more valuable than a bank in a lot of ways. Because they have some more greater flexibility.

Then you have the correspondent lenders, which are mortgage lenders that may have small branches in a city or a town. They’re not a bank, but they are able to lend directly to Fannie and Freddie. They use, not to get too complicated here, but they actually use bank warehouse lines to fund the loans, and then they’ll sell the loans, but they are true correspondent lender. And then of course, there’s banks. But there’s different types of banks, there’s large banks like the Citi groups and the Bank of America’s and Wells Fargo. And then there’s more of a medium sized bank, like the bank that I work for, and then there’s small community banks, too.

So, there’s lots of different sizes, and all have pros and cons. When you’re looking at mortgage lenders, programs are very important. The program that you can get is important. Rates are important as well. The other thing that’s very critical, is being able to fulfill the timelines, because there’s some challenges out there with certain types of lenders where they can’t meet the commitment letter deadline in the purchase contract, or they have a struggle with their appraisal process, or they have a struggle closing a loan in 30 days. Those are questions you need to ask the lender upfront, because different lenders had different operations. Some will actually use outsourced processing, which might be in another state, whether it’s not all under one roof, or the loan originator that you talk to may not have control over that process.

So, those are just some things to think through. But clearly, there are advantages and disadvantages for every type of lender that’s out there. So, it’s good to know, get some recommendations, and also to kind of compare the products and make sure it’s a fit for you and that you feel comfortable with the group that you’re working with. I think ultimately, that’s the most important thing, that you feel confident that they can help you and fulfill the closing date for you. That’s a key element.

[00:27:52] TU: Yeah, that’s a good reminder, Tony. Interest rates, of course, are very important for the reason we mentioned in terms of the length of the loan, and what that’s going to mean in terms of dollars out of pocket. But don’t overlook some of those things about abilities around appraisal and underwriting and closing on time and communication, and making sure that you feel comfortable. There’s, of course, going to be some open communication. There’s a lot of things that need to get done in a short amount of time.

So, I think it’s a good place to highlight the pharmacist home loan product that is offered, Tony, through your organization at IBERIABANK/First Horizon. We’re seeing a lot of interest in the pharmacist community about this product, which many listening might have heard of doctor type of loans and think, “Hey, I’m a pharmacist. I’m not eligible for that.” And here with IBERIABANK/First Horizon, we have an opportunity that is available to pharmacists. So, talk to us more about that program in terms of down payment, what’s involved or not with PMI, maximum loan amounts and where this option is available in terms of where folks may live?

[00:28:58] TU: Sure, sure. Well, this product is often a great solution, and it’s been really fun to be able to help so many people with this program. It is somewhat unique in that you can put very little down payment and not have PMI and still have very aggressive interest rates too. So, to kind of just highlight the program overall is, if you’re a first-time homebuyer, first time buying, you can put as little as 3 percent down. And of course, there’s no PMI. If you’ve owned a home before, it’s 5 percent down. You’d have to put a 5 percent down payment and the no mortgage insurance clearly is an advantage. But the other thing too is oftentimes the rates on this program, the 30-year rate that we offer on it is often better than my 20 percent down rate. So, you’re still getting a really competitive rate and priced very, very well. As far as the minimum credit score is 700. So, there is a minimum credit score you have to be above 700. There’s no like clear reserve requirement. What that means is having extra money reserves of payments in your bank account or investments, which is nice too, for a lot of first-time homebuyers and those that are buying their first home.

But the other piece about the loan limits that Tim referenced, currently, our loan limit on this product is 548,250. But that’s about to change. I think we’re probably looking at at least 625,000 starting January 1, 2022. So, we’re going to see a nice bump up. It may even be higher than that, and that’ll be across the country. So, this program is available in basically the 48 lower states. Alaska and Hawaii are the only two states that we’re not licensed in, but we can offer it in 48 states. So, it’s a nice footprint that we can help and we’ve helped individuals in pretty much every state, I think, that I referenced.

But the loan limit thing is exciting, because I think that’s going to enable a lot more people to buy in higher priced areas. And we may even see that go higher than that in certain areas that are even higher priced. And there are certain parts of the country that priced markets, housing prices are much higher, clearly in California, in and around DC, Northern Virginia. So, those are some places where this could be even higher than 625. So yeah, it’s exciting to see a little bit of a move higher there.

[00:31:19] TU: So sorry to our friends of YFP in Alaska or Hawaii, as Tony mentioned, this is available in the lower 48. We’ve got more information that goes into more detail on what Tony just shared there. You can find that at yourfinancialpharmacist.com/home-loan. And again, that’s a summary of much of what we’re talking about here on this episode as well.

So Tony, we’ve talked so far about knowing the landscape of interest rates. We referenced the Freddie Mac resource, folks can go to find that information, making sure that they’re considering that points may be including those rates, as they’re looking at various options. So that was, number one, know the landscape. Number two, we talked about knowing your budget, the importance of not only the down payment, but also other costs that are involved in the transaction, as well as ongoing costs with the home purchase. Number three, we talked about pre-approval, why that’s so important, how it’s different than pre-qualification, and how the credit score has implications there. Number four, we just talked about comparing some of the lenders and the options that are out there and we talked about the pharmacist home loan product.

So here we are, finally, we put in an offer on that home, we’ve got our lender obviously lined up, we’re working with that agent, hopefully that offer is accepted. And now we’ve got this process that happens from offer accepted to ultimately closing on the home where those keys are handed over. So, what should folks expect in this application underwriting process in terms of forms that they’re going to need to prepare, documents that they’re going to have to show, and any work that they might be able to do in advance to get some of that ready?

[00:32:55] TU: Yeah, so the exciting part happens, right? We’ve got the property under contract, but there is quite a bit of of items that lenders will need. Once you feel comfortable and you found the lender, that’s a good fit for you, lenders, we’re all really going to need the same things, and it’s going to be income information. So, if you’re self-employed, we’ll need typically two years of your tax returns, both your corporate returns and your personal returns. And then for income for those that are employed, it’s a little easier, just need two years of your W-2s, and your most recent pay stubs for the past 30 days. Those are what lenders will need to verify income.

Then we’re going to have to verify your down payment. And typically, that’s going to be bank statements and lenders have different types of ways to do this. We actually have a technology that we’ve – no, it’s not our proprietary technology, we have a FinTech company out of California, that has been doing very well in the mortgage space. They built a platform where when clients enter their information, we can actually do a read only format for your bank statements. So, you don’t even have to supply them. It’ll tell us what’s in the account, and the average two months and we verified it that way. So that’s been really helpful and a lot of clients have liked that.

But outside of that alternative, traditionally, it’s two months of statements. So, two months of your most recent bank account statements to verify the down payment. If they need additional reserves, if the lender needs additional reserves in, if you have an IRA or 401(k), or any investment account, brokerage account, those assets would be verified with a two months of statements or a quarterly statement as well. And then of course, we’ll need a copy of the purchase contract. So typically, once you have a purchase contract available, you’re able to lock a rate in and that’s important because rates can be volatile. They can move in, especially with economic reports, that can cause rates to move up and down and lenders typically cannot lock rates until they have a purchase contract so they know how long to lock it and they have an actual property address for the bond that they’re locking, basically. So, that’s another step that we’ll need.

The other items that you need to work on too, is homeowner’s insurance. I always encourage people that to get started with that as soon as possible, especially if you’re in the southern states, southeastern states during early July, through the end of October. We have some tropical storms down in this area and hurricanes, even if they’re not any threat to you, if they are in, what’s called the box, insurance companies have limits on when they can write insurance. So, we’re always very encouraging to get that process started soon. So, homeowners’ insurance is an important component. And typically, driver’s license, things like that.

The application will go through all the questions about your employment, where you’ve worked the last couple of years, a lot of your vitals, date of birth, social security number, those types of things, and you’re on your way. So, it’s an exciting – that’s when the process officially begins. Typically, the appraisals ordered shortly after that mortgage application is put in. So, we also need to know who your realtors are, if there are realtors involved, so they can open the home – they can be the point of contact for the appraiser. That’s another item that we need to know. We need to know the parties who are involved. And often we do, but I just included that because that’s something else the lender will need to know. You may need to supply that to your lender, make sure that you do. That information, the key contacts in the transaction. But from that point on, that the journey is on, and you’re moving through the loan process after you make that formal loan application.

[00:36:33] TU: Yeah, and I mentioned a few moments ago, Tony, the importance of open communication. This is an exciting time, this can feel overwhelming, there’s a lot of moving pieces and parts. I think much of what you just shared to me is a good reminder of folks of like this is the time to over communicate on both sides, for both the lender, as well as the home buyer, and making sure that you’re being responsive, things need to move quick, there’s a lot of ducks that need to get in a row. The other reason, I think, this section here on our final one on completing the application and bringing this whole process to ultimately a close is folks should be thinking about some of the information that’s been requested and what implications things like job transitions may have, big financial purchases people are making, right?

Ideally, we’re trying to have as little disruption as possible in this time period, because of the information that the bank is requesting from you and wanting to have the stability of both that funds to close as well as looking at your income. So, for folks that are in transition, for folks that have pending large purchases, I’m thinking of the residents or the fellows and those that are moving from a first to a second job. Just be thinking about some of the timeline and the implications that has on finishing up this process and ultimately the overall home buying process.

Tony, great stuff as always. It’s been a great year of having you on the show, and always appreciate your input and your expertise. And folks, again, more information, yourfinancialpharmacist.com/home-loan. You can learn more about all of what we talked about here on this episode, as well as the pharmacist home loan product and get in touch with Tony and the team at IBERIABANK/First Horizon from there. Tony, thanks so much.

[00:38:10] TU: Thanks for having me, Tim. Always good to be here. Thank you again.

[SPONSOR MESSAGE]

[00:38:13] 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 percent 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 percent 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 preapproval process, visit yourfinancialpharmacist.com/home-loan.

[OUTRO]

[00:38:55] 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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YFP 223: How First-Time Home Buyers Navigated the Current Housing Market

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How First-Time Home Buyers Navigated the Current Housing Market

On this episode, sponsored by APhA, Jacob and Michaela Soppe discuss their home buying journey in the current real estate market.

About Today’s Guests

Jacob and Michaela are graduates of Ohio Northern University who moved to eastern Ohio in 2018 so that Jacob could pursue his dream of starting a pharmacy with Southeast Healthcare. Since then, he has successfully grown his pharmacy and offers clinical services including diabetes and hepatitis C clinics. Michaela works at East Ohio Regional Hospital where she collaborates with doctors and patients in the inpatient, outpatient, and long-term care settings. In their spare time, they love to stay active and travel the world. They recently bought their first home and are excited to continue to serve God and their patients in their community.

Summary

In this episode, Tim Ulbrich turns the microphone over to Nate Hedrick, The Real Estate RPh and co-host of the YFP Real Estate Investing Podcast, as he interviews two pharmacists, Michaela and Jacob Soppe, about their home buying journey. Michaela and Jacob share their experience working with YFP’s Real Estate Concierge, their home search, how they determined their home buying budget, and the realities of buying a home in the current real estate market.

Jacob and Michaela weren’t necessarily looking for a home after pharmacy school and focused their energy and funds on paying down student loans and investing. When they were ready to start the home buying process, they didn’t know what to do or how to start, so they contacted Nate Hedrick and started working with the Real Estate Concierge Service. Nate paired the couple with a real estate agent in their area who worked with them diligently until they found a home that met their budget requirements and exceeded their expectations on must-have items like room for a family and plentiful parking.

The couple shares their experience receiving regular emails with listings and changes to the housing market, a day with nine house viewings, their experience with their home inspection, and how their experience at closing differs from what many folks will see in the current market.

Mentioned on the Show

Episode Transcript

Nate Hedrick: Hey, Michaela, Jacob, welcome to the show.

Jacob Soppe: Thanks for having us.

Michaela Soppe: Yeah, thank you for having us.

Nate Hedrick: Absolutely. Excited to chat today. We are talking all things real estate. I’m taking over the Tim and Tim show here on the Your Financial Pharmacist podcast so we can talk a little bit more about real estate today. So again, appreciate you guys joining us.

Michaela Soppe: Absolutely.

Nate Hedrick: So we are here to talk a little bit about navigating the current housing market, right? So you guys are first-time home buyers, just closed about two months ago on your first house, and what we thought we would do is kind of sit down and talk a little bit about that, talk about what it’s like to buy a house in the current market, what it’s like to be a first-time home buyer, how you guys navigated that, and just kind of get that information in front of people. So before we dive too deeply into the real estate side of things, maybe give us a little bit of background on your pharmacy journey so far and kind of what you guys are up to.

Jacob Soppe: I graduated in 2018, and I immediately got a job on rotations. I met with one of my preceptors and they wanted to open a pharmacy, and they wanted me to open it for them, and that’s something I’m interested in, and so I opened it. That was three years ago. And we’re continuing to grow, and I’m very happy with it. We’re a clinic pharmacy, but we also do long-term care, we also do diabetes clinics, and we’re just starting up Hepatitis C clinics.

Nate Hedrick: That’s great.

Michaela Soppe: So I graduated in 2019. We both graduated from Ohio Northern. And we actually got married while I was on rotations, so he’d basically said, “Hey, how do you feel about moving an hour and a half away from Columbus?” I’m like, “OK, that’s great. But I have rotations in Columbus.” So I started working with Rite Aid after I graduated as a pharmacist and kind of floated all over the place because we didn’t really know where we’d be living for sure. And then worked with them for a couple years and at the end of that, in January, I got a job working at a local hospital. So I do mostly inpatient, but I also have a mix of some outpatient stuff and long-term care in there with that as well. So I’m kind of running all over the place. But I love it.

Nate Hedrick: That’s great.

Michaela Soppe: And we finally made it out closer to where Jacob works. So.

Nate Hedrick: That’s nice, especially when, you know, you’ve already got long days at the hospital or at the pharmacy, you don’t want to add an extra long commute to that. So that’s great.

Michaela Soppe: Exactly.

Nate Hedrick: And when you guys graduated from pharmacy school, I know it was different years, but when you graduated, was buying a house kind of always in that mix? Was it always part of the “next step?” Or was this something that came along later?

Jacob Soppe: We knew we wanted to buy a house eventually, but there was student loans in the way that kept me up at night.

Nate Hedrick: Sure.

Jacob Soppe: And I was like, I can’t buy a house until I pay off these, we pay off these loans. And so after about two years, we paid off the loans and that’s when we started looking for a home.

Michaela Soppe: Yeah, it was definitely student loans first and then, you know, it all worked out around the same time where my job brought us instead of an hour and a half away for Jacob, it’s now five minutes away. And at that point, we were like, OK, like we’re ready to find a house because we’re going to be out here for a while.

Nate Hedrick: Wow, yeah. So I know I’ve talked to others who have that feeling of like, man, I cannot buy until these are gone. And so you guys took that and said, yeah, let’s make sure that’s the case. Let’s go all in on the loans and then once that’s done, then we’ll go ahead and buy a house. Do you feel like that was crippling at all? Was it just like, this is what we have to do to get it done?

Jacob Soppe: It was definitely the second one there. We just felt like we had to do it and felt like it was the right way to go for us.

Nate Hedrick: Yeah.

Michaela Soppe: Yeah, it was kind of like, let’s still act like we’re college kids for a couple years, you know, not buy a bunch of brand new stuff. Like most of our stuff came from our families or stuff I had from college. And so until the loans were gone, we didn’t really spend much money on anything else. Like we’d go traveling, but other than that, it was just loans completely. Like our entire paychecks went to it, basically.

Nate Hedrick: Yeah, avoiding that lifestyle creep can be a really great way to get ahead and make sure that those loans could be knocked out first. So that’s awesome. Were there any other factors that were holding you guys back? I mean, was the market something that scared you? Or talk to me a little about that too. Was it just the student loans and once those were gone, you were ready to move?

Jacob Soppe: The other thing that was holding us back was, like I said earlier, I was driving an hour and a half one way to work each day, so a total of three hours when we started and Michaela was still in school. We wanted to see where she was going to end up working and then when she ended up moving closer to my work, it worked out because it was like just after we paid off our loans. So we didn’t end up looking for a house at our old employer where I was still driving 45 minutes, and I really liked the idea of living like right next to work and the gym and church — and we’ll get into that later.

Michaela Soppe: I guess something I should say is that we moved four times in three years.

Jacob Soppe: Yeah.

Michaela Soppe: And progressively each time, every time my position changed, basically, going from rotation student to floater at Rite Aid to actually having a store at Rite Aid to getting the job at the hospital. Basically every single time, we moved closer and closer to where Jacob was working. And now, it definitely just where are we going to be settled was kind of like a factor that was holding us back slightly too because like my goal was always to get a job closer to where Jacob was working but just we didn’t know when that would happen. And it ended up being at a really convenient time for us.

Nate Hedrick: That’s great. And that actually, that’s a good segue because one of the things I want to talk about today is choosing the location and some of the steps that go into that kind of getting ready phase of buying a home. And that’s actually Step No. 1 of six steps that we’re going to talk about today. So we put together a video series — and actually, there’s a guide out there, we can link to that in the show notes. But if you head on over to YourFinancialPharmacist.com, we have the “Six Steps to Home Buying.” And what I’d like to do is actually walk through each one of those steps and kind of get your take and your experience as first-time home buyers and see what information we can share with our audience. There’s a lot of people that are probably in your shoes or who are about to be in those shoes here pretty soon where they’re graduating, they’ve got a lot of student loan debt, or they’re ready to buy a home, and now it’s time to figure out, OK, what does that actually look like? And more importantly, how do I do that in this kind of market? Because it is quite the seller’s market. It’s very competitive out there. And so trying to get a home today is more difficult than it’s been before. So we’ll start with the first step, which is making sure you’re ready. A lot of this step includes things like choosing a location, determining what is important to you guys, and also setting a budget and not letting the bank set the budget necessarily, not just going out and asking for the biggest loan we can get but setting our own budget. And so when you guys sat down and said, “OK, we need to figure out if we’re ready,” what did that look like? Was it a formal process for you or was this like, I don’t know, I’ve been on Zillow, let’s go take a look. You know, what was that like for you guys?

Michaele Soppe: There was definitely a lot of Zillow involved. So before we made our final move here closer to work, the apartment we were at, we were initially looking for houses there because it seemed like a good, you know, central location at the time when I was with Rite Aid still. So I think Jacob was on Zillow every single day, just you know, browsing houses for probably half a year or so at least and then continuing once we did move a little bit closer into another apartment, like OK, now we’re getting serious. What are we looking at? It wasn’t like a formal, let’s sit down and talk about this. It was just something we talked about almost every day probably for months just casually like, OK, you know, what do we want out of this? And everything kind of grew from there.

Nate Hedrick: And did you sit down and figure out, again, like not a formalized but at least like a budget for what you wanted to spend? And how did you go about doing that?

Jacob Soppe: One thing that we talked about even before we got married, we decided together that we both definitely wanted to live way below our means, less than 50% of our income, just because that’s what made us feel safe. Just in case one of us lost our jobs.

Nate Hedrick: Sure.

Jacob Soppe: It’s getting harder to find a job, especially with the growing concern of the pharmacist job market. Then also we want to have a family. We’re big givers as well. And so it just takes a lot of that stress off having a big cushion to make all those fit potentially with Michaela either decreasing work hours or going to 0 in the pharmacy in the future.

Nate Hedrick: Sure.

Jacob Soppe: But as far as budget goes, we decided that we wanted to really find a house for $200,000 or less. And I know like especially in Columbus, Ohio, where we’re from, that is very difficult to do in a nice place for a nice home.

Nate Hedrick: Sure.

Jacob Soppe: But the nice thing about where we moved is that the rural Ohio is much lower cost of living, and we were able to meet that goal of finding a home in that budget.

Michaela Soppe: Yes.

Jacob Soppe: Actually, way under budget.

Michaela Soppe: When we started looking at homes, there were a lot of homes we found that we liked that were more like $250,000-300,000. So like I’d say our upper limit kind of became $300,000 with the understanding of we’d much rather not spend $300,000 on the house. So we actually did find a couple that we liked, which we didn’t get a chance to put an offer in on. I mean, the market out here isn’t quite as crazy as it is in Columbus, but stuff still sells fairly quickly. So it ended up being a good thing because our realtor could kind of point us towards the house that we’re in now, which was like half of that but way big enough for both of us and even for a growing family. And yeah, so that — like we had that budget in mind the whole time. And it did shift a little bit as we were looking, but then it all ended up going back to what we were originally thinking.

Nate Hedrick: Yeah, I love that. And I think there’s two things that I think are really, really important. One is intentionality, right? You guys stepped back and said like, ‘This is important to us to live slightly below the typical means,’ right? Or ‘We can live at 50% of our income. And here’s why we’re doing that,’ right? The intention behind that is that if we want to cut back on hours, we lose a job, we’re not stressing about this home purchase. And I love that. I think that’s super important. The other thing that you said that I think is interesting because I advise my clients of this all the time is that it’s super easy to fall in love up to whatever amount, right? If I start looking at $500,000 homes, I’m going to love $500,000 homes. The trick is not to exceed that budget if it’s reasonable for your market. And so you guys took a step back and said, “Yeah, you know what? It’s possible to find a nice place under this $200,000 in our market.” And again, I know the West Coasters out there are probably like screaming at their radios right now. But the idea is that, you know, you guys took a look at your market and said, “This is feasible, and so I’m not going to push it beyond my means because I’ve set this budget, and this is realistic for where I’m looking. I think that’s a really great way to set yourselves up for success. So I admire that a lot. The other thing you mentioned is that you leveraged your realtor, and that actually leads us to Step No. 2 or point No. 2 here, which is assembling a team. And this is actually where you and I got connected back in May of this past year. And you know, you guys came to us, the Real Estate Concierge service, which is a service that we offer to pretty much anyone that if you want to get connected with a real estate agent, we will actually help you do that. And so again, if you head on over to YourFinancialPharmacist.com and head over to “Buy a Home,” you can check out the Real Estate Concierge service there, a free way to get connected with an awesome local agent. And again, that’s actually how Jacob and Michaela and I got connected. We got you connected with Sean, and I guess tell us a little bit about that process and what it was like to work with an agent.

Jacob Soppe: Yeah, I want to thank you guys, thank you again for finding Sean, our realtor.

Nate Hedrick: Sure.

Jacob Soppe: We had no clue on like what realtor, who should we go to, and we heard about your service through YFP, and so we reached out to you, you found us a great realtor. Sean has over 10 years of experience as a realtor, he’s also a broker. And he was amazing, mainly because one, he was super responsive, two, he found us homes, including the one we ended up buying, that we would like. And we didn’t think we would like this home, so we didn’t put it on our list of liked homes and must-see homes. But he’s like, “I think you guys will like it anyway. Let’s go.” And we looked at like, I don’t know how many homes.

Michaela Soppe: Well, the one day, I think it was a Saturday, we did nine homes on that Saturday. And he had it all set up like perfectly. And then honestly, the whole process only took a week or two for us. He was just on top of it. And you know, ultimately, we looked at 14 or 15, and this was one of the last ones. And we basically knew going into it like, this is something that we’re definitely open to buying because it was a great price, like great location, can’t really get any better. And I’m just really glad that Sean figured out what we liked so easily and you know, pointed us to this house because it wasn’t really on our radar initially.

Jacob Soppe: And one other thing I want to give him praise for too is every house we went to, he pointed out anything that he thought was a potential problem. And so like he was super honest, he wasn’t in a rush to sell us a home.

Michaela Soppe: Yes.

Jacob Soppe: And so I really trusted him and I think that you’ve really found a great realtor.

Nate Hedrick: Good, I’m so glad. That’s awesome. And that’s exactly what we want to hear, right? I mean, the agents you work with, it has to be somebody you can trust. And it’s so funny, that’s exactly what I try to do for my clients is point out the scary, right? My job is to walk around and look for things that you don’t recognize as bad while you just figure out if you’re going to like the house. That’s awesome that Sean was able to do that for you guys. Were there other members of the team along the way that were important as well? I know obviously the real estate agent is big, but were there other players that jumped in here as well that you found a lot of value in?

Jacob Soppe: Not really.

Michaela Soppe: Honestly, it all happened very fast.

Jacob Soppe: We weren’t even really seriously looking for a home.

Michaela Soppe: Yeah, this was just to get our feet wet.

Jacob Soppe: We were actually in the middle of a lease.

Nate Hedrick: Ok.

Jacob Soppe: We were just like looking at homes, we’re like, ‘Oh, well, it takes about a month or two to start closing on a home, so maybe we should just start looking at homes for a couple months and then –’

Michaela Soppe: See what’s out there.

Jacob Soppe: See what’s out there. And so we started looking at homes and we found one that we really liked, and we’re like, ‘We kind of want to put in an offer. But I still have like six months left on my lease.’ And so I was just like, you know what? Let me call up the landlord tomorrow and see if they’d be OK if we put an offer on a home and moved out early. And we talked to them and we ended up having an agreement, and we were able to leave early. And so we’re like, ‘Oh, great.’ Well, the home that we really liked, apparently some other people really liked it too. So it was already gone by the next day. But that really opened the door for us to seriously look.

Nate Hedrick: That’s great.

Michaela Soppe: Yeah, and I guess that’s something else I’d say is don’t be afraid to break your lease because we lived in three apartments before buying this house, and we broke our lease every time, which obviously —

Jacob Soppe: But it was with the —

Michaela Soppe: With their permission. Like obviously, it’s not ideal. But like, I mean, definitely talk it through with them and see what you can do if you’re ready to buy a house. That shouldn’t be something holding you back because usually, they will work with you and figure out a deal that way.

Nate Hedrick: It’s a great tip, and it’s something that I’ve done with tenants of mine. You know, if I can fill that vacancy quickly, it doesn’t bother me who’s in that house as long as they’re a great tenant. So that makes a lot of sense. That’s a good tip. That also leads me to you talked about putting in an offer and looking for a house, but what about the paying for it, right? So there’s dollars there, so talk to me a little bit about financing and did you guys have an idea of how you wanted to finance the home ahead of time? Or what did that look like?

Jacob Soppe: I mean, I’m really adverse to debt. I really don’t like debt. And Michaela really let me spearhead this. And so we went in — I don’t know, I was like, “You know what, I want to do” — how much down was it? I don’t remember anymore.

Nate Hedrick: 15% down?

Jacob Soppe: Not 15%, 20%.

Michaela Soppe: He would have rather paid cash, but reasonably, he wanted to do 20% down.

Jacob Soppe: Yeah, 20% down at 15-year fixed mortgage. But I kept, you know, I listen to YFP, I listen to a lot of other podcasts as well. And I looked at the offer that IBERIABANK has that you guys work with. And I felt like I really couldn’t pass up taking advantage of the low interest rates going on right now. And I was thinking to myself, ‘Well, if I’m going to pay it off early, I can still do that.’ We didn’t necessarily need to do a lower amount, but we ended up doing 5% down on a 30-year fixed. And we do a lot of investing as well, so we are putting every single dollar that we’re not spending on a mortgage into investments.

Nate Hedrick: I love that.

Michaela Soppe: So like when you have a 3% mortgage with IBERIABANK, we’re like, well, we can make more investing that money, you know, in the meantime than we would if we just kind of threw it at the house.

Nate Hedrick: Yeah.

Michaela Soppe: So that kind of changed his mind over a month or two.

Nate Hedrick: I definitely get that debt aversion, but it also makes a lot of sense if you break down the numbers, does it preserve your capital in a way that allows you to do other things, like you said, travel more, invest better, pay down student debt if you hadn’t already done that? Those are the things that that flexibility can allow. So I love that you guys took a look at that and even though you went in with one notion, you evaluated your options and made kind of the best financial move for you guys. That’s huge. And for those that want to learn more about that, definitely head over to YourFinancialPharmacist.com, and again, head over to the Financing section of the “Buy a Home” section, and you can find out more information about IBERIABANK and some of the pharmacist loan options that are out there. Great way to get a low down payment loan without having to get hit with PMI or things like that. So definitely a good option. So then Step No. 4 would be the search, so actually looking for the property itself. And we’ve alluded to this a little bit, but talk to us about that process. What were things that you guys were looking for? Or what were things that you learned after seeing a couple of houses or on that nine-house day, what were things that you learned along that process?

Michaela Soppe: We learned that house hunting is tiring on that nine-house day.

Nate Hedrick: I imagine.

Michaela Soppe: It was a lot of Zillow, a lot of probably other online websites too for houses. And honestly, Jacob looked at most of that because I got a little overwhelmed with all the options.

Nate Hedrick: Sure.

Michaela Soppe: But something we really wanted, which actually kind of excluded this house initially was we wanted a two-car garage was one of our main things because we’ve kind of done it all. We’ve done garage, no garage, all of that. So this house we ended up buying only has a one-car garage, but it has tons of parking, like a carport. You can have everyone over, and they don’t need to park in the street.

Nate Hedrick: Nice.

Michaela Soppe: So that’s kind of why we initially didn’t look at this house. And Sean was like, ‘Well, let’s go look at it.’ So we started out with Zillow. Once we got hooked up with Sean, he created basically an account for us on — was it MLS? On MLS, and basically every day, he would push emails to us of like, here’s any changes in the housing near you, like new houses, price drops, houses going under contract, coming back on the market, being sold. That was super helpful. You know, he’d send it to us after work each day so that he wasn’t interrupting our day and we could look at it, like them, communicate with him what we wanted to see, what we weren’t interested in, stuff like that. And then from there, he would call Jacob up and be like, “Hey, I have a list of these houses. Let’s go see them tomorrow if you’re free or whatever the next day you were free was.” And I mean, really, he just kind of led the way and was like, here’s houses you liked, here’s houses I think you would like, and kind of all over our price range too. We saw stuff under our budget, over our — not over our budget, but on the higher end of our budget — and kind of just pieced together from there what we really wanted and what was important to us.

Nate Hedrick: Yeah, and sometimes just getting out there and seeing it in person can make all the difference. You know, you might think there’s one thing that’s super important or not realize something that is important to you until you get out and see a house that has that particular feature and recognize that. So that’s great. And I also love the tip about the auto-emails. That’s something I recommend for a lot of my clients is get that auto-email so that you are getting daily alerts. It helps us really learn that market so that you can move quickly. If you’re just looking at everything on Friday afternoon and then scrambling to try to react to the properties that have come up in the week, it’s going to be tricky. But if you can get that daily, just take 20 or 30 minutes out of your day to really learn that market, see what properties are coming available, you’ll have a lot more chance at the good properties, and you’ll know what the right price point is because you’re starting to learn that market and see what’s becoming available. So great tips. And then once you actually found the property, again, I know we’ve talked a little bit about this, but talk to me about that negotiation process because Step No. 5 is all about putting that deal together. And so I know negotiations are hard in the current market, there’s not a lot of wiggle room, but what did that look like? What was the putting together the offer process look like?

Michaela Soppe: So Sean was really great with this too because the house that we really liked, ended up buying that we’re living in now, we actually were able to get for asking price.

Nate Hedrick: Nice.

Michaela Soppe: So out here in Eastern rural Ohio, it’s a little different than Columbus, obviously. We knew when we were here he was in contact with the seller’s realtor, and she told him like, “Hey, there’s another offer on the table today. Do they want it or not?” So basically, we were sitting in his house at 8 p.m. like kind of putting together our offer. We knew that this is a house that we would really like, that it could be the house that we’re buying, you know? And we’re like, ‘Well, let’s offer them asking price.’ They’d already dropped the price $5,000 I think. This particular house was on the market for —

Jacob Soppe: Over 30 days.

Michaela Soppe: It was. Some houses go within a week out here, some of them are on the market for months, depending on the houses. You know, there’s not that many people in rural Ohio. But you know, so completely different from the big cities. So basically, we did asking price but we also really wanted this house, so we added an escalation clause just in case, which went I think like $8,000 over maybe.

Nate Hedrick: And could you enlighten our audience about what an escalation clause actually means?

Michaela Soppe: Yeah, so basically if you have an escalation clause on your offer, it means that you’re willing to go up so much more money if the other person bid higher than your or offered higher than you on the house. So like if you’re offering $200,000, the other person offered $205,000, but if you have an escalation clause going up to $210,000, they could take your $210,000 — or I guess $206,000 at that point. You know, something slightly higher than what the other person offered if your clause goes above that.

Nate Hedrick: Yep, that’s spot on. And it’s a great way to protect you from pitting you against yourself, right? Because then you can put in $200,000 and you pay $200,000 if that’s the final price. But if there are other offers, you can still protect yourself by getting higher than — just slightly higher than those next offers. So thank you.
Michaela Soppe: So hopefully it keeps you out of a bidding war.

Nate Hedrick: Exactly.

Michaela Soppe: So yeah, I mean, putting the offer in, I think the deadline was given to us by the seller’s realtor was like 9 p.m. or something. And he faxed over all the papers by 8:55 p.m. and called like, “They’re on their way,” you know?

Nate Hedrick: Nice.

Michaela Soppe: Basically, we knew an hour after that they were —

Jacob Soppe: They verbally accepted our offer.

Michaela Soppe: Yeah, they verbally accepted an hour after that.

Nate Hedrick: Great. Yeah.

Michaela Soppe: It was a very fast process, I feel like, and probably a little less stressful than it is in the big cities for us. But at least putting the offer down was really simple.

Nate Hedrick: Still, yeah, it sounded like crunch time decisions, though, and faxing it then at 0 hours.

Michaela Soppe: It happened really fast.

Nate Hedrick: That’s great. And did you have inspection contingencies on the home as well? I know some people are out there waiving inspection contingencies. What did that look like?

Michaela Soppe: We did have an inspection. I guess something I should mention is we also offered to cover closing costs. I know that’s a big deal-maker or -breaker anymore. But we did have an inspection, and Jacob can talk more about that process.

Jacob Soppe: OK. So

Michaela Soppe: I set it up.

Jacob Soppe: Yeah, so I scheduled an inspection with one of the six recommended inspectors that our realtor gave us contact info for. And so I did some price shopping with them and got to know the guys who did it. And I picked one,s scheduled a time before our closing date, and they came in and they agreed to meet them at the house while they did the inspection and kind of showed me what they were looking at. And then they gave me a full report, photos, and descriptions of the inspection about two days later. So it’s like 80 pages. And we got to look through them, and they highlighted the things that they thought were a big concern and that what we should look at before closing. So what that led to is that we talked — we showed our realtor that report too, and most of the things we’re like, ‘Ah, don’t worry about it. We’ll just fix those problems.’ And our realtor was like, ‘No, no, no, no. The sellers are going to fix those for you. And so we’re going to use this contingency and try to barter for to see what we can get them to fix before we close.’ And we went back and forth probably like four times with the sellers.

Michaela Soppe: That sounds about right.

Jacob Soppe: And our realtor ended up saving us like $5,000 in repairs.

Michaela Soppe: And just like little — some of the stuff was bigger, but some was just little stuff that we’re literally like, it’s fine, you know. And some of the bigger stuff the sellers were like, ‘Well, we’ll split it 50/50 with you guys,’ and Jacob and I are like, ‘OK, that’s fine.’ Sean was like, ‘No. You’re not paying for it.’

Nate Hedrick: I love it.

Michaela Soppe: He’s like, ‘You guys offered asking price. They’re going to pay for it.’ And we’re like, ‘OK, sure, we’ll see what happens.’ And like Jacob said, I mean, they basically agreed to everything except tightening a railing outside. Like literally $5,000 worth of stuff, they got done for us before we closed. Can’t thank Sean enough for that.

Nate Hedrick: That’s great.

Michaela Soppe: Because we had no idea. We’re like, ‘Oh, this is fine. They’re never going to agree to that.’ But they did.

Nate Hedrick: And that’s exactly why you have a good real estate agent to lean on, right? Because again, without that experience, without that know-how, you would have lost out. So that’s a big, important point. The other thing I think is great there is that you guys went into it with this idea of I’m going to offer full asking, and so because of that, like there’s a renegotiation process that may occur. And so there’s two — I think a lot of people assume as soon as you put that offer in, that’s it, you’re done, that’s what you’re buying the house for. But the reality is you get to go back to them, and there’s renegotiations that can occur if you have the right contingencies in place. And again, lean on your agent for that. But that’s a really important factor to making sure you’re getting a good deal. So that’s awesome. Well, that leads to our last step, which is Step No. 6, all about closing. So you’ve gone through, found a house, put the offer in, renegotiated on the fixes and everything, and now you’re ready to actually sign the paperwork. So talk to us a little bit about the closing process. Anything that surprised you or things that you learned during that?

Michaela Soppe: I’d say it was pretty straightforward for us. I mean, basically with all of the negotiations that happened ahead of time, we knew exactly what we were getting, exactly what to expect. We did come walk through the house before we closed, I think the morning that we closed.

Jacob Soppe: The same morning that we closed.

Michaela Soppe: Yeah, just to make sure everything was done, everything was what they said they would do. From there, everything was good. You know, Sean was there at closing with us for the first part. And then once you actually get into the more financial stuff with the bank, your realtor leaves and says, “See you later.” So I guess that was kind of surprising. I’m like, ‘Oh, OK, so he’s not here.’ But it makes sense too just that he would come for a little bit of it.

Nate Hedrick: I remember my first — when I bought my first house, I thought that like my agent was going to be there waiting with the keys as soon as I signed and he was going to drop them in my hand, but then there’s a whole — like title had to actually transfer, and there was the — like you’re working with the bank first and finishing the deal. Was that your experience as well?

Michaela Soppe: So we got the keys at closing.

Nate Hedrick: Nice. That’s pretty rare these days. That’s awesome.

Michaela Soppe: Yeah, we didn’t have to wait until after for it in our case, at least. So I mean, that was kind of what I expected and I guess what I assumed was the norm. But I also wouldn’t be surprised if it does take awhile.

Nate Hedrick: No, that’s good. And again, that is — it’s more rare these days. And again, some states even require you to have different levels of closing with a lawyer present and things like that. So it’s nice when you can actually do it all in one fell swoop like that. That’s excellent.

Michaela Soppe: And we had kind of asked Sean like, do we need an attorney to be there with us? Are we good? He’s like, ‘Well, unless you have any questions about the stuff that’s already been fixed or gone over,’ like everything he basically had already gone over everything with us and there wasn’t any surprises.

Jacob Soppe: And there’s a lawyer at the title company.

Nate Hedrick: Yeah, and depending on your state, that may vary, right? Some states will actually require that you have a lawyer present or that they’re actually the one doing the closing with you. But again, in Ohio where we are, that’s not the case. So good to lean on your agent there for the local guidelines. Well, great. Well Jacob and Michaela, I really appreciate you guys sharing your story. I think, again, it’s a tricky time to be a first-time home buyer, but you guys are proof that it can be quite easily done. And again, YFP is here to help you guys if there’s something to make the process easier. We’re along for that same ride. Any final thoughts or other tips you can share with our listeners?

Jacob Soppe: Well, I can share one thing that we did not include in our search talk, but we were actually looking at a home that we could potentially rent out in the future.

Michaela Soppe: Oh, yes.

Jacob Soppe: Once we outgrow it. It might be awhile before we outgrow it because there’s plenty of space here, but we were looking for a home that we potentially could rent out or even hack out. And we found this home, and the offer we put in fits the 1% Rule that a lot of landlords like to follow when they’re looking for a good home but also I wanted to make sure we bought a home that we could increase the value on. And there’s a lot of opportunity to do that in this home. But we also found that this was — in the neighborhood of like 20 homes, this was like the second lowest valued home in the neighborhood. So we feel like we can really use that to help increase the value of this home if we end up selling it.

Michaela Soppe: Yeah, and part of the plan with this home too — and we’ll be here for awhile — but eventually, it’s something that we could easily rent out in the future because it’s a great size for a rental home, and it’s actually really close to the highway. Like you can see the highway, you can’t necessarily hear it all the time. But it’s in its own little neighborhood but in a really good location for people just passing through. So that was something that was always in the back of our mind that we knew we kind of wanted, our realtor knew we wanted it, you knew we were looking for it. So that was something that just kind of like fit together well with the home we ended up getting as well.

Nate Hedrick: Yeah, that’s awesome. I think that, you know, your shameless plug for our other show, the YFP Real Estate Investing podcast with David Bright and I as cohosts, if you haven’t checked that out, definitely do so. And maybe we’ll have Jacob and Michaela on that show once they turn this property over and start renting it out. I love it. Well again, guys, really appreciate you guys being with us today and sharing your story. Where can people reach out if they want to get in touch with you?

Jacob Soppe: They can reach me at my email, [email protected]. Soppe is spelled S-o-p-p-e.

Nate Hedrick: Perfect. Well, I’ll make sure to put that in the show notes. And again, thank you guys so much for being here.

Michaela Soppe: Yeah, thank you, Nate.

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YFP 216: Common Credit Blunders to Avoid When Buying a Home

Posted on by yfpadmin

Common Credit Blunders to Avoid When Buying a Home

On this episode, sponsored by IBERIABANK/First Horizon, Tony Umholtz discusses common credit blunders when buying a home.

About Today’s Guest

Summary

Tony Umholtz, a mortgage manager for IBERIABANK/First Horizon, discusses the impact of credit on purchasing a home and common credit blunders that he has encountered when working with pharmacists during the lending process for the pharmacists home loan product.

Tony explains how credit and your credit score can impact your home buying process. Your credit score can affect your interest rate for a home loan. He details how credit information is collected and how the three main credit bureaus, Experian, TransUnion, and Equifax, aggregate your FICO score. Tony lays out how the scores are calculated, with payment history making up 35% of the score, credit utilization making up 30%, length of history with 15%, and credit mix with 10%.

Some common blunders that Tony has seen when working with pharmacists include having no credit or limited credit history, maxing out a 0% interest rate credit card, and relying on third-party credit tools for an accurate FICO score. Tony further shares that clients may not be checking credit reports and correcting errors that may appear on those reports. During the home loan process, borrowers have also made the credit blunders of co-signing for a loan without fully knowing how it would impact their credit and applying for credit for large purchases like a car or furniture for the whole before the sale is final. The lender knows and can see those last-minute credit applications and changes, and those changes can impact your loan approval.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tony, welcome back to the show.

Tony Umholtz: Hey, Tim. It’s good to be here.

Tim Ulbrich: Excited to have you back on. And last time we had you on was Episode 204, where we talked about the current state of buying, selling, and refinancing a home. And we’re going to link to that episode in the show notes. But Tony, before we jump into the meat of today’s episode, give us the update from your perspective on what’s happening out there in the home buying market. Anything cooling off?

Tony Umholtz: Well, you know, it depends on what you mean by cooling off. It’s still — we’re still kind of dealing with a lot of the same challenges we’ve had this past year with inventory levels are still very, very low. But there’s still a lot of demand from home buyers. And you know, hopefully we’ll see some of that additional inventory come online soon. But with interest rates continuing to decline throughout the summer, there’s still a lot of demand for both new purchases and refinances.

Tim Ulbrich: I suspected as much as interest rates came back down. I know we saw a little bit of a jump up and have come back down since. So appreciate the perspective that you share on that. And so today’s episode, the idea for this episode came from a conversation Tony and I had back on Episode 191 where we talked about 10 common mortgage mistakes to avoid. And on that episode, one of those mistakes we talked about was credit. But we wanted to dig deeper, knowing that there’s a lot more to discuss and also to hear from Tony as he can share more about some of the experiences and what he sees folks making often in terms of credit mistakes that might have an impact on their lending situation and through the process. And so you know, these mistakes could lead to surprises, which surprises during the home process, home buying process, are certainly not good things. We want to avoid that. And that could be surprises in the form of a higher interest rate or surprise credit score. And again, we want to do everything that we can to avoid that and making sure that we’re ready and prepared going into the home buying and into the lending process. Tony, before we get into the common mistakes that you see folks making around credit when purchasing a home, let’s start with the mechanics. How does credit information get into one’s lending application? When does this happen? And how does a borrower get rated?

Tony Umholtz: Great question. And you know, there’s really three large repositories that aggregate all of our information as consumers. And that’s Equifax, Experian, and Transunion. So those are the three main bureaus that are out there that are gathering all the data on our credit histories. So for example, you know, any credit cards that we may have, even starting as young as 18 years old, you know, installment loans, car loans, anything — mortgage loans, student loans, all these types of creditors are evaluated by the three bureaus. So they aggregate all the data, our payment history, our performance, how long we’ve had credit, so those are essentially the three bureaus that are kind of watching us, so to speak.

Tim Ulbrich: And I want to dig in a little bit further about the impact one’s credit score can have on their application, ultimately the interest rate in terms of they’re able to access. So before we look at the numbers, remind us the components of one’s credit score, Tony. I’m specifically thinking here about the FICO score.

Tony Umholtz: Yes. So you know, typically when we look at the FICO score — and we’re starting to see a re-emergence of other scoring models, but the primary driver of our credit scores is going to be our payment history. So payment history is by far the biggest driver of our credit score. So meaning on time payments, not having a 30-day delinquency. And I want to just touch on this for a minute because it’s something that’s come up a lot over my career, my nearly 20 years in the business is let’s just say — we just had this incident with one of my borrowers this past week where they did not get a credit card statement. They were selling their house prior to buying the new home they were buying. And he missed a credit card statement that came to the home. And if it’s over 30 days late, you’re reported to the bureaus. So if it’s 15 days late, you’re not reported to the bureaus as a delinquency. But if it’s over 30 days, then it becomes late. So it’s — that’s a question that comes up a lot. And unfortunately, it’s something we had to navigate here at the last minute.

Tim Ulbrich: Oh man.

Tony Umholtz: But payment history is the biggest driver. The next would be credit utilization. And that primarily is going to be driven on revolving credit accounts. And what I mean by revolving credit accounts is going to be your credit cards that you might have or lines of credit. And those are essentially going to be evaluated based upon how much you have borrowed on that card. For example, I always advise people to try to stay at 50-70% of their credit limits. And what that means — so let’s say you had a $10,000 credit limit on your credit card and you ran it up to $9,000 balance. Well, that’s going to report adversely to the creditors, credit bureaus. And remember, credit utilization is 30% weighting of your score. It’s a big weighting. But that’s the other really big driver of your credit history. Those two alone are like 65% of the weighting of what determines your credit. And then the next couple I would say, just to add in here, is length of credit history, you know, the longer you’ve had credit, good credit, the better that’s going to weigh on your score. That’s usually about a 15% driver. And then your credit mix is about a 10% driver. So the types of credit you have is very important too. You know, do you have experience with — you know, a lot of times, people will come in before they buy their first home and they have maybe a car loan, student loans, credit cards, but they haven’t had a mortgage yet. And a lot of times the mortgage will add more — a stronger credit mix. It would be viewed stronger because it’s a bigger installment loan. It’s a little tougher to get. And then the last driver of your score is inquiries. A lot of people will call me and say, “Tony, the inquiries really hurt my score, and I don’t want this to damage my score.” But they really have the least amount of impact on your score. If you go and have a tremendous amount of them at one time, that can hit your credit a little bit. But normally, a couple of inquiries isn’t going to have much of an impact.

Tim Ulbrich: Yeah, and it sounds like, Tony, you mentioned several components here, but low hanging fruit, you mentioned payment history, so on-time payments, and then credit utilization, how much of that balance is used each month in terms of the revolving amount. Those two alone making up more than 60%. So you know, I think being in tune of if you’re looking to really optimize credit, I think of some tips here that folks may want to consider, specifically with payment history and on-time payments, something like automatic payments, right? Obviously we want to make sure we’ve got the funds to pay that money, you know, in the account that that’s coming from, but the example you gave of someone not getting a mailed statement, hopefully folks can get electronic statements, you know, as a backup to help prevent that. But something like automatic payments can really help make sure that we don’t have something like that happen, especially if you’re in the midst of purchasing a property where the timing of that is less than ideal. I would also point folks here to an episode, 162. Tim Baker and I talked about Credit 101, and what Tony just mentioned there of the makeup of a FICO score was one part of that discussion. But we also talked about credit security, the importance of understanding your credit, how credit really is a thread across the financial plan, and so credit being a very important topic as it relates to the financial planning process. Tony, I’m someone listening today, and I feel like I’ve got a good idea of my credit score. And the question that comes to mind here is how significant of an impact can this have on securing the best rates and terms? And so you know, what I’m thinking of here is 30-year mortgage, maybe because of a higher or lower credit score, we’re looking at maybe a quarter of a percent. And maybe that doesn’t look as much of a big deal on paper as it actually can be mathematically, so tell me about what the impact of this might be.

Tony Umholtz: Well, the longer term the loan is, the more impactful your credit history — your credit scores are going to be. So it’s a good point, Tim, because you know, for example, if you have a 710 score versus a 740, you’re going to get probably about an eighth to a quarter better rate on a 30-year loan having over a 740. Typically on most of our mortgages, over 740 does not get much more benefit.

Tim Ulbrich: OK.

Tony Umholtz: So a 740 score versus an 800 score isn’t going to see a huge benefit. Some of the jumbo loans that get over $550,000 may see a little bit more of a benefit because they have some pricing matrices — the matrix will go up to 780 or higher. But where you really see the impact is like if you’re under 700, right, and you’re at 660 versus even a 700, talking about a large margin risk profile added to the loan, especially on a 30-year fixed. One thing I do want to mention that I think it’s important is the shorter the term, especially on a 15-year fixed, the more flexibility you have with the credit score. So I’ve even had some customers that have been under 700 and it really impacted their 30-year rate, but the 15-year rate stayed the same because the hits don’t really adjust to that until you get even lower because a lower term, you’re paying back the loan faster.

Tim Ulbrich: Yeah, that makes sense. And I would encourage folks, even though that may not seem significant, eighth of a percent, quarter of a percent, when you’re talking about Tony’s comment, a 30-year mortgage, $400,000 or $500,000 home, you know, that can start to add up in terms of obviously difference in monthly payment because of that interest as well as the difference in what you’re going to pay over the life of the loan. And here, we start to think about opportunity costs, right? Where else might that be used in other parts of the financial plan, whether it be investing, other debt repayment, and so forth. So now that we’ve talked about the makeup of the FICO and really understanding that score components and the impact that that might have, let’s talk about some of the common mistakes that you see, Tony, folks that make when they’re applying for really any loan but here, we’re going to talk about the pharmacist home loan a little bit more specifically. And the first one I have here is no or limited credit history. So we’ve been talking for the last five minutes or so about the importance that, you know, a higher credit score can have in getting more favorable rates and terms. So if someone’s listening and they have limited credit history or no credit history, what are the problems that can present themselves there? And what are some of the solutions that they can pursue?

Tony Umholtz: Well, it’s one of those things where especially if you’re young, it’s hard to come right in with very established credit. But I would suggest, I mean, just a couple points here. You know, one thing that — and I didn’t realize, and I’ll just take my own example. But I remember my first day, first month let’s just say, of my freshman year of college, there was a credit card company on campus where you could get a credit card, right? And being the finance major that I am, I was one of those guys that didn’t charge much but used it here and there. And it helped me with my credit history. And I’ve seen that. If you can get even a small credit card even in college, even if it’s got a couple hundred dollar limit, and you use it as a wise steward, right, you’re not out there running it up, I think that’s a great way to start building your credit. That really helped me because I had a solid credit score coming out of college. And I see that with other people too. Now, student loans being paid on time, that all helps as well because student loans will show up quickly too. I do have a situation now with a client that we’ve had to like rebuild their — they had no credit. They had zero credit history, right? So there’s no score. And that becomes a real challenge, especially — I mean, for example, the pharmacist home loan, we do — you don’t have to have a real in-depth credit history. You really can have a fairly young credit history, but you have to have a score. You know, we have to know what that score is. The only other option we have if you have no credit score that we have available is FHA where we essentially kind of have to build your credit history to some degree. But that’s kind of a rare thing these days. But that’s — every now and then, we run into that. I would just say to start building it early. Having some credit is not a bad thing. Just be responsible with it.

Tim Ulbrich: Tony, I’ve heard you say that before about for those that have no or limited credit history, the FHA is an option and building credit. Tell me more about what you mean by that.

Tony Umholtz: So when we say building credit, we essentially are using other types of forms — like for example, you might have paid auto insurance, right, or utility bills, or rent. We’re able to pull some of these other types of elements of payment history together to show responsibility and the ability to repay. So those are some of the things that we’ll actually use to build the credit history as well as we suggest to get a credit card or something to that effect to — depending on their timing and when they want to buy to start developing that so they can at least get a score. But having a score is pretty critical to get the best loans, you know. Really the only one that we have out there is FHA that will allow us to work without a credit score.

Tim Ulbrich: Got you. Another common mistake I’ve heard you mention is, you know, folks that might have purchased an appliance, piece of furniture, there’s several examples of this, on a 0% interest card and not realized the impact that that might have when they’re going through the lending process and purchasing a home. Tell us more about that.

Tony Umholtz: You know, this is another one, Tim, that I learned firsthand personally when I was young and lots of my — I’ve seen it many times over the years with my clients, but you know, I’ll give the example of buying furniture. Fortunately, I did this after I bought my home. I was 25 I think at the time. It was a long time ago. But essentially, I went into a furniture store, was able to buy all this furniture, and they said, “Hey, by the way, that $4,800 in furniture, we’ll give you a credit card where you don’t have to pay interest for over a year.” I said, “Well, that sounds great. Let’s do it.” And you won’t have to make payments for over a year. Well, unfortunately, how those credit cards work — and they’re in all sorts of retail goods. It’s not just furniture. There’s a lot of different promotions out there. It reports to the bureaus as a maxed-out credit card. So you know, a lot of electronics companies are the same way. They’ll offer this to you. And you’ve just got to beware because it’ll report to the bureaus as a maxed-out credit card. And as we discussed, 30% of our weighting of our credit score is based upon credit utilization. If we show a maxed-out credit card, that’s going to be a big hit to our score. And I see that a lot. It’s unfortunate. But it comes up a lot.

Tim Ulbrich: And you taught me that, Tony. I did not know that that was often viewed as a maxed-out credit card. So obviously what we just learned about FICO and utilization, that makes a whole lot of sense of the impact that that could have. So we talked about no or limited credit history, we talked about buying an appliance or piece of furniture or something like that on a 0% card. The other thing I’ve heard you mention several times — and I think we’re seeing more and more as folks are using more of these tools — would be relying on a third-party credit app or tool, whether it be something like CreditKarma, CreditSesame, when we’re relying on that for credit score information that may not match up necessarily with what you’re seeing on the lending side. Is that correct?

Tony Umholtz: That’s right, Tim. Yeah. That’s right. And I think this is an important topic because there’s a lot of variables out there. And I don’t want to say that these like a CreditKarma and some of the other apps and trackers aren’t legitimate and helpful. They certainly are. And they give you a good idea of the trend of your credit score and how you’re performing. The one thing I would caution everyone on, though, is it’s not typically indicative of what your score is to a creditor. Now, mortgage companies in particular, we run what’s called a tri-merge report, which is all three bureaus. So we’re going to see Equifax, Experian, and Transunion’s, each of them give us a score, provide us a score. And we take the median score. So mortgage lenders take the media score where — and the same thing would apply for like a commercial loan if you’re getting commercial loan for a building or something of substance. An auto company, if you’re buying a car, will often just pull one. So they may just pull Experian, right? Or Equifax. So you know, a lot of times there is a little bit of variability in our scores. And they can be different. Our Equifax score could be potentially be 750, our Experian could be 739, and our Transunion might be 730. Well in that case, you’re at 739, not over 740. And that’s where I see the mistake come up because a lot of these trackers will show you a score that’s a little higher than what we would see. And a lot of my customers send me — my clients will say, “Hey, here’s my report, here’s my credit score.” And it’s oftentimes a lot different than what we pull. But I think there’s a lot coming on scores over the next couple years. I think you’ll see different ways of risk assessment. It hasn’t hit us yet, but I think rental performance will come into play more too. It’s important to always pay our rents on time. You know, traditionally that didn’t always come up on reports. But I think there’s going to be some other elements that are going to potentially help us. And I think you’ll see that the medical collections take less weight on the reports. We’re already seeing that too, which is really a blessing for a lot of people that have had things happen.

Tim Ulbrich: Tony, I can see this playing out. You know, you gave a good example where somebody might be on that line, let’s say a 740, and they think because of what they see on CreditKarma or CreditSesame that they’re going to be above that and then come to find out that they’re not, and that obviously can have a surprise and be an impact on rates. And you know, I’m sure — it reminds me of the patient that might walk through the doors of the pharmacy and be upset with the pharmacist because of what they get through claims adjudication on the insurance side. And the pharmacist is often not deciding that price, but the reality is they’re the person that’s in front of the patient. And I suspect here, that can be much of the same where they may be surprised and take it out on you guys sometimes.

Tony Umholtz: It happens.

Tim Ulbrich: It happens, right?

Tony Umholtz: We’re the messenger.

Tim Ulbrich: Yeah. It’s an emotional process.

Tony Umholtz: It is. One thing that we find that’s been helping too is we have a tool as part of our platform here that can actually tell — we can see what credit — what the scoring potential for a client based upon activities they could do to their report such as paying down debt, consolidating a card or whatever it might be. So it actually — we are able to a lot of times add some value to help people get their scores a little higher. We’ve had a lot of success with that.

Tim Ulbrich: The next one I have here, Tony, is borrowers that may not be checking their credit reports and therefore identifying and correcting any errors that could lead to higher rates. And this one is really something that I find interesting. You know, I do an activity in a personal finance course that I teach where I have folks actually go out, pull their credit reports, analyze them, and then they write a reflection on kind of what they learned. And the trends I have found is that about 50% of the students No. 1, have never checked credit before, have never run a credit report. And then the number of folks that are surprised by what they find on that credit report. So any insights here, even any examples that come to mind of where this can be problematic, especially when you’re in the midst of trying to secure a loan and secure a loan at the best rate?

Tony Umholtz: I think it’s really important for everyone to take advantage of the free credit reports that are out there. You know, the annualcreditreport.com. You’re allowed to have one copy from each bureau per year. And I think that’s something that we all need to do. And the surprises I think are hey, I thought I canceled that credit card years ago, right? And sometimes having open credit — it doesn’t hurt you. But you may not want to have a whole bunch of things out there just from a fraud risk potential. But — and making sure that you’re not attached to things you don’t want to be attached to. You just — in this day and age, you never know, and especially if you get into partnerships and cosigning and things like that, you’ve got to be really careful about what you’re attached to and knowing what entities your credit, you’re attached to. That’s one thing I would just caution because I’ve seen some problems come up with cosigning and people not being aware that they did or applications from everything from student loans to auto loans to business loans. And then just there is a lot of fraud out there, you know? And I think that I’m on LifeLock. I’m not trying to promote anything, I just, I’ve put that on me and my wife’s accounts just so we know what’s going on, right, in case anything ever were to happen we’d be made aware. But certainly would encourage everyone to do that. And you know, I think just knowing what’s out there. I know when I did it one time, I had a credit card that I hadn’t used in like 6-7 years and it was still open, right? If you don’t use it, might want to close it.

Tim Ulbrich: And I’m glad you mentioned the cosigner because I do think that’s something that we hear and see often from the community, whether that’s student loans, whether that’s auto loans, whatever be the situation, obviously there’s a potential risk there of late payments, somebody may or may not be aware of that and the impact that that could have during the credit and obviously impact that could have on your credit and then the surprise that could present during the lending process. Tony, last one I want to talk about here before we wrap up by talking about the pharmacist home loan product is applying for credit before sale is final. And I think many of us who have gone through this process, we’ve gotten the advice of, do as little as you can in terms of new credit or inquiries or anything during this process. But give us some more details, not only why is this important but what is the time period that we should be thinking about this because I sense that there are listeners out there that might be buying a home and also be thinking about refinancing their loans, for example.

Tony Umholtz: Right. And this one is really important, guys, if you’re in process for a home loan because us lenders, we know what you’ve applied for during the process. We’re notified if you secure a new loan. So for example, one that comes up a lot is a new auto loan, a — furniture for the home. I’ve seen that quite a bit. And a lot of our clients are proactive and ask the question first. And we will look and see. If it’s something like hey, my car absolutely won’t work anymore, I need to get a new one, we’ll look and see, will that impact you. We’ll include that new payment into your numbers so it doesn’t affect your home closing. But normally, you want to try to postpone any activity, new credit, when you’re in the mortgage process until after you close just because there’s a lot of risk there, right? It’s a big transaction. You do not want to jeopardize it with new credit because we do know about it. We will know. We are notified if you open anything up. And that’s a really important point if you’re in the process. So I would just caution everyone to be very careful with that. And I will give the classic example. Before they tracked, this is going back probably 2005, I remember I went to this closing for a client of mine, and it was a fairly nice home. And he goes, “Hey, Tony, look at my new car I bought last week!” And the guy had bought a new Porsche, right? This is before we had the trackers. I’m like, don’t tell me this. Oh, don’t tell me that. But anyway, nowadays, we do know what activity has happened. And be very careful. And if you have to do something, just speak to your lender first before you officially apply for any other types of credit during the process.

Tim Ulbrich: Yeah, and that’s where my mind was going, Tony, just knowing the examples that might come here, right? It could be credit, we talked about some of these already, furniture, appliances, student loans, auto loans. Like there’s a lot of things that could come up here, and I think just open communication with the lender if you have questions to make sure that you’re not doing anything that’s going to jeopardize obviously, again, the goal here being that we get the best loan at the best term, you know, and ultimately the best rate so that we can keep the cost of interest low throughout the life of the loan. So Tony, we’ve talked about the makeup of the FICO score, understanding what feeds into that score. We talked about the impact that that could have on someone’s rate and their ability to secure that competitive rate. We talked about some of the common mistakes that you see folks making around credit in the home buying. And I think this is a good connection to the pharmacist home loan product. And I know many of our community members are familiar with this from previous episodes, information we have on the website, but for folks that are hearing this for the first time, give us some more information about the pharmacist home loan, what is it, how it’s different from other options that are out there in terms of down payment, PMI, minimum credit scores, and so forth.

Tony Umholtz: Sure. I mean, again, just a great tool for pharmacists to purchase a home. And the main points of it is you’re able to buy a home — if you’re a first-time home buyer, you could put down as little as 3% and have no PMI. And if you’ve owned a home before, it’s 5% down with no PMI. And that’s significant savings not having the MI but also the interest rates tend to be better than I can offer with a 20% down normal conventional loan for someone else, which is quite a nice opportunity for people. And the minimum credit score is 700. So it doesn’t have like a super high credit threshold. And it’s flexible on reserves and things like that. You know, some programs have very strict reserve requirements, and this one has some flexibility there, has some flexibility on how we value student loans, and you don’t have to be — you know, one of the other things that a lot of doctor loan programs have out there is some of them have restrictions if you’ve been out of residency for 10 years, you can’t use the product. This one does not have those limitations. So it’s — it’s been a great tool for a lot of people. And we’re very pleased that we can offer it.

Tim Ulbrich: And we’ll put Tony’s contact information in the show notes for folks that want to reach out to Tony directly. Also, if you haven’t already done so, make sure to check out — we’ve got a great comprehensive post, very informational, that I think you’ll find helpful, “Five Steps to Getting a Home Loan.” And you can — in that blog post, which we’ll link to in the show notes — learn more about the pharmacist home loan product. We’ve got some calculators there as well. And that’s available at YourFinancialPharmacist.com/home-loan. Again, that’s “Five Steps to Getting a Home Loan” at YourFinancialPharmacist.com/home-loan. Tony, as always, appreciate your insights, your expertise in this area, and thank you for the time coming on the show.

Tony Umholtz: Hey, Tim, thanks for having me. It was great to be here.

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YFP 206: Three Strategies for Buying a House with Student Loans

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Three Strategies for Buying a House with Student Loans

Nate Hedrick discusses strategies for buying a home with student loans. He talks about the decision to rent vs. buy, how to determine when you’re ready to buy, and three strategies to consider when deciding to buy a home with student loans.

About Today’s Guest

Nate Hedrick is a full-time pharmacist by day, husband and father by evening and weekend, and real estate agent, investor, and blogger by late night and early morning. He has a passion for staying uncomfortable and is always on the lookout for a new challenge or a project. He found real estate investing in 2016 after his $300,000+ student loan debt led him to read Rich Dad Poor Dad. This book opened his mind to the possibilities of financial freedom and he has been obsessed ever since. After earning his real estate license in 2017, Nate founded Real Estate RPH as a source for real estate education designed with pharmacists in mind. Since then, he has helped dozens of pharmacists around the country realize their dream of owning a home or starting their investing journey. Nate resides in Cleveland, Ohio with his wife, Kristen, his two daughters Molly and Lucy, and his rescue dog Lexi.

Summary

Nate Hedrick returns to the show to discuss knowing when you are ready to buy a home, questions to ask yourself to gauge your readiness, and three strategies for buying when you have student loans.

The first strategy for buying a home when you have student loans is to buy a home as soon as possible. The advantages of this strategy include immediate emotional satisfaction, being your landlord, building equity in your home, and tax advantages for homeownership realized. The disadvantages include high upfront costs, increased likelihood of paying PMI, the effect the purchase may have on your budget, and the decrease in flexibility to move at will.

The second strategy is to pay off your student loans first, then buy a home. The advantages to this strategy are emotional relief from debts being gone, increased flexibility in the budget, and potentially increased emergency funds should problems arise. Disadvantages to this strategy include a period of renting and not building equity, potential loss of market appreciation, potentially missing out on historically low-interest rates, and delayed access to tax benefits.

The third strategy is more of a hybrid model. In this strategy, the homebuyer pays down the student loans and then buys a home. With this third strategy, there may be a feeling of relief and confidence, less overall debt, and a lower risk of defaulting on payments. Disadvantages are the same as the second strategy, though generally for a shorter time.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Nate, welcome back to the show.

Nate Hedrick: Hey, Tim, great to be here.

Tim Ulbrich: It’s been so fun to hear you and David on the Real Estate Investing podcast as hosts. I shared with you before we hit record, I’ve enjoyed being a fan of the show, love hearing other pharmacists’ stories about their real estate investing journey. So kudos to you and David on the work that you’ve been doing. That’s not what we’re going to talk about here today, though. I want to bring you on as a guest in your role as The Real Estate RPh, someone who has expertise on the home buying side, also being a real estate agent, so we can dig into the topic that I think is front-of-mind for so many pharmacists out there, especially in this real estate market, and that is buying a home while still dealing with student loan debt. So Nate, before we jump in, I think folks if they’ve listened to any of the news lately, they know the chaos that is the real estate market right now. But just give us a quick pulse from what you’re seeing in your market in Cleveland and obviously as an agent in helping other pharmacists.

Nate Hedrick: Yeah, absolutely. And thanks, it’s been really fun getting started with the podcast. And David and I are having a blast meeting all these great pharmacists doing real estate investing. And it’s been a really fun time. So but yeah, the market right now is obviously a big seller’s market. There is very low inventory. The interest rates are low, so it’s driving up people that want to buy because money is cheap. And so we’re seeing a lot of bidding wars. Houses come on the market and there’s 10 or 11 offers by Saturday afternoon and people are looking for highest and best by Sunday evening. And so it’s just — it’s a bit crazy. It’s nice for a market with my sellers. I had a listing that was on the market I think — I don’t know — two or three days that we got a full-price ask. So it’s really nice to have listings, but my buyers, it’s a lot of work. We’re doing a lot of offers that include escalation clauses, which bump up the price, and appraisal gap coverage and all kinds of crazy stuff.

Tim Ulbrich: I was thinking about you last week, you know, for agents that are obviously working with the buying and the selling side, like what a difference of just — I mean, effort of course and work but also I mean, you know, on one end you might be working with somebody who’s putting in one offer that is one of 10, 15, 20 offers. On the other end, it’s like, keep them coming. Keep the offers coming and we’re going to react to the best one.

Nate Hedrick: Yeah, I had a physician client, two young physicians, new residency here in Cleveland, they’re moving from D.C. back to Cleveland. And I think we ended up looking at — it had to be 60 houses. It was the most I’ve ever seen with one client. And there’s other real estate agents that are listening that are probably like, that’s not a lot. But for me, that was a ton, a ton of houses. We did one offer every week and one offer every weekend, so two a week at least. It took us 10 or 11 houses, or 10 or 11 offers to get something accepted for them. But they’ve got a great house. It just took a ton, a ton of effort to get them there.

Tim Ulbrich: Yeah. Persistence for sure. So let’s talk about home buying and student loans. You know, our audience knows well that pharmacists today are facing big mountains of student loan, $175,000 is the median indebtedness for a pharmacy graduate in 2020. Hopefully we’ll be getting the 2021 data here soon. But I think we know where that number is going to be going. And we often hear from folks in the YFP community as well as prospective financial planning clients of ours at Your Financial Pharmacist Planning that pharmacists are often trying to juggle several competing financial priorities, which really of course depends on the person, right? It could be buying a home, paying down debt, investing, saving for retirement, the list goes on and on. And what we often do when it comes to comprehensive financial planning is we’re working with clients to help them determine their financial and their life goals and to ultimately develop and establish a plan to help those individuals reach those goals. So when we talk here about student loan debt, obviously one big goal that we hear from many folks in the community, a big barrier is I want to get a home, but I’ve got all this student loan debt. And when is the right time? And so I think there’s this question of, is there a best time? You know, what are the different options that are out there? So Nate, high level, what do you think of as kind of the buckets or strategies that folks may be thinking about when it comes to buying a home while also focusing on student loan repayment?

Nate Hedrick: Yeah, and I think this is, you know, regardless of the market, there are three main options for what this looks like. And you do this in a buyer’s market or a seller’s market. But you know, Option 1 is kind of the “I want everything now,” right? Buy a home ASAP. Go ahead and just do it. Option 2 would then be the opposite of that where you’re paying down all your debt first and then you buy a house, and that’s like the very Dave Ramsey approach. And then there’s Option 3, which we’ll talk a lot about I think as we go through this. But that’s kind of what I call the hybrid approach, where you’re looking at getting rid of the bad debt first and then going ahead and purchase that home, even though you’ve got some of those student loans in place. And we’ll talk through those details.

Tim Ulbrich: So we’ll dig into each of those strategies. First things first, you have to decide if it’s renting, is it buying, what’s the best move for you going forward? And really, if you do choose to buy a home, knowing whether or not you’re ready and being prepared to do so. So Nate, just some initial thoughts on how can someone determine if they are ready to buy a home.

Nate Hedrick: Yeah, absolutely. I think there are a lot of things you can do in advance to make sure that you are prepared for that process and some questions you can kind of evaluate to determine is it right for me to rent? Is it a good time for me to jump in and start buying? And again, how do my other finances fit in with that? So you know, for example, are your student loans at a point where they are causing you significant stress? That’s just one easy-to-answer question, right? Are these driving me crazy? Are they the thing that I can’t stop thinking about? Or is it that I need to go buy a house first? And if your answer to that question becomes, absolutely, I’ve got to get rid of these student loans, it’s the thing that’s killing me, maybe you need to wait on that house purchase. And so questions like that can help you start to figure out where are your priorities, and then you can start looking at the actual financial pieces. You know, for example, do I have an emergency fund? Am I contributing to my retirement fund on a regular basis? Right? I would typically advise somebody to have those things in place first before going out and purchasing a home. You know, there are advantages to buying that house but not in replacing your emergency fund or taking away from your retirement just so you can go do it. So those early financial questions I think are a really good place to start so that you know your priorities before deciding what strategy is right for you.

Tim Ulbrich: Yeah, Nate, what I like about those questions, one thing I talk often about on the show — our audience has heard me on repeat say this — is really trying to avoid making any financial decision in a silo. Right? Taking a step back and saying, what else is going on with the financial plan? And I think in this scenario, right, we’re talking about home buying, we’re in the spring of 2021, the market is en fuego, like you’re talking to peers and friends and colleagues and others that are buying homes, it’s all over the news, interest rates are low, like that puts the pressure — perhaps — on like OK, got to buy, got to buy, got to buy, especially if folks are having that as an interest. And these questions, you know, are my student loans and other debt causing significant stress? What about my emergency fund? Where am I at with my retirement funds? Where are the contributions? How might this position to buy v. continue to rent ultimately direct that? So really taking that step back and asking those questions and also being fair that rent prices right now are also en fuego. So like this may not be necessarily just a home prices are escalating, therefore it’s best to stay put. But I think asking these questions to really try to evaluate it, you know, as objectively as you can with the rest of your financial plan in consideration. So let’s dig into those three strategies that you mentioned, Nate. And we’re talking here again about paying off student loans while also looking at purchasing a home. You mentioned No. 1 is “I want it now,” right? So ultimately, you know, getting the home as soon as possible and really focusing on that. The second approach you mentioned is really more of that Dave Ramsey type of approach of OK, let’s pay down all of the debt and then we’ll even think about a home after that. And then the third you mentioned is more of a hybrid approach. So let’s start with No. 1, the “I want it now,” buy a home as soon as possible. So who is this strategy for? Talk to us more about some considerations around this strategy.

Nate Hedrick: Yeah. And so full disclosure, this was me about seven years ago, right? We had come out of pharmacy school and residency and decided we wanted a house. We wanted space to call our own, we wanted space for our dog, we wanted — like, you name it, there were 10 reasons why emotionally we were ready to have a house. And so for us, it became alright, that’s going to be the driving decision, we’ll figure out the costs later. I don’t care, we’re going to buy a house. And so this strategy is really for those people that say, “Look, I am ready to jump in. I am comfortable with where my student loans are at, or comfortable enough that I can take this financial responsibility, and it’s time for us to dive in and take a look at purchasing that actual house.”

Tim Ulbrich: Yeah, the other group I think about here too, Nate, you know, without getting into the weeds of student loans, would be for those that are pursuing a forgiveness option, right? So whether it’s PSLF, Public Service Loan Forgiveness, non-Public Service Loan Forgiveness — if you’re hearing those terms for the first time or want any more information, check out any previous YFP episode. I think we’ve talked about them. But you know, when I think about the strategy around forgiveness, now, granted if that is the right move, which is a further conversation back to my point about not looking at things in a silo — if Public Service Loan Forgiveness of non-Public Service Loan Forgiveness is the path forward, typically the strategy is then, OK, what can we do to minimize payment, maximize forgiveness. Well in that case, there might be additional cash flow, right, that’s there on a month-by-month basis that may not be the case if somebody’s let’s say in an aggressive repayment, either in the federal program or in the refinance. So great example where student loan strategy can really intersect here with the home buying discussion and decision as well. So advantages and risks. So as we talk about this strategy, Nate, buy a home as soon as possible, “I want it now,” what are some advantages? What are some potential disadvantages or risks?

Nate Hedrick: Yeah. I think most of the advantages here are emotional, right? I think they’re kind of obvious from that standpoint. You get the house, you get to become a landlord right away. But there are a couple of financial advantages as well. One is that you build that equity and that credit right away. I mean, if you had been in my shoes seven years ago and now where the housing market is today, right, our house has gone up tremendously in value just sitting here and enjoying it. So there is some advantage to that. You’ve got tax advantages as well. You know, you get to pay down or at least deduct in some capacity your mortgage interest and some of your property taxes in some cases. So there are definite financial advantages, but I think in this strategy, most of the advantage side is leaning toward the emotional aspects. And then on the risks or the disadvantages I guess, you know, obviously there’s less flexibility built in. You know, renting is great because you have that flexibility if your job changes or if you want to go to a different location. There’s higher upfront costs from doing it this way. Obviously you’ve got a lot more debt load, a lot more debt-to-income ratio is being increased by doing this. So you know, from a financial aspect, it’s a bit more tricky for sure.

Tim Ulbrich: Yeah, and I think I’ve talked about this on the show before when we had a discussion on renting versus buying — we’ll link to that previous episode in the show notes — but you know, don’t forget about all the other costs. Right? We’ve talked about this on other episodes before, all of the other costs that come along with the home purchase, not necessarily just doing a rent payment comparison against what would it be with mortgage .Obviously you’ve got taxes, you’ve got insurance, you’ve got things that you need to furnish the home, take care of the house, etc., other costs that can be a significant factor. So strategy No. 2, get rid of all of the debt, then buy a home. Now I know folks are going to hear this, Nate, because I was in bucket No. 1, right, so I’m with you there. You know, folks that are looking at $175,000-250,000 of debt, like seriously? Like wait until I have all of that paid off? I mean, you know, some may — as we’ve had featured on the show before — some might be able to knock that out in 2, 3, 4 years very aggressively. But many folks are looking at 10, 15, 20-year repayment. So where does this strategy fall? What might this be an opportunity for some folks to consider when we talk about getting rid of all of your loans and then buying a home?

Nate Hedrick: Yeah. I definitely think this plays into someone who might have a smaller debt load than the average pharmacist. And by smaller, you could still be talking about $60,000, $70,000, $80,000 but something that you can tackle in 1 or 2 years if you really were aggressive with it. I think you’re right, the typical pharmacist or even the typical pharmacist couple in some cases where you’re coming out with $300,000 together in debt, like it’s just — it may not be possible to choose this strategy and still make financial sense. But there are plenty that do it. I mean, take a look at Tim Church’s story, right? He went out and him and his wife really focused every dollar on getting rid of that debt first and again, because it was a major pain point for them. They said, “I hate this debt. And the idea of taking on more makes me sick to my stomach. I can’t do it.” So if you’re one of those people, this might be the right call for you.

Tim Ulbrich: Yeah, and I think that’s a good reminder, you know, Nate, of like really being true to how you emotionally feel. Here, we’re talking about how you emotionally feel about debt but also it will be about how you emotionally feel about other parts of the financial plan and not necessarily just what someone else is doing or what else you have read but really being true to how do you feel about that. And then this case, an obvious advantage would be if you just hate the idea of that student loan debt and you can really aggressively pay that off, then obviously the advantage being you’re going to have a lot of relief from having no other debt and be able to move into that home in a very confident financial position. So that of course is one advantage. What are some other advantages that you think about with this strategy as well as some disadvantages or risks?

Nate Hedrick: Yeah. From the advantage side, I definitely think that you have more flexibility once you get there. Right? All of the advantages are kind of once you get there. But you have that more flexibility in your budget when you’re ready to buy a home, you’ve got greater cushion, you can make bigger mortgage payments, especially if something unexpected comes up. So I know a couple of physician and pharmacist friends who are looking at methods like this where they want to get rid of their debt first so that one of them can cut back on their hours and they can still afford that home that they want to purchase. So there are definitely — it provides more flexibility, but again, a lot of those advantages don’t kick in until you paid off that debt. So you’re kind of sitting on the disadvantages until that point. And so again, obviously the risks there are it could take you several years to get there and you’re not building any equity in that time. And so you could miss out on significant market appreciation. You also could miss out on locking in these great interest rates that we’re having right now. I mean, we are talking about truly, truly historic lows. They’ve come up a little bit in the last couple of months as buying interest has increased, but I mean, truthfully, you cannot get interest rates much lower than they are right now. And so you might miss out on that if it takes you 2 or 3 more years to get access. And then of course, you know, there are very few advantages for income earners like ourselves in terms of tax implications. But getting a mortgage is one, and so you miss out on that small advantage as well.

Tim Ulbrich: I think interest rates is an interesting conversation, especially for those that are new graduates that are looking for a home or recent graduates. You know, Nate, it feels like — you know I graduated 2008, you were a few years after that — like we’ve been in a historically low interest rate period. Right? So I don’t feel like I have an appreciation — like when we say historically low rates, it’s like, yeah, they are relative to where they’ve been, but they were still really good just a couple years ago. And before that, we were talking about historically low rates that were there as well.

Nate Hedrick: Right.

Tim Ulbrich: So we don’t have the perspective. Like go talk to my parents or talk to my grandparents, and you hear stories of double-digit interest rates and other things. So definitely an important consideration, but I think it has become somewhat of a norm that we’ve been used to here more recently. But who knows where that will go here in the next year or so?

Nate Hedrick: Definitely.

Tim Ulbrich: Third strategy you mentioned, Nate, is a little bit more of a hybrid approach. So what do you exactly mean by that?

Nate Hedrick: Yeah, and so this is one that I really advocate for, which is really getting your financial house in some sort of order and then going off and purchasing that home. So it’s not paying down everything, but it’s also not just jumping in head first. What this looks like is getting those student loans either refinanced or into a student loan forgiveness program or under some sort of control, getting rid of the other bad debt that you might have, credit card debt, for example, getting rid of that stuff first, the things that are really going to outpace any of the advantages you get with purchasing a home. And once you’ve got that in line, you’ve saved up a sizable down payment so that you’re avoiding things like PMI or any sort of getting rid of your emergency fund, then you go forward and purchase that home. So it’s really about maximizing the benefits, minimizing the risks and trying to balance that out.

Tim Ulbrich: Yeah, this really intrigues me, Nate, and I wish I would have had you in my ear back in 2009 because I think what resonates with me with this strategy is, you know, I went into the buy a home ASAP. And I think with just a little bit more time, if I would have been able to really better understand like what are all of my student loan repayment options and what is the best fit for Jess and I in this repayment journey — and when I think about this, I think about locking in your strategy. Right? So it doesn’t mean — here, as you’ve articulated, it doesn’t mean you’re debt-free before you’re purchasing a home. That was No. 2. But we’ve got a game plan, and we know exactly what that game plan is, we’ve considered other parts of the financial plan. So whether that’s refinancing, whether that’s loan forgiveness, whether that’s some other plan, we know what that’s going to look like month-to-month, we know what the total amount is going to be paid or total amount that also may be forgiven in a forgiveness plan. And so now, we can put in that one puzzle piece of the plan of the student loans so we can then start to move these other puzzle pieces like the home in around it. Right? But we’re not moving into the home purchase decision still wondering like, what is the student loan plan? You know? What might this look like? We talk often on this topic, webinars and speaking events and other things, and I often will show a slide and a chart that shows for a pharmacist coming out with $150,000 or $200,000 of debt, if they choose Option A, B, C, D, or E when it comes to student loan repayment, whether that’s forgiveness or non-forgiveness, federal or private, there’s a difference, big difference that can happen on a monthly payment basis as well as what’s paid out over the life of the loan. So if that’s a question mark, you know, and you haven’t evaluated those options, I think it’s really difficult to know where does that home piece fit in around that, if the payment is going to look like on a month-to-month basis is still unknown. So talk to us then, Nate, about the advantages and disadvantages of this strategy when it comes to this hybrid approach of paying down the student loans and having a strategy while also moving forward with home buying.

Nate Hedrick: Yeah, I think this really tries to play into the advantage — it really ups the advantages where it can and then it kind of disengages those risks wherever it’s possible. So for example, you’ve got that feeling of relief because you’re going to have the student loans under some sort of control, right? They’re not going to be gone.

Tim Ulbrich: Yeah.

Nate Hedrick: But maybe you’ve refinanced them down to 3% now and now you know, OK, this is basically like inflation money. I have my payment, I’ve got that figured out every month, and I can stack things on top of that. It also helps because hopefully you’re going to be taking on less overall debt, especially if you’re taking the time to build up that down payment, that emergency fund, you know, and maybe you’re paying off things like — or you’re getting enough down payment that you’re going to avoid PMI or using a pharmacist home loan product to avoid PMI. All of those things are going to help you in taking on less overall bad debt. So those big advantages, and then again, kind of the ultimate is that if something does happen, right, if you lose a job, if you miss out on work for a period of time, or someone needs to cut back on hours, you have a lower risk of defaulting on those payments because you’ve set yourself up for success from the beginning. It’s not perfect, you’ve not paid down all that debt going into it. But you’re getting that home a little bit sooner, and you’ve got this cushion built in that may help you out. The disadvantages is obviously this still could take time, right? You could still take 2 years to approach this hybrid model where it makes sense. I like to think that you can pull this off in probably a year, a year and a half, because really, truly getting that down payment saved up in that time should be doable, especially using like a pharmacist home loan product. But you are waiting. It’s not getting the house tomorrow. It’s giving it a little bit of time still.

Tim Ulbrich: Great stuff. And for those that heard the three strategies and the discussion we’ve had here today and want a refresher without going back and hitting replay on this episode, Nate has put this into a blog post, “Three Strategies for Buying a House with Student Loans.” That’s available at YourFinancialPharmacist.com, on the YFP blog, and we’ll link to that in the show notes. Nate, I want to spend a few minutes and talk about the Real Estate RPh concierge service that we offer to the YFP community because I think that many folks that are listening to this are probably somewhere in the stages of home buying, whether that’s a hey, I’m out there looking right now, or I’m going to get started. Maybe it’s three months out, six months out, whatever be the case. But we know how important it is to have an agent that understands your situation and really ultimately has your best interests in mind. And we’ve got the advantage of having you, Nate, as someone who both understands the pharmacist, is a real estate agent, has gone through this process of student loan repayment and making a decision to buy a home, and I think that perspective can be incredibly valuable to other pharmacists that are in the home buying decision-making process. So Nate, tell us about exactly what is the real estate concierge service and what folks can expect as they go throughout that.

Nate Hedrick: Yeah, so this goes back to when I bought my first house. And it came time to get myself an agent, right, I knew I was a buyer, I knew that getting an agent was basically free. But that’s about all I knew, right? I knew that I needed to go find one. And so I started asking my friends. And someone said, “Oh yeah, here, use this person.” And they were fine. They did their job OK. But as I learned more about real estate, becoming an agent, working with clients, I realized there was a lot of things that they could have done differently and that I wish I would have known as a buyer from the beginning. And so I said, “We can improve that for other people. Let’s go out and do that.” And so what I do is I actually connect with potential buyers, with pharmacists like yourselves or with anybody that’s looking to purchase a home anywhere in the country. We do a 30-minute planning call. It usually doesn’t take that long, but I at least set aside that 30 minutes to answer questions, go through the home buying process with you so that you can fully understand it, ask any questions that you have about it, and then once we have that conversation, I go out and I find you a great real estate agent. And sometimes it’s somebody we’ve already worked with, we’ve helped over 30 pharmacists close on houses at this point, which is pretty fun. And — so it might be somebody we’ve already worked with in the past, or it might be somebody that we simply know from interviewing them. And so I’ll go out and I’ll interview agents, try to match up someone who I think is going to be a really good fit for you. And then we get you connected, and you get off to the races with this great, personally-vetted agent. The other cool thing is that I don’t leave once that connection takes place. I get to be still a part of your team. And so if you need a second opinion, if you just want to bounce ideas off of me, somebody that isn’t your agent but is an agent, you can come right back to me, sign up for another call, send me some emails. You know, it just gives you that person in your back pocket that knows and understands this process to really help you out. And so it’s been a great tool for our pharmacists to tap into and our community to tap into. We’ve had a lot of success over the last year or so.

Tim Ulbrich: Yeah, that’s great, Nate. And for our community, this really initiated I think in part because of really the value that I see Nate brings to the community, his expertise in this area. We’ve known each I think for the better part of a decade now.

Nate Hedrick: Yep.

Tim Ulbrich: I realized that this topic of home buying is something that close behind student loans and some others is really top-of-mind for our community and going through this process firsthand a couple times, know how important it is to have a good agent that is in your corner. So —

Nate Hedrick: Especially in this market.

Tim Ulbrich: Yes. Big yes.

Nate Hedrick: I mean, having somebody that’s going to be able to fight for you and understand what kind of things are going to get the deals done — if you’re a buyer, I mean, that is so, so essential right now. I’ve seen tons of people that just get frustrated because the agent they’re working with isn’t helping them along or not explaining it to them well enough, and then they just say, “You know what, forget it. I’m just going to rent for another year. I’ll figure it out later.” But a lot of the agents that we work with, like they understand this market, they work in it every single day. And they’re able to navigate it for you and help you actually achieve that home buying process.

Tim Ulbrich: Yeah, and full disclosure, as Nate mentioned, the service is completely free to use for the buyer. If you work with an agent within the network that is referred and end up closing on a property, then that agent pays a small commission back to Nate. So that’s full transparency of how the process works. Obviously having Nate in your corner can be a valuable resource. We know that home buying, it’s an exciting experience, it can also be overwhelming at times. You’ve got finding an agent, financing, searching for the place, this market, as you mentioned, Nate, so that’s really the value I think that can be brought through the concierge service and working with Nate. So for those that are interested, YourFinancialPharmacist.com, top of the page, you’ll see Buy or Refi a Home. Then you can click on Find an Agent. That’ll get you connected to getting some time on Nate’s calendar. And we’ll also link to that directly in the show notes. Nate, as always, appreciate you taking the time, appreciate your expertise, and looking forward to having you back on the show in the future.

Nate Hedrick: Yeah, thanks for having me. And we’ll talk again soon I’m sure.

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YFP 204: The Current State of Buying, Selling, and Refinancing a Home

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The Current State of Buying, Selling, and Refinancing a Home

On this episode, sponsored by IBERIABANK/First Horizon, Tony Umholtz, a mortgage manager for IBERIABANK/First Horizon, discusses trends in the housing market coming out of the COVID-19 pandemic and the current landscape for those purchasing, refinancing, or selling a home.

About Today’s Guest

Tony 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.

Summary

On this episode, Tim Ulbrich welcomes Tony Umholtz back to the show to discuss housing conditions in a post-pandemic world. While there may have been significant economic turmoil related to the COVID-19 pandemic, real estate continues to boom. Tony explains some possible motivations for such an active market include work and school being remote in many cases, those in apartments feeling cramped and seeking more space, and others still who have sought to purchase second homes in less populated areas.

Tony addresses some fears about a potential future housing bubble, explains some differences between buyers in the previous housing booms with current buyers, and differentiates the present home buying process, from the practices of the housing boom and conditions that led, in part, to the Great Recession of 2008.

With post-pandemic life offering more flexibility than ever before, Tony explains how that mobility is reflected in the housing market. He makes some predictions about the future of the real estate market and interest rates, shares insight regarding new generations aging up and into the housing market, and provides considerations for those who may be first-time homebuyers, contemplating making a home purchase in the present market.

Lastly, Tony explains the details of the Pharmacist Home Loan offered through IBERIABANK/First Horizon.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tony, welcome back to the show.

Tony Umholtz: Tim, thanks for having me. Good to be back.

Tim Ulbrich: Excited to have you back on the show. You’re a frequent guest I think at this point, and we’re going to link in our show notes to previous episodes in which you’ve been on talking about buying homes, selling homes, what this means from a lending standpoint, options, what’s the professional home loan, and we’ll dig into some of that here today as well. But for those that maybe didn’t catch you on a previous episode, give us some quick background and your current role with IBERIABANK/First Horizon.

Tony Umholtz: Sure, sure. Well, I’ve been in the business a long time now. I hate to say this, but it’s been almost 20 years in the mortgage banking business. And I have been just focused on residential lending has been my focus and have been with IBERIABANK for about 3.5 years. We recently did a merger with First Horizon, so hence the slash. But it will be a full combination by the fall. But it’s been a great company and we’ve been very excited.

Tim Ulbrich: Yeah, and excited for the collaboration here. And we’re going to talk as we get towards the end of the episode about the pharmacist home loan product as I suspect many of our listeners if they’re not already aware, that may be something that’s a good fit for them. But we’re going to spend most of our time today talking about really an interesting topic, and that is housing considerations in a post-pandemic world. I mean, it’s really been a strange year. And although there has been some significant economic turmoil related to the COVID-19 pandemic, certainly what that has meant for jobs that have been lost, the real estate market is continuing to boom. I think we’ve all probably heard stories, maybe some are dealing with it firsthand — I’ve talked with a colleague, a friend, a family member — it’s a wild market out there, Tony. So despite the challenges we’ve had economically related to COVID-19, what’s happening as we’re seeing this, really this significant real estate boom that’s going on across the country?

Tony Umholtz: Well, it’s a very interesting dynamic. And COVID-19 changed everything. But the real estate market has been a big winner. And the interesting part of all this is it’s — there’s been some long-term changes in demographics and even just housing in general, housing construction that just came to a point last year. And one of those things that we’re seeing here, Tim, is we were behind — our decade of new constructed homes, the past decade was the lowest it’s been since the ‘60s. Right? So the inventory created was nowhere near to meet the demand. And that’s one of the reasons we are where we are right now. And of course with COVID last year and so many supply chains being affected, employment being affected, you know, the raw materials, lumber, other materials needed to build homes, there’s less supply. So that’s just caused this challenge here, but it’s a good time — not every housing market is perfect, but the majority of housing markets in our country are thriving right now.

Tim Ulbrich: So Tony, you mentioned one thing in terms of the new home construction, some of the raw materials with lumber contributing to some of the issues we see, really simple supply and demand that I think is leading to a lot of the stories I know I’ve heard of bidding wars and offers that are well above asking and appraisal waivers and other things we’ll get to here in a moment. But what else? You know, I think of — is there some pent-up demand here of we had a housing market that last year if we think about the timing of COVID, you know, March of 2020, that really typically is kind of the beginning of the boom of the home buying season, obviously the pandemic might have tampered with some of that or perhaps people not picking up and moving that might have been going to other jobs or more people working from home and they want more space and so they’re looking to maybe get out of the city or move into the suburbs. What are some of these other factors beyond the construction, beyond the raw materials, that really has got us into this supply-and-demand position that we’re in right now?

Tony Umholtz: Well Tim, you mentioned a few things. And one of those is people moving to the suburbs. We’ve seen a big exodus from some of the big cities. I think one of the housing markets I could say that’s underpriced probably right now is New York City, right? There’s been a lot of — comparatively, there’s been a lot of exodus out of New York City, San Francisco and New York City, some of the bigger cities because people can work from home. A lot of people can. Not everyone can, but a lot of people can, and I think that’s changed a lot of things for a lot of people. The other thing too that I’ve seen is just when I mentioned demographics, the shifts, just the millennials, right? And even Generation Y, they’re starting to get into the housing market more and more, and they’re looking and saying, “Hey, I’m paying $2,000 in rent. I could own a house for this.” I think it’s starting a realization that you can own a home and have your own home. I’ve just seen a huge increase in first-time home buyers as well. I think that’s another big shift with this large group of our population moving up and aging. And then just low interest rates, right? I mean, you have the Fed being very supportive — our Federal Reserve is being very supportive and accommodative to help the economy get through this very, very difficult time. And the housing market’s been a winner. And anytime you have low barring costs, usually it leads to expansion in the real estate market. So that’s the multiple reasons why. And then you put on top of that a limited supply of homes, and that’s why we are where we are in many markets.

Tim Ulbrich: Yeah, and I’d like for a moment — you mentioned one factor, Tony, obviously interest rates, I’ve seen some numbers out there before that on average, you know, if you see a certain drop in basis points or certain percentage reduction in rates, that has obviously an impact on the demand, among other factors, of course. Rates aren’t the only thing. But tell us more about what we’ve been seeing really over the past year. I remember you and I talked about this back in March of 2020, here we are in April of 2021, you know, what have we seen in terms of rates, whether it’s first-time home buyers, those that are refinancing? And then not expecting you to be able to crystal ball this, but where might we see some of the trend of this going forward as I think it might have an impact for folks that are thinking about something like a refinance, you know? Does it make sense now? Or does it make sense that I kind of sit and hold and wait for the future?

Tony Umholtz: That’s a great question, Tim. It’s hard for me to pinpoint exactly. I can tell you trends that I’m seeing right now. You know, clearly we had unprecedented stimulus last year to help rates go to those levels. The Fed is still accommodative. And rates are still very, very good. Purchase money, meaning loans for purchasing a home, are going to be lower than refinancing. There is typically an adjustment — and it’s really a trickle-down effect from Fannie Mae and Freddie Mac on refinances. So there’s a slightly higher rate for refinancing versus a purchase money loan. But it still makes sense. We’re still writing a lot of refinances. And one area that I’m seeing opportunity, even though we’re off the lows — the lows were saw last fall, but we are off them now. But there’s still a lot of people with rates that are over 100 basis points, which is 1%, are over 1% savings level. And then the other thing that I see too is debt consolidation, people that own a home already and they have a lot of equity built up, but they have other loans that they’re paying higher interest rates, we’ve been able to really help some folks get their budget in line, really get themselves on a clean slate and really get a good savings plan. So I think refinancing can make sense no matter what the rates are. Everyone’s situation is different. And the trend for rates, I think what we’re going to see — and this is just, again, a disclaimer that I’m not an economist, but I do — I’m a bit of a nerd, I will admit, and I read a lot of this stuff and I have all kinds of subscriptions that I follow. But the trend is going to be some inflation this year. But the Fed is accommodative. So I think rates will be a little higher as the year goes on, but you have a lot of things that are going to help rates stay at a certain level. But I do think rates will trend a bit higher this year. On the other hand, looking out into the future, large government deficits and debt like we’re posing, I think we’ll hear even more of that here this week coming out, I mean, that’s all deflationary typically. So what that means is it puts pressure on rates to go down, right? So it’s just an interesting time. It’s hard to really be a crystal ball seeing the future, but this year, I think the trend is going to be slightly higher rates.

Tim Ulbrich: Yeah, and as you mentioned, Tony, we saw rates really at a significant low back in the fall, but I do think — and you probably see this more than I do every day — I’ve talked with a handful of individuals in the last several weeks that still may have purchased back in, you know, I remember fall of 2018, rates on a 30-year fixed mortgage were north of 4.25-4.5% for many folks. So I think there still is opportunity out there. And for folks that maybe haven’t gone through that evaluation to see do the numbers make sense? Of course there’s other factors beyond that, not to exclude refinance as an opportunity, even as we may see rates tick up here in a little bit. Tony, one of the things I wanted to get your feel on, you’re in this every day, obviously, in your market down in Florida but also have a good pulse on what’s going on nationally. Here in Columbus, I mean, the folks that I have talked to, it seems like above asking is the norm and in some cases, significantly above asking, bidding wars that are ongoing, sometimes appraisal waivers that are happening, and I think it just raises some attention and warrants some conversation about like, what are the implications of those types of things? You know, I think for folks that are out there shopping now or soon to be out there shopping throughout the spring and the summer, before you find yourself looking and then within 24 hours, you’re in a bidding war, like what are some things, you know — No. 1, are you seeing those and are hearing about that across different markets? And then for the buyer, what are some things that they should just be thinking about of the implications of those types of scenarios?

Tony Umholtz: That’s a great question. And absolutely we’re seeing that in a lot of markets. We lend across the country, so we’re seeing it in multiple, multiple markets. It is — and some are worse than others. But they’re all pretty heated in a lot of ways. One thing I’ll mention just on the waivers of contingencies, I think you’ve got to be very careful with that. I think you need to be very aware of what you’re getting into because when you say I’m just waiving the appraisal contingency, well, if you were to pay $300,000 for a house and it comes in at $280,000, well, the bank is going to use $280,000, the lender is going to use $280,000 as the price point, right? So in that case, you’re coming to the table with $20,000 more in equity. So there is some risk here involved when you waive these contingencies. So I think, you know, I know it’s hard. And I get calls all the time from listing agents on pre-approval letters I’ve sent on behalf of our customers, and they want — they ask me all these questions, and obviously I can’t answer anything personal. But they tell me, “Your input was important because we’ve got 12 offers.” You know? “And I’m taking them all to my seller tonight, and we’re going to meet and go through each one.” Some of the things I’ve learned — one thing I’ve learned from a couple very veteran real estate agents, this might help the audience here, is a lot of my clients will say, “You know, just put the minimum amount of my offer on your pre-approval letter.” So if I’m offering $300,000, just put $300,000 on that letter. So we’ll do that a lot thinking it’s a negotiating tact. But what a lot of these agents have told me, they say, “We actually like the ones that say $500,000 on it.” And the reason why is they know the client’s very qualified.

Tim Ulbrich: They know it, yep.

Tony Umholtz: So they look at it differently than I think a lot of people do because a negotiating is a negotiating. They’re trying to find the strongest candidate that’s going to close. And it’s not just about the price, even. It’s also — price is important, but I think it’s the ease of closing and a lot of times, you’re competing against cash offers too. So you have — and they might be a little lower, so you have to overcome and say, “Hey, mine has financing, but I’ve got to put my best foot forward.” But I’d be very — again, very cautious about waiving these contingencies. I think you have to have some sort of out. If you’re working with a realtor, you have to see if you can negotiate that in. If the appraisal comes in low, it’s going to cause big problems for a lot of people.

Tim Ulbrich: Yeah, and I’m glad you said that, Tony. I think this is a good reminder, you know, something I’ve shared many times on the show before, but especially in the market that we’re in where negotiation is not in your favor as the buyer, right? It’s very much a seller’s market. You’ve got to really take a step back and hopefully objectively evaluate before you’re out there even shopping, what does this mean in the context of the rest of the financial plan, right? And so you know, having a pulse of the market of if you’re looking at homes that are $300,000-400,000, what might that actually end up being in the market? Is it more like $320,000? $330,000? $420,000? $430,000? Depending on offers and so forth. And how does that work out for the rest of your plan? Run out those numbers. Work with your planner, work with your coach to really evaluate that because I think that obviously home buying can be a very exciting, emotional thing. It’s a very important step for many people in their financial plan, but we’ve got to make sure we’re doing it in the right context of everything else that we’re trying to achieve. Tony, the other question I have for you — it made me think about this when you said cash offers, more of them being out there, and I’ve heard the same thing, is how does this then work out for folks that are trying to sell a current home to buy? So I’m thinking of a contingency upon the current sale of a home to buy. You know, is this market even less favorable to them? Or are there strategies that they can employ for those that are in that position where they aren’t able to buy until they also have the sale of their home that they can be competitive against other buyers that are in the market?

Tony Umholtz: We’ve seen a lot of these lately with the contingencies. We’ve had a couple approvals that we’ve done where we’ve had to — the client clearly had to sell their house before they could afford a new one. But once they listed the house, they sold it so quickly that it really was a fast process.

Tim Ulbrich: OK.

Tony Umholtz: So I think the challenge is you don’t want to have that — it’s going to be hard to win over 12 — or say there’s 10 other people bidding on the house at the same time, it’s going to clearly be challenging to win if you have a contingency. But there are some situations where you’ll be surprised that that house sells pretty fast. That’s the other piece is if you want to sell your home, you kind of have to be on your toes and find something pretty quickly.

Tim Ulbrich: Absolutely.

Tony Umholtz: Or negotiate some lease back with the buyer of your home.

Tim Ulbrich: Tony, one of the things I’ve been thinking about lately is considering how hot the market is, considering just the unique factors we have of kind of what’s going on with interest rates and potential inflation and supply and demand and new construction being down, all these variable, like living through 2008, I can’t help but think back to man, are there lessons that we learned there that we should also be thinking about now as we’re really continuing to see this market as hot as it is? You know, essentially is there reason for concern? And I saw a statistic leading up to this episode that says — this was reported from Google — that the search for the phrase “When is the housing market going to crash?” was up 2,450% over the last month, so obviously others are thinking about this. Some research from JP Morgan, quoting that “after robust gains over the past five years, the nationwide nominal house price index is now 40% above its 2012 low point and 4% above the peak that was reached in 2006.” And they go on to say, “If 2006 was a historic bubble, then current price levels should be looked at more closely.” You know, you think about obviously the value of homes going up much faster than we’re seeing in terms of individual’s income, we’re still coming out of some unemployment, you know, related to the pandemic, people getting positions back, so my question here is like, are homes overvalued? You know, what’s the concern of this? And like what is different here from what we experienced in part related to the Great Recession of 2008?

Tony Umholtz: Great questions. I mean, you know, lots of things that you mentioned there. And I’ll give you some feedback from my experience in the business before that time. So I started in the mortgage business almost 20 years ago now. And I lived through that. I was actually — my third year, I think I was in my fourth year in the business was 2005. And I was still pretty young at the time, but I was one of the top loan originators in my company nationally at the time. I wrote 400 loans that year. And I look back at that year, and I was always a very fairly risk-averse person. So you know, I wasn’t one of those lenders doing crazy loans. But back then, Fannie Mae even took loans with no income documentation. I remember running them through Fannie Mae’s system, and they just needed a pay stub and that’s it. So I’ll give you the differences that I’m seeing, and I’ll just equip everyone with the most knowledge they can have here. So back in that timeframe, half of the business I wrote was people who were speculators. They literally were going to buy the homes to either rent them or flip them. That’s what it was. You know, everyone was caught in this train, I’m waiting in line to buy a home to flip it, to rent it. It was that kind of thing. And the other half was owner-occupied clients. So that was the mix of my volume back then. Nowadays, I’d say 95% of the loans that we write are owner-occupied homes. And some of them are like true second homes where people are literally going to be moving to Florida or to another area as soon as they retire. It’s I want to lock in my property now because we’re retiring in a few years. It’s that kind of thing. So the amount of speculation that I’m seeing on an individual buyer basis is much different. Now there’s a lot more institutional landlords out there, hedge fund-types that own rental property, but it’s not to the degree that — I remember back in ‘05, it was just so many people, the greed level, lending standards were much different. We could — like I mentioned, we could do loans with very little documentation. Lots of lenders did — and I’ll share this with the audience if anyone’s ever seen the Big Short movie, I was on the phone, probably 28 years old at the time, with Bear Stearns. I was one of the bigger producers. I remember Bear Stearns mentioning to us that they would buy 100% no documentation loans from us.

Tim Ulbrich: Sheesh.

Tony Umholtz: And I just remember thinking to myself, that’s — and I hadn’t been in the business that long, maybe four years or so — and I remember thinking, that doesn’t seem right. And then of course, couple years later, you know, I had the foresight.

Tim Ulbrich: Come to find out…

Tony Umholtz: But come to find out everything had happened. But the amount of greed that was in the marketplace was a little bit, it was a different environment than it is today. And not to say that things — but the amount of leverage that was in the environment, like anyone could get a loan. It was — people were just buying loans in speculation. Now it seems more fundamental. But you know, the one thing I will add in is interest rates, what does that do? Because if you see interest rates double from here, that’s going to affect affordability. And then from my vantage point, I think with rates being low, prices have risen. But one thing that you should look into is the historical real estate values. And even though we had that peak in ‘06, you’ll notice that we dropped off a lot, and then it typically hovers around that 3-4% long-term appreciation. I think we might be a little over that right now, but I wouldn’t be surprised if we kind of just huddle along that line. Again, never say never, but it’s one of those things where it’s hard to — I don’t see the leverage, the difficulty in getting a mortgage today is much different than it was 14, 15, 16 years ago. It’s not — if anyone’s gone through the process, we really do due diligence, right? We see your income, your assets, we see your credit, we verify everything.

Tim Ulbrich: Yeah, and I was just going to share the same thing, Tony. If anybody has gone through this within the last couple years or even since 2008, you know the difference in terms of paperwork, I saw the difference in terms of transparency of information, easier to understand documentation from a lendee perspective if you’re willing to read through all of that paperwork. So I’m glad you shared that. I think the circumstances are different, and I think it’s important for folks to understand this is not a 2008 type of scenario or 2006 type of scenario in terms of documentation required, in terms of the types of mortgages that are out there, the lending practices, in terms of how conservative I would argue they are today compared to where they were back then. Tony, you said affordability, and that’s something that’s also top of mind for me is you know, I think of pharmacists — obviously, because that’s our community here — where incomes are relatively flat for many pharmacists right now. In some cases, we’re actually seeing incomes go down just because of hours of work that are available and for a variety of industry pressures that we have on those positions — and I’m generalizing here. Of course that’s not true for all positions. But it makes me think, then, about that case where for pharmacists, specifically we may see wages that are flat, obviously housing costs here going up significantly, we’re not even talking about perhaps general inflation in other areas that may be coming into the future. But even beyond pharmacists, like I think this question of affordability is a really interesting one. And you mentioned interest and demand among millennials. I guess the other side of that coin I would ask is like is this market making housing unaffordable for perhaps a generation in some regards? That this is going to impact many people getting into a home and the economic benefits that can come from that.

Tony Umholtz: I think it clearly can influence a lot of people. I mean, you think about in certain markets and just how much prices have gone up, I mean, again, borrowing costs have kept things pretty darn low. That’s helped. But one thing about borrowing costs versus income — and flat income is not, obviously you’re not seeing that gain every year.

Tim Ulbrich: Right.

Tony Umholtz: But normally, the income increases and the increase in prices, it’s not — the increases in prices is outstripped because of that borrowing cost. But you’re clearly right. The one thing that I will throw in, the other thing that’s to me is a little more frightening is rent prices.

Tim Ulbrich: Yeah, that’s right.

Tony Umholtz: They came down right when COVID hit because of the shock to the market, but they’re really surging in most markets. So when I have clients that we do our preapprovals, we see what they’re paying in rent, and it’s eye-opening. So I think that that’s the other side of this is if rents are where they’re at and you look at that affordability, you know, that’s going to be a challenge. And this is one thing we just have to keep an eye on. The markets are — they’ll correct themselves eventually. But the Fed may have to keep rates low longer.

Tim Ulbrich: Yeah. Is that — on the rent side, Tony, I’m sure it’s more complicated than I’m suggesting, but is that a trickle down effect of supply and demand on the buying side? That you know, if there’s not as many homes to go around for people that are interested in buying, you then increase the demand on the rent side, which further drives up rent price?

Tony Umholtz: It’s twofold. So I mean, part of it is supply and demand with rentals too. You know, if you have very little vacancy in your apartment building, you can command higher rents. The other thing you’ve got to watch is as there’s more and more multifamily, which is an apartment complexes or rentals being built, that’ll also put some pressure on rents as well and I think over time will catch up, builders will catch up. It might take a couple of years, but I think there will be an equilibrium, it always does shift. And the other thing I’ll just mention too with COVID is none of us saw COVID coming, right, until it hit. And with the Great Recession of ‘08, we saw some warning signs. You can never predict what it’s going to be. Right? We don’t know this for sure. And you know, we’ve put a lot of safeguards in to prevent some of the things that happened in ‘08. But it could be something different, right? And we don’t know what that will be to impact, but at the end of the day, you need a place to sell. And it was funny, I was on the phone call with a past client this morning. And he had bought his home in 2007, probably the absolute worst time to buy it, and he said, “You know, I just kept it rented.” I think the value got — down here in Florida, there’s parts of this area that got cut in half. I mean, we were hit probably as hard as anywhere in the country. And it came all the way back and is well above what he paid for it now. But that’s one of the things about housing is even investors, if you rent the property, you get a return not just from appreciation. That’s how — this isn’t a talk about investments, but that’s why it’s always important to have that if you own an investment property, that it cash flows, right? So that’s what you’re looking for.

Tim Ulbrich: Tony, one of the other questions that comes to mind here is if I’m someone listening who maybe I’m interested in buying a home, but it’s not a burning need in the moment. I could wait. Is there any merit into hey, let’s let things cool off a little bit, let’s let supply normalize and ride this out for a little bit? Or do you think because of how significant the supply and demand issue is now, that we might be in this type of a market for awhile?

Tony Umholtz: I think it’s going to be awhile before we see things really calm down. I mean, it’s — everyone’s market is different too. I think we have to be clear on that. Most of the country is experiencing a very robust housing market, but every place is different and every pocket of the city can be different. So I think it’s your individual area, but I think overall, in general terms, it’s just going to be up to the person. I don’t think — you know, I’ll just go back and I’ll talk about last year, and I’ll go back to 2017-18. I had conversations with clients of mine, and a lot of these were people that I had done business with for years, so as some of them took a pause, I had a couple of them sold their homes in ‘16 and ‘17 because the market had gone up nicely, said, “I’m going to rent for awhile, then I’m going to buy back in.” Well, that didn’t work so well. So even my own feelings, I remember a couple years ago thinking, things are pretty hot right now, it’s 2019. So it’s hard to predict, and I think you’ve got to look at your family situation. This is a lifestyle decision. It’s not like buying a stock in Apple or Amazon, right? It’s a — you live there. So while it’s an important, big investment, over time, it’s going to be OK. And I think the amount of money you’re going to have to pay in rent will be something you have to keep in mind when you’re paying that rent versus owning a home that you’re building equity in just by making the payments. So if you absolutely don’t have to buy, yeah, you could wait it out, see what happens. But I don’t know how much better it’s going to be. Then the other side of it what are interest rates doing?

Tim Ulbrich: That’s right.

Tony Umholtz: So if we see interest rates moves a half-point higher, then even if prices stay the same and they flatline, you’re going to be paying more per month. So there’s a lot of factors to go into it.

Tim Ulbrich: I’m glad you mentioned the rates again too, Tony, because I think that we often throw around terms like a half-point, quarter-point, that obviously if folks haven’t run numbers before, I’d encourage you to do so. I mean, a half a point, three-quarters of a point, of course as that increases on a $300,000, $400,000, $500,000 loan over 30 years, we’re talking about tens of thousands of dollars of difference, if not more than that. And so this comes back to the conversation about not only where are rates from a time perspective but things like credit and optimizing your credit and understanding your credit score and how to improve your credit, things that we’ve talked about on the show before but obviously why credit such an important part of the financial plan, as we talk here related to home buying and interest rates. Tony, the other trend I want to get your perspective on, you and I have talked about this briefly offline, you know, we’ve mentioned a little bit about the work-from-home movement and perhaps because of this, folks moving more out to the suburbs. I’m also thinking about just beyond their current area, the flexibility that they may now have, not within their area but to move to a warmer climate or to move to a beach town or something that wasn’t on the table before but now because there’s perhaps more flexibility in their work environment that they’re able to do that. So are you seeing those trends, especially knowing where you’re at down in Florida where you’re seeing more folks that are looking for a second home or picking up and moving because they have more flexibility with their work?

Tony Umholtz: The transition has been amazing. I’ve — a couple of stories this week that we have. We have a couple of closings for clients here in Tampa that are from New York City. They can live anywhere. And I’ve been getting a lot of referrals from Miami as well that a lot of folks moving down from New York. And some of them have lived in the city their whole life and just are ready for a change. And they can remotely, and it’s freed them up. I think you’ll see Miami become a major financial district in our country now. I mean, you’re seeing a big exodus of kind of the Wall Street financial firms moving down, relocating their businesses down there. And we’re seeing a lot of it here in Tampa, a lot of second home purchases too for those that can afford them because they can use them and take their kids that might be homeschooled right now or doing online learning. I’ve done a lot of lending on Amory Island, which is down here about an hour and a half south of Tampa. And it’s a really neat spot, but it’s just — the amount of demand because people can do that. They can live there, they can live there part of the time and work there and enjoy the beach. But in other places too, I’ve seen other second home markets around the country where people are taking advantage of this ability to work remotely. And I think the technology has been — this is something that’s always been there. 2020 was a catalyst, right, for all this to happen. And I think you’re just going to continue to see that trend, although there is some of that movement back for some people to get back into the office, especially as the vaccinations have really grown across the country. But I still think you’re going to see this ability to work remotely. Even with me, I’m in the office a couple days a week, and then I work from my home office as well. So we can work effectively both places.

Tim Ulbrich: Yeah, I think every time you and I have connected, Tony, over the last year we’re probably both at home. Sometimes the kids are in the background. It’s just part of the new norm, you know? I think that, to your point, like we saw this coming. I mean, the desire for a more flexible, remote work environment and then obviously the pandemic in 2020 was the catalyst. And it’s going to be interesting to see what goes back, you know, to normal and what stays. You also have the advantage down there of no state income tax in Florida, right? So that’s a bonus for people that are looking there.

Tony Umholtz: We do.

Tim Ulbrich: Let’s transition, Tony. I want to talk a little bit about the pharmacist home loan that you all offer through IBERIABANK and First Horizon. I suspect many of our listeners are already aware of this product from previous podcasts that we’ve had. We’ve got information also on the website, YourFinancialPharmacist.com/home-loan. But I think for many of our listeners, when it comes to home buying, I think of, OK, what are the most common barriers? Well, student loan debt typically rises to the top. And then the other thing I think about is usually the cash available as a new practitioner or a pharmacist who’s getting started to be able to put a down payment on a home. And I think the pharmacist home loan offered through IBERIABANK/First Horizon really allows folks an opportunity that they may have thought otherwise was impossible or weren’t aware of the option that was out there. So tell us a little bit about this mortgage loan option that you all offer. What’s the product about? Minimum down payment, maximum loan amount? And then some of the requirements for one to qualify.

Tony Umholtz: Sure. Well, the product’s been just a great help for so many people. And I think the big advantage of this program is you can do as little as 3-5% down with no PMI. So if you’re a first-time home buyer, you could do 3% down with no mortgage insurance. If you’ve owned before, it’s 5% down, again, no mortgage insurance. And the interest rates are very, very strong. In most cases, they’re better than a client putting 20% down, which is an advantage. And as far as the maximum loan amounts go, we currently are capped at $548,250 as a maximum loan amount for the product. And there’s a minimum credit score of 700. So you have to have at least a 700 credit score to qualify. But other than that, it’s really — that’s the qualifier. So there’s nothing else really you have to be concerned about. There’s not a clear reserve requirement or anything to that degree. And there’s no prepayment penalty on the mortgage either. So you can pay the loan off early if you choose to. Just is a great way to get into the housing market. And PMI is — you look at a $400,000 or $500,000 home, and you’re paying hundreds of dollars a month at that point.

Tim Ulbrich: That’s right. Yeah, great stuff. And we’ll link, again, in the show notes, YourFinancialPharmacist.com/home-loan. We’ve got lots of great information on the site about the product, about home buying considerations, some great educational content there as well. So I hope our listeners will check out that post, “Five Steps to Getting a Home Loan,” again, YourFinancialPharmacist.com/home-loan. Tony, you know, two of the collaborations that we have among others as well that really have been I think a big plus for us at YFP and our community, obviously the work that we’ve been doing with you, tapping into your expertise on the podcast here for pharmacists that are looking for financing options on a home loan purchase. So if you’re in the market for buying a home, I would encourage you to reach out to Tony at IBERIABANK/First Horizon. And for those that are buying and also looking for an agent, a shoutout here to Nate Hedrick, the Real Estate RPh, who is there to help you find an agent in your area that would be a good fit for you. And Nate’s there to walk alongside you in that journey. You can find more information about that at YourFinancialPharmacist.com, click on “Buy or Refi a Home” at the top of the page, and you’ll see more information about the professional home loan with IBERIA/First Horizon as well as an option to find an agent. So Tony, thank you so much for taking the time to join again. What’s the best way that our listeners can reach out to you if they have questions or want to get in touch to learn more about the product?

Tony Umholtz: Definitely by email. My email address: [email protected]. And also our office number, (813) 603-4255. I know it’s all listed on the website, but those are the best ways. We have a great team, and glad to help. Everyone’s situation is different, so we love to help. That’s what we do.

Tim Ulbrich: Tony, great stuff again. Thanks so much for taking time to come on the show.

Tony Umholtz: Thanks, Tim. Good to be here.

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YFP 199: Introducing the YFP Real Estate Investing Podcast

Posted on by yfpadmin

Introducing the YFP Real Estate Investing Podcast

On this episode, Tim Ulbrich welcomes Nate Hedrick and David Bright, co-hosts of the brand new YFP Real Estate Investing Podcast that is launching on Saturday, April 17, 2021. Tim, Nate, and David talk about the mission and why for the show, who the podcast is for, the content that will be covered, and the guests that will be featured on the show. They also discuss the newest guide developed by Nate and David, The Pharmacist’s Guide to Real Estate Investing, which details a step-by-step plan on how to get started in real estate investing.

About Today’s Guests

David Bright, PharmD

David Bright is a pharmacist with a heart for teaching. He’s been a full-time professor since 2009 with a passion for implementing and improving pharmacy services. Themes of “implementing and improving” in the pharmacy space are quite similar to themes of “building and fixing” in real estate, which has been a growing hobby for David and his wife, Heather, who bought their first house more than ten years ago. That fixer-upper house became a live-in house flip, which they sold a few years later, only to repeat the process with their next house. When David and Heather got sick of perpetually living in a construction zone, they pivoted to fixing up rental properties in West Michigan, where they now live.

David invests in real estate as a way to bring greater diversity to financial planning and to fund memorable life experiences with family and friends.

Nate Hedrick, PharmD

Summary

On this episode, Nate Hedrick and David Bright, cohosts of the brand new YFP Real Estate Investing Podcast join Tim Ulbrich to discuss the podcast launch, the why and mission for the show, the target audience for the show as well as the guests and content.

Nate and David also share some of the steps from their guide, The Pharmacist’s Guide to Real Estate Investing. Here are some of the highlights:

Get your financial plan together: Taking stock of your own finances and financial picture will help you to better understand which investment and financing strategies may work best for you.
Time to study up: Learn about and do your research on which real estate opportunities will best match your personal skill set.
Location is everything: Choose where you are going to invest, taking into consideration factors that will impact your investment such as rent to income ratios, population growth, and more.
Choose a strategy: Choose which strategy of investment you plan to implement of the many options, including house hacking, flipping, long-term or short-term rentals, or BRRR.
Build your team: Build your team of professionals around you, specific to your investing needs. This likely will include a realtor who is familiar with real estate investing, a lawyer, an accountant, contractors, and property managers among others.
Double check the math: If you do the math wrong with real estate, it can be a bad experience. If you do your math correctly, with the use of some tools and resources, you can get familiar with the numbers and more easily find a deal where you are comfortable in making a decision.
Make an offer: Keep emotion out of the decision and realize that not every property is going to work out. Stick to the plan and research you’ve conducted in steps 1 through 6 and make your offer.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. And today’s show is a special one, not just because it’s Episode 199 — hard to believe that we’re almost to Episode 200 — but special because we have something exciting to announce that we’ve mentioned on the podcast and in the YFP Facebook group over the last couple weeks and something that really has been in the works for much longer than that. On Saturday, this Saturday, April 17, we’re launching a brand new podcast through the Your Financial Pharmacist podcast channel called the YFP Real Estate Investing Podcast. Now, as much as I love the new podcast and the focus on real estate investing, I’m excited that the hosts of the YFP Real Estate Investing Podcast are two pharmacists, real estate investors, and friends that I have known for awhile, two guys that I have a great amount of respect for in the work that they do as pharmacists and the integrity in which they approach their business and their investing and the heart that they have for educating others and who have both been on the show before. And that is Nate Hedrick, the Real Estate RPh, and David Bright. Nate and David, welcome back to the show.

Nate Hedrick: Thanks so much for having us.

David Bright: Thank you.

Tim Ulbrich: So I know you both have been on the show before. Nate, you’ve joined us many times on the YFP podcast. And David, we had you on not too long ago, Episode 167 where we talked about must-know real estate terminology. But I don’t want to assume that our audience knows your background and really important information that they get to know you as we get ready to launch the Real Estate Investing podcast of which you two will be serving as the co-hosts. So David, let’s start with you. Tell us a little bit about your career, how you got started in real estate investing, and your why behind pursuing real estate investing while keeping your pharmacy career.

David Bright: Absolutely. Yeah, I started in pharmacy at 16 working in the drug store and went from there where pharmacy school, community pharmacy residency, and really just loved that outpatient community pharmacy drug store opportunity that was there. A lot of the implementing and improving of non-dispensing clinical services really got me excited about that outpatient space. And then later as well with academia, that implementing and improving also mirrors hobby of real estate, the building and fixing of real estate. And so that was something that my wife and I had enjoyed too. We bought our first house as a short sale. It need a lot of work, so that kind of live-in flip was a way that we could diversify our financial plan, also just create some extra money for those memory-making experiences with the family. And so we’ve just enjoyed kind of doing that over time. At some point, we decided we didn’t enjoy living in a construction zone anymore, so we started enjoying doing that in other properties. But that’s just been a fun hobby along the way and part of our why behind real estate.

Tim Ulbrich: Great stuff, David. And I know you and I have had this conversation before, but we’ve known each other dating back to community pharmacy residency all the way back in 2008-2009. And I like the connection you’ve made before about really some of the challenges around developing, implementing, evaluating patient care services in the community pharmacy setting and really the connection between some of the interests and passions that you have in real estate as well. So excited to have you experience, your perspective, on the show, really to be sharing that information with the community but also what I have always taken away is really your passion to help other pharmacists and really lead with education, really teach some of these principles, and help folks understand how they might be able to apply that to their own personal situation. So Nate, as I alluded to, we’ve had you on the show many times. I think now officially the most frequent guest on the YFP podcast. So starting way back on Episode 040 and 041 where we had a two-part series talking about 10 things every pharmacist should know about home buying and then most recently on Episode 193, building v. buying a home, what to consider. And that was in early March of 2021, and I think many of our listeners know you as the Real Estate RPh. So for those that haven’t caught one of your several — I think at least five or six at this point — episodes on the YFP podcast, Nate, tell us about your background, pharmacy career, and how you ultimately ended up as a realtor and real estate investor.

Nate Hedrick: Yeah, and I expect the trophy for most frequent guest to be arriving.

Tim Ulbrich: It’s on the way. It’s on the way.

Nate Hedrick: Alright, good. Yeah, no. So I started off full clinical track. I did a residency right after graduating from Ohio Northern back in 2013 and really fell in love with the pain and palliative care space. And was a hospice consultant for a long time and really just, I loved that role. And then as time went on, I kind of moved into more of a sales-y type track where I was working with outside clients and really kind of touting what the other pharmacists were doing rather than doing that work myself. And as all that was happening, I was getting this interest in real estate and real estate investing. I think the story I tell all the time was I read “Rich Dad Poor Dad,” and my mindset just completely shifted. So when I should have been going out and getting my BCPS or some sort of additional certification in pharmacy, I told my wife I was going to get my real estate license. And she looked at me like I was crazy at first, but we’ve really fell in love with where that stake in our career and the opportunities that I have. And so back in 2017, I took that same idea and launched Real Estate RPh, a website all about educating pharmacists about home buying and home selling and real estate investing. And really just have been growing that ever since. And so really excited that we are able to launch this podcast today. I feel like it’s the culmination of a lot of that stuff coming together, that idea of education and connection really in the purest form. So I’m really excited about this.

Tim Ulbrich: Yeah, and this really has been in the works for I would say a couple years. I mean, it started with the idea of hey, we were seeing a growing interest of real estate investing, wanting to learn more among the community, how can we help provide some education, some awareness, how can we connect pharmacists with other pharmacists, and all of that really led to hey, let’s start with a podcast, let’s start with the education, I think something we’re all passionate about. And then let’s see where it goes from there into the future. So let’s dig into the new podcast launching this Saturday, April 17, on the YFP podcast channel. Nate, what’s the mission and the why of the show?

Nate Hedrick: Yeah, the mission is actually pretty simple. It’s to empower pharmacists to leverage real estate as part of their financial plan. We realized that not everyone’s listening to this podcast trying to take over a real estate empire, right? And really, when David and I sat down and started thinking about what kind of philosophy are we going to have behind the show and what kind of guests are we going to have on the show and all that, we really sat back and said, we don’t need to replicate what’s already out there. There are some fantastic resources in the real estate space, Bigger Pockets being kind of the most obvious one with excellent podcasts and books and all these things that I think really promote the idea of real estate investing. But what we felt like was missing was this idea of how do you couple a really fulfilling career, i.e. pharmacy, and real estate investing? How do you do both? And so our whole idea with this show is that we’re going to show you how to not just leave pharmacy but stay in pharmacy while also investing in real estate. And so that’s really the overarching philosophy behind this program and this show.

Tim Ulbrich: Great stuff. And I think to reiterate that, that really is going to be the focus of the content and the audience that we want to reach. So you know, not to say some folks may get started and eventually build that empire, Nate, that you talked about, but knowing the vast, vast majority of pharmacists that are listening have either not gotten started yet but have the interest piqued, wanting to learn more, or maybe have taken a step or two, might be saving for that first property, might have bought a property or two, but really looking to take it further from there. And that’s going to be the focus of this show. So David, with that in mind, you know, what can our listeners expect? The kind of guests, the topics that we’re going to be covering as they listen to this podcast that we’ll be launching each and every Saturday?

David Bright: Yeah, I think the obvious one is we don’t really intend on focusing on pharmacists that have left their career of pharmacy. That’s not really our focus. Again, we’re focused on pharmacists that want to have real estate as a part of their financial plan. So there’s a lot of other, better resources out there for those kind of things. But for those that are looking for tangible and practical tips on getting started, on growing, on getting better at what you’re doing, that’s where we’re focused. We’ve got guests that are on talking about short- and long-term rentals, talking about house flipping, talking about rehabbing, property management, taxes, lending, all those different things go into buying your first or your second or your fifth property. And so focusing, again, on ways that you can jump into that and make that even better.

Tim Ulbrich: Yeah, and our goal is, David, you know, I think one of the things we’ve discussed thus far is that real estate investing can look like a lot of different things. And we’re going to obviously highlight a lot of different stories that will emphasize that. And it’s probably going to take a lot of guests and a lot of episodes to even fully uncover the variety of options that are out there. And so we’re not suggesting that there is a one right path to real estate investing. What we want to do is explore many different areas, feature many different stories, the good, the bad, the ugly, make sure we’re representing all sides of that and then really give folks an opportunity to go learn more and say, ‘Oh, that’s interesting, I think that might fit or might not fit for my personal situation,’ as they evaluate where real estate investing does or does not fit in the context of their financial plan. So Nate, if someone has a question about real estate investing that they would like to be answered or perhaps they have a story that they want to have featured on the show, where can they go?

Nate Hedrick: Yeah, and so as this podcast drops, we’re going to also be launching a new website just to help out with that. And so YFPRealEstate.com will be your go-to source for getting in touch with us, asking questions, you can apply to be a guest on the show, all sorts of stuff. So as this podcast launches and you guys start listening here, you can head over to YFPRealEstate.com. And then we will also have — we’ve already launched, and it’s been running for about a week now, and that’s a Your Financial Pharmacist Real Estate Investing Facebook group. So if you’re looking for community, looking for a place to connect with others, we’ve already seen some great photos posted and people talking about their investments already on there. So definitely check that out.

Tim Ulbrich: Yeah, I’m glad you mentioned the Facebook group, Nate. One of the goals we had with that group and with this effort overall is to connect other pharmacist investors with one another. And we had a question last week in the group that was in essence like, “Hey, where are you from? Welcome to the group. Where are you from? Tell us a little bit about what you’re hoping to get out of this group. Tell us a little bit about your investing, what you’ve been working on.” And to see pharmacists, “Hey, I’m from Buffalo, New York,” “I’m from Columbus,” “I’m from this part of the country,” I think we’re going to see a lot of that connection start to happen organically. So I hope folks listening will join us in that Facebook group as well, which we’ll link to in the show notes. David, I want to come back to the concept that we don’t feel like real estate investing is something that folks have to choose it’s either that or it’s my pharmacy career. We really feel like folks can be successful in their pharmacy career, still be passionate about what they’re doing and what they’ve spent a lot of time and money to train to do and still pursue and potentially reap some of the benefits that come from real estate investing. So David, tell us, how can one enjoy their profession while also investing in real estate?

David Bright: Yeah, I think it’s the same kind of answer that you think about when it’s how do you get 700 prescriptions and 50 flu shots done in a Monday in a drugstore. It’s you have a team around you that helps you, right? Like this isn’t an individual sport with real estate. Like I know that I am not a realtor, I am not a contractor, I am not a property manager. I’m not a lot of those things. But I can find people who are really good at each of those areas. And so by bringing that team together and by having some direction and leading that team, I can really step back from the day-to-day side of it and let other people that are really good at what they do do what they are good at. And to me, I think that’s how a lot of pharmacists can find real estate investing as a part of their financial plan without it taking over or taking too much time.

Tim Ulbrich: And one of the things that I know I’ve heard both of you talk about and seen you role model as well is that the value that a team can bring to the process and really thinking about how to begin to build your real estate portfolio with both the team and the system in mind. And I think that’s really critical. I suspect many folks listening are not only busy in their full-time career as a pharmacist but they perhaps have family, other commitments, other priorities, other things that they need to be doing, want to be working on, things that they enjoy. And so we need to be able to do this, if we’re going to do it, in a way that is realistic with those other responsibilities and those other roles that one has. So Nate and David, you created a really valuable guide, the Pharmacist’s Guide to Real Estate Investing, that details essentially a step-by-step plan on just that: how to get started in real estate investing. And we’re going to link to this in the show notes, and I’d like to walk through this for a few moments to give our listeners a taste of I think some of the information and the content that they’re going to get on the show. But that guide, the Pharmacist’s Guide to Real Estate Investing, you can download that guide for free by visiting YFPRealEstate.com or you can text REIguide, all one word, again, REIguide, to 44222. And you can download a copy of the guide that way as well. So Step No. 1 of this guide is get your financial plan together. So a topic obviously near and dear to my heart. And Nate, tell us about why this step, getting your financial plan together, is really such an important first step.

Nate Hedrick: Yeah, I think a lot of this comes back to the original mission of Your Financial Pharmacist as a whole. I think back to, Tim, when we had our very first meetings years and years ago, and I said, you know, I want to be the real estate side of what you’re trying to create here. And again, it all stemmed from that idea of you’ve got to have a good financial house first before you can move on and do anything else.

Tim Ulbrich: Yeah.

Nate Hedrick: Again, as I approached my own real estate investing, we really stepped back and did a lot more time with the education side and the reading side because if you don’t have that financial base, that strong financial base, it becomes very, very difficult to escalate or to be successful in the real estate investing side. So we put that first because, again, it’s really the core philosophy of YFP, but it’s also just absolutely essential if you want to be truly successful I think in the real estate investing side.

Tim Ulbrich: Yeah, and one of the things, Nate, I think you mention this in the guide that I like is if you think about real estate investing being similar to pharmacy school, personal finance is like your pre-reqs, right? Your basic science courses. So before we build upon that, before we get into our therapeutic courses, other more advanced content, we better be sure we’ve got a really good foundation or we’re going to end up in trouble when we get on rotations and we have the preceptor that exposes the lack of that information. So that’s Step No. 1, get your financial plan together. Step No. 2 is time to study up. So I love that you guys write that first, you need to learn the basics and then can decide what real estate investing niche fits your skill set. So David, talk to us about how to approach learning about real estate investing and what resources you have leaned on as you got started in your own journey.

David Bright: Yeah, I think just like you wouldn’t recommend a drug therapy without having any therapeutics courses, you need to have that time to study up. And with setting aside that time is probably the most important thing for the life of a busy pharmacist. And so for me, I found that during my daily commute, it was really easy to plug in podcasts and audiobooks. And so we will — as a part of the show, we have some outro questions where each guest recommends some resources. And so I would encourage you to take notes as we get through there. And we always put those things in the show notes as well. If you’re looking for good books and resources that got each guest started, we’ll have those going as well. So we’ll have several recommendations coming over the next few weeks. ANother thing I think are groups, whether that’s in-person meetups — at some point we can hopefully be doing that again — and then also just gathering with other friends and people that can bring accountability and education and you can share in that with. So carving out that time I think is really important, but I also think that there’s some even a life of a busy pharmacist, you can find 15 minutes here and there to get through an audiobook or podcast slowly.

Tim Ulbrich: Yeah, and David, I’m envisioning a future state, post-COVID perhaps, where we have a real estate meetup of pharmacists at a state or national meeting or other venues, which is really exciting to think about. What is your over-under, David, on the number of times we’re going to hear guests recommend “Rich Dad Poor Dad” in the first 50 episodes?

David Bright: Oh, 48 out of 50 I think is what I’m thinking.

Tim Ulbrich: Yes.

Nate Hedrick: We’re going to have to strike that from the options. You can’t pick that as your favorite. I’m sorry.

Tim Ulbrich: So Step No. 3, location is everything. Nate, you know this, obviously as an agent. So choosing where you’re going to invest in real estate is such an important step. Nate, give us a broad overview of some factors to consider, whether somebody is choosing the location for their first or perhaps their fifth real estate property.

Nate Hedrick: Yeah, absolutely. So really it comes down to assessing those locations. I think as we look at investors when they are either starting out or they’re looking at a new market, figuring out where to invest is one of those big steps in terms of OK, well, is it going to be something that I need to have close by? Do I have someone there that’s a part of my team that I can tap into? Do I know anyone there already? And then it gets into the actual macroeconomic factors of that location. So is the city seeing population growth? Job market — is that diversified? What’s the rent-to-income ratio look like? All those things get factored into it. And so there are — you can be successful anywhere at any time. Anybody that tells you, oh, you can’t invest there. The market doesn’t work. It works for something. But what you have to find is a way to pair that location with your strategy and your goals. And so I think figuring that out together can be difficult. So we really try to address that in the guide about here are some factors to consider before you start moving forward.

Tim Ulbrich: And Step No. 4 then is choosing a strategy. So we’ve got our financial house in order, we’ve soaked up lots of real estate investing knowledge, we’ve decided on a location, and David, what comes next when one evaluates the strategies available?

David Bright: I think that as you’re figuring out that strategy, that’s just really important because you think through each potential real estate acquisition through the lens of that strategy in order to make sure that it’s effective. Like you may find this beautiful lakefront property, and if you run the numbers as a long-term buy-and-hold where someone moves in there and lives there for years, it may not work nearly as well as if it was an Airbnb or VRBO kind of vacation rental. The numbers may work much better that way. So figuring out your strategy and the way that you want to invest in real estate can really help you figure out which property is the right acquisition for that plan.

Tim Ulbrich: Yeah, and we’ve talked about a few. I know you mentioned a couple earlier in the show, but we’ve had on guests talking about house hacking, we’ve had Nate on to talk about flipping, we’ve talked about long distance real estate investing, we’ve talked about using the BRRRR strategy. So we’re going to dig into these and others as pharmacists, again, evaluate, OK, what’s out there? And then as I learn more, which of those may fit into my financial plan. So Step No. 5, build your team. Nate, we talked about this briefly already but team, team, team, is so important when we think about real estate investing not only in the long-term success but also being able to make the most of our time and the limited time that we have. So talk to us about this concept of building a team and who we should be thinking about being included on this team.

Nate Hedrick: Yeah. And this applies whether you’re investing locally down the street or whether you’re investing across the country. There are just certain members that you’re going to need to build into that. And we try to one, demystify that process but also make it feel easy. I know every time I heard, “You have to build a team to be successful in real estate,” it just sounded kind of overwhelming. Like I don’t know how to build a team. I don’t know how to do any of that. So we’re trying to break that down and make it a little bit easier. But the idea is that you need to have that real estate agent, you need to have potentially a lawyer or an accountant, a financial planner. You know, there are all these different members that can help you out. And so how do you tap into the good ones? And how do you get to that team more quickly? So the guide helps with that a little bit. And then it also leads to our expansion of the real estate concierge service, which we’ve been doing on the home buying side for years but really this new model is looking at how do we connect you guys with investor-friendly agents? So again, head on over to YFPRealEstate.com. We have access to our real estate concierge service. We can get you connected to a local investor-friendly real estate agent, somebody that can actually help elevate that business wherever you’re trying to invest.

Tim Ulbrich: Very important distinction between agents that, you know, specialize on the primary residence home buying side and those that are familiar with the investing side and ideally maybe even have some experience themselves or have worked with many clients that have gone through that path and know what they may be looking at to be able to advise them. Step No. 6, David, the math. So we’ve got to actually figure out is this a good deal or not? And so Step No. 6 is double or triple check the math. So talk to us about the importance of running the numbers and obviously something we’ll dig into in much more detail as we go throughout the show on individual cases and scenarios. But you know, how is the math run? Why is it so important? Talk to us about this step.

David Bright: Yeah, I think we’re all familiar in the pharmacy space that if you do the math wrong, that can be life-and-death for a patient. And I think the parallel with real estate is if you do the math wrong with real estate, it’s life-or-death of that deal. Right? It can be a really, really bad experience if you do the math wrong. If you do the math right, you check it well, and that ends up being a great investment for you, then that’s also a huge win. So there’s some strategy in doing those numbers correctly. There’s some online calculators and YFP has one, I’m sure we’ll put the link in the show notes today. But those online calculators are just like in the profession of pharmacy where there’s different online calculators for things that we need as well. So just getting familiar with those numbers to the point where it becomes really understandable and simple of how to evaluate those deals makes it just that much easier to find something that you’re comfortable with to break through that analysis paralysis and to jump in.

Tim Ulbrich: And we will link to the YFP rental property calculator that David was alluding to, we’ll link to that in the show notes. And finally, Nate, Step No. 7 is we’re ready to make an offer. So talk to us about really two key points to keep in mind as folks are getting ready to make an offer.

Nate Hedrick: Yeah, I think when you get to this point where you’ve done all this background work and you’ve gotten to this point where OK, I think this is a deal that we’re going to go put this offer in, there’s two really important things to keep in mind. And that is that you need to keep emotion out of it. This is an investment. This is not your forever home. And so once you’ve done all that math like David said, don’t ruin it by ignoring the math and making a bad decision. So keep the emotion out of it, walk into that deal with ‘here’s where we’re going to go’ from a numbers standpoint, and we’re not going to vary from that. And then realize that not every good house is going to work out. Even if everything looks great, if you can’t get to that right negotiating spot, it’s worth it to walk away. So I think, again, Step 7 really should be do what you did in steps 1-6 and make sure you stick to it because that’s really what the offer is all about is that you’ve done all this background work to stay in line with what you’ve decided ahead of time.

Tim Ulbrich: Great stuff. So we just scratched the surface on these seven steps that are part of the Pharmacist’s Guide to Real Estate Investing, which you can download at YFPRealEstate.com or you also can text REIguide, again, all one word, REIguide to 44222 to get a copy. So I hope that you will join us for Episode 01 of the YFP Real Estate Investing podcast. It’s going to launch this Saturday, April 17, where Nate and David talk with Tim Baker and I about how real estate investing may fit into a pharmacist’s financial plan. We also talk about considerations for how long someone should be in their personal finance journey, where you should be perhaps with debt repayment, where you should be perhaps with your investing plan before jumping into real estate investing, and then we also talk about how one may balance real estate investing with a busy pharmacy career. So you can listen, again, to the YFP Real Estate Investing podcast right here on the YFP podcast channel. It’s going to launch each and every Saturday. What better way to start the weekend than learning about real estate investing, hearing from other pharmacists that are along this journey as well? So David and Nate, thank you both not only for your time on this episode but I know firsthand the time and effort that goes into putting a podcast together. It’s both exciting and exhausting at times. There’s moments of re-records, there’s moments of that was an episode that went great, but really an awesome opportunity as well to meet other pharmacists and connect with folks all across the country. So I appreciate your passion for this topic, your willingness to teach others, and the time commitment that you’ve made in being able to put this podcast together.

Nate Hedrick: Yeah, we appreciate you letting us do it. This has, you know, really been, like you said, months and months in the making. And it’s really fun to get to this point, and David and I have been having a really good time interviewing the initial guests we’ve been working with, and I can’t wait to see where we go from here.

David Bright: Yeah, we’ve got some really inspiring people coming on in the first few shows and so I’m really excited about it and looking forward to it kicking off officially on Saturday.

Tim Ulbrich: Great stuff. So again, this Saturday, April 17, I hope you’ll join us for Episode 01. And as always, we appreciate you joining us on this week’s episode of the Your Financial Pharmacist podcast. Have a great rest of your week.

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YFP 193: Building vs Buying a Home: What to Consider

Posted on by yfpadmin

Building vs Buying a Home: What to Consider

On this episode, sponsored by Live Oak Bank, Nate Hedrick, the Real Estate RPh, joins Tim Ulbrich to discuss considerations for building vs. buying a home, the pros and cons of building, lending considerations when building a home, and common pitfalls when choosing to build a home.

About Today’s Guest

Nate Hedrick is a 2013 graduate of Ohio Northern University. By day, he is a clinical pharmacist and program advisor for Medical Mutual. By night and weekend, he works with pharmacists to buy, sell, flip, or rent homes as a licensed real estate agent with Berkshire Hathaway in Cleveland, Ohio. He has helped dozens of pharmacists achieve their goal of owning a house and is the founder of www.RealEstateRPH.com, a real estate blog that covers everything from first-time home buying to real estate investing.

Summary

Nate Hedrick, the Real Estate RPh, digs into some important considerations to keep in mind when planning to build a home versus buying a home, how the process for building a home differs from purchasing a pre-existing home, the main approaches to building, and important questions to ask your builder or developer when building in a development or on raw land.

Nate shares his personal experience with his clients in the real estate market and the various motivations for building a home instead of buying. Those who choose to build a home over buying a pre-existing home may be motivated by both the nature of the current housing market and a desire for a variety of customizations to the home.

Nate outlines the many pros and cons when building a home. Benefits of building a home include the level of customization on design based on the builder, creating the home that you want but can’t find in the market, and that new home feeling. Cons when building include the time it takes to complete the home, usually around 9 months, as well as the financial process differing for building a home from the process for buying a pre-existing home.

The two main approaches to building a home are examined: working with a builder or developer to purchase and build on a lot or buying a plot of raw land. When working with a builder or a developer, clients can expect to have a concierge type experience, whereas buying raw land may require purchasers to perform more tests and do additional research to ensure that the land will be viable for the build. To avoid major issues, buyers should include their real estate agent and builder in the entire process of buying and building on raw land. Similarly, when working with a builder or developer, buyers should include their real estate agent in the process as your agent acts as an advocate throughout the buying and building process.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Nate, great to have you back on the show. How you been doing?

Nate Hedrick: Tim, great. Always good to be here.

Tim Ulbrich: Excited to have you back. We had you on Episode 197, Ways to Reduce Your Monthly Costs, and we have some exciting news coming up. Details will be forthcoming. But we’re going to be launching a YFP real estate podcast. Our goal is weekly content for real estate investors, either current investors, pharmacists that just want to learn more, that have been thinking about it but haven’t pulled the trigger. We have heard loud and clear from the YFP community that they want more information on real estate as an investing path. We’ve brought more content in 2021, at the end of 2020. We’ve got more coming ahead. And more information certainly will come. Nate Hedrick is going to play a big role in that effort. So Nate, exciting times ahead, right?

Nate Hedrick: Yeah. I’m really excited. It’s going to be a pretty cool podcast, and we’re bringing back another YFP past guest. We’ll keep it a surprise for now. So excited about all that.

Tim Ulbrich: I love it. And I think you and I, we’ve talked about this extensively, but we know that many pharmacists have inquired about real estate investing. And we have seen firsthand the value that can come from showing examples, stories, the good, the bad, the ugly. And for pharmacists that are thinking about this or even have begun this journey that can see other examples all across the country and of course connect with those folks. And so we’re excited to bring this community together of pharmacist real estate investors. Stay tuned. We won’t announce the exact date of launch or any of that at this point, but wanted to put that on folks’ radar that we’re going to have some more great content coming for you related to real estate investing. So Nate, we’ve been talking a lot about home buying on this show. But something we have not talked as much about is building a home. And I’m excited to dig into this topic and talk through some important considerations to keep in mind if you’re planning on going that route and how the process may differ from buying a home. And this information that we’re going to draw for this episode of which we will link to in the show notes comes from a post on your blog, The Real Estate RPh blog, and that post is 20 questions to ask if you’re building a home. So we will link to that. And this episode is really meant for folks that have been interested in this topic, are thinking about building a home, on the fence about building versus buying. And so we’re going to dig into topics surrounding that. So from what you have seen, Nate, with your clients and in the real estate market, you know, how prevalent is this? Are folks often thinking about building a home instead of buying a pre-existing home?

Nate Hedrick: Yeah. It really depends on the market, but I’m seeing more people going this direction simply because the inventory has been so low recently. With the way the market’s been — actually, I just heard about a client recently that looked for a house for about 2.5 months and there was just nothing. Anything that was coming along was going $20,000, $30,000, $40,000 over asking. And it just became untenable. So they said, ‘Look, we’re just going to sit back, we’re going to renew our lease for another year, we’re going to go ahead and build.’ So I think sometimes it’s something that’s being forced upon people, but other times, you just have someone that goes in and says, ‘Look, we know what we want in a house. We can’t find that in our market today. We’re going to go out and build it, right? We’re going to find the specific spot that we want it to be, and we’re going to get the exact house that we want. This is how we’re going to do it.’

Tim Ulbrich: Yeah, and I just had a similar conversation a couple weeks ago with a pharmacist down in the Raleigh, North Carolina, area. Same thing, you know, very hot market let alone just what we’re seeing national trends in that area specifically and prices where homes were going relative to asking said, ‘You know what, we’re just going to build the thing,’ which I’m guessing is easier said than done as we’ll talk about but is certainly a consideration. What other motivations might folks have? I mean, is it typically just demand? Is it I can’t find anything, these custom aspects that I want? Like what are you seeing from folks in terms of motivation to build?

Nate Hedrick: Yeah, a lot of times, it just comes down to if you know what you want or if there are specific things that you want in a home and it’s difficult to find in that particular market, then you can go out and build it, right? So if you are — and actually, it’s funny. My wife and I were running into this recently. We’ve been kind of casually looking at other houses, just to see what else it out there, and keep coming back to the fact that like if we were to really move, I don’t know that I’d want to go get this big, gigantic house, right? I’m more interested in the land and putting our kind of style house on it. And there are other people that fall into that same category. So I think there are a lot of different motivations. But if you want that true customizability and that feeling of like the brand new car, right, that’s where that home building usually tends to come in.

Tim Ulbrich: Now Nate, you and I both know — especially you as an agent — that when you say we’re “casually” looking, that’s a done deal, right? I mean —

Nate Hedrick: No, I look at enough real estate to be able to look at it casually I think. Hopefully.

Tim Ulbrich: That’s true. So high level as we start this conversation, and we’ll dig in in more detail about what are some specific considerations when you’re considering building, whether it’s working with an agent or financing, common mistakes that folks make, but high level, pros and cons of building. You know, for folks that are thinking, yeah, maybe it’s us, maybe it’s not us, like what are some things that folks may want to think of when it comes to making this decision.

Nate Hedrick: Yeah, the biggest pro is the full customizability. And this can vary based on the actual builder, right? Some builders are going to give you absolute customization from floor plan to design to fixtures. And even if you don’t get that level, right, there are going to be 10 floor plans to choose from. And within that, you can pick your countertops and your cabinets. Again, it gives you that full range of customizations. If you know exactly what you want or are close, 80% of that you know and you can get the rest of the way, that building allows you to get that full customizability. The real con, though, right — or the couple of cons I guess would be timing. So obviously it takes time to build that house, especially if you’re customizing it from the ground up. You’re looking at the very minimum nine months from that date of contract, usually longer, to really get that home built. So waiting game is there. You’ve also got a different type of lending that goes on. And we can talk about this more. But construction loans are very different than your traditional conventional mortgage. And so there’s other stipulations that go with that, some other fees, and it can make it a little bit more tricky, basically.

Tim Ulbrich: And when you talked about customization, Nate, never have gone through this process. You know, I’m sure some folks look at that and they’re like, that’s incredible. I’ll get to choose every detail. I look at that and say, my gosh, I don’t even know what shirt I’m going to wear on any given day let alone what the knobs are going to look like. So is there a wide range of like if you want to keep it simple, builder may say, ‘Here’s Option A, Option B, Option C.’ And then the details are already contained within that? All the way to every little detail is negotiable along the way.

Nate Hedrick: Yeah, it depends on the builder. A lot of times what I’ll see — for the most part — is they’ll offer 3-5 options for a given set of whatever, right? So they’ll say, ‘Your countertops are coming from this supplier. And you’ve got from marble to granite, and these are the preferred options.’ And you’ve got an allowance for that is how they often do it. So they’ll say, ‘Cabinetry allowance is $14,000, and we’re getting it from x, y, and z cabinet maker.’ So then you can go to that particular site or they’ll a lot of times have handouts that you can look through, and it narrows down your options, right? That’s the most common setup. The other cool thing I’ll see a lot is where high end, especially high-end purchases and high end builders will offer a designer as part of that process where you can sit down with them for x number of hours as part of that fee or the cost of building that house, you get x number of billable hours with that designer to pick and choose all those things. And a lot times, those designers will bring with them ideas and collections where they’ll say, ‘Well, if you’re going to choose these cabinets, these are the drawer pulls I recommend.’ Again, you can totally get into the weeds, but that can make that analysis paralysis much, much easier to manage.

Tim Ulbrich: And it always stays on budget, right? I mean, it’s always on budget.

Nate Hedrick: You know, it’s funny, again, these allowances, they offer those but you can pretty quickly break them if you want to.

Tim Ulbrich: I’m sure. I’m sure. Well, it just reminds me like, no judgment here, it’s just human behavior. If I were looking at a home and there were some options involved, like you kind of make one decision that I would suspect has a domino effect on other things that you want to do. So since you talked about the lending piece being different, let’s start there. You mentioned construction loans, which are of course a different animal than conventional home financing, which even within that we’ve also got multiple options we’ve talked about on the show before. Most recently, we had Tony Umholtz from IberiaBank, Episode 191. We talked about 10 common mortgage mistakes but in there talked about some of the financing options. So Nate, talk to us here about lending considerations. You know, what exactly are we dealing with when it comes to construction loans? What’s different? How does this change or not change things like pre-approval and down payments and timing? Walk us through that.

Nate Hedrick: Yeah, it’s fairly complicated, actually. I’ve been meaning to like put together a post and digest this because there’s not a lot of great resources out there that actually walk through this. But the idea is that you’ve got two phases to think about when you’re thinking about a construction loan. And again, a lender is probably going to beat this up and say, ‘Well that’s not what you call it,’ but this is how I explain it, right? So you’ve got — we should have Tony back with me, right?

Tim Ulbrich: Yeah.

Nate Hedrick: But you’ve got this kind of pre-build phase where you’ve got to pay for either the land and the lot, right, the location, and then you’ve got to start paying that contractor, that builder, for some of the materials. So before there’s ever a house there, there’s still costs being incurred. So there’s this construction phase of that loan. And then after, when it’s done, you actually have a mortgage. You have a house that’s paying a 30-year fixed rate mortgage or whatever. And so there’s a number of ways that lenders will break that down. Sometimes they’ll do separate loans. You apply for one, you get the construction loan, you go through that, then you will create basically a mortgage that will pay off that construction loan and then go from there. Sometimes you can do a combined process where the loan will be all in one. They call it a single close often where you’ll close once on that construction loan and it will convert to a 30-year fixed mortgage at the end. It varies by lender, there’s advantages and disadvantages to both. It’s a whole separate podcast episode just to talk about that. But the idea is that you want to make sure you have a conversation. It’s not like going out and getting pre-approved for a $500,000 house. There are considerations in terms of well, is the lot or the land included? Right? Is that included in the finance or do I have to pay for that lot in cash? Again, a number of considerations that come up as you start down that road.

Tim Ulbrich: And so speaking of finding a lot to buy and where folks look and buying land, you know, that to me seems like something that could be both exciting and overwhelming. And I’m used to my typical searches for a home on Redfin and Zillow and things like that. Is it same type of process, you know, in terms of finding a lot to buy, where folks look, what makes a good lot, a bad lot? What are things that folks need to consider here?

Nate Hedrick: Yeah, so there’s two main approaches to this. So one is that you’re going to — that is kind of the more traditional option, which is that a builder or developer has purchased several acres and they develop that into a neighborhood, right?

Tim Ulbrich: OK.

Nate Hedrick: We see this all the time, right? Coming soon, houses starting in the $300,000s, join Orange Village or whatever it is.

Tim Ulbrich: Yes.

Nate Hedrick: You see these. And a lot of times what happens with that is you’re not going out and finding and hunting down a lot. It’s the full concierge package all put together. You go out to the builder, they say, ‘We have 40 lots that we’re preparing to be built upon. You can pick your spot on the street. Here’s our preferred builder or builders.’ A lot of times they’ll have anywhere from one to three builders that they work with on those development lots. And you basically find your lot that way. The other option is to go out and buy raw land. And you can find these on the MLS, you can find them on Craigslist, you can drive around and see some with a sign in the yard. And you can buy raw land and then go out and find your own builder who will come out and custom build on that particular lot. And so the two approaches are very different. One is a much more kind of put together process, going out and actually going to that developer on that particular build lot whereas the other can be much more flexible and a lot of times, you get your truly customizable builds when you’re talking about going out and buying a plot of land and then bringing in a builder to come do that plot.

Tim Ulbrich: And in the first example, Nate, you’ve given, which I drive by those all the time, right? So you see homes for sale. That seems obviously, you know, concierge is probably a good way to think about things kind of customized and put for you together, it’s packaged together, it’s .25 acres or whatever be the lot size. You know it’s ready for water, sewer, all that stuff taken care of. You have comps of that obviously based on the neighborhood. The other one to me is both intriguing/overwhelming. I was just driving by a property yesterday here in Columbus. It was 131 acres for sale. And I’m like, that’s interesting. I don’t know, it’s by the interstate. I was like, there could be something cool you could do with it. And then I stopped right there, right? Because you start to think about like, what is a comp for 131 acres of land like this? And what about being ready for sewage and water and things like that? So any thoughts for folks that are going more that route of I’m just looking for random land that’s out there and putting a home where it may not be as put together for them, if you will. What are those things? I’ve listed a couple, thinking of comps for land, water, sewer, things like that.

Nate HedricK: Yeah, absolutely. So you have a due diligence period on raw land like that where you can start to assess those things, everything from getting like a geotechnical survey, something as simple as a soils test to determine if the soil is appropriate for bearing the structure that you’re talking about. This is a particular problem in certain areas like I think about my in-laws that live in Pittsburgh. So there’s a lot of hills, there’s a lot of old mine shafts, quite honestly — that sounds ridiculous, but that’s a real problem that you contend with as a developer out in Pittsburgh. And so you have to do these site and soil samples to make sure that you’re going to have supportive structures to be able to handle the house that you want to build there. You mentioned hookups, that’s a huge one, right? So if you are out in the country, you might not have access to city water. You might have to put in a septic system and dig a well and again, that well might need to be 100 feet deep, 200 feet deep. Like who knows? Right? If it’s truly, truly raw land, these are all things that you would need to figure out. And so a lot of times what you’ll do is you’ll find a piece of land that you’re interested in and either the seller of that property has done all that work for you and they can say, ‘Here is the site and soils test. Or here’s the survey that we’ve done. There’s already a well. There’s — whatever, you name it.’ Right? They may have done that up front or you can order that yourself. And there are companies that specialize in this. And a lot of times, your agent will actually help you coordinate with those companies. You can often go to your builder because your builder will have the specs needed to make those decisions. And so I often recommend that if you’re going to be doing this, it’s not a buy land, find a builder later. It’s do it all at once because you want that person involved.

Tim Ulbrich: Yes.

Nate Hedrick: You want the architects involved, you want the surveyors involved, the builders involved, all at the same time to make sure you’re not going to run into a problem.

Tim Ulbrich: Now I suspect the question I’m going to ask here is, ‘it depends,’ but I’m going to ask it anyways. One of the other thoughts I have as I look at raw land periodically just out of interest that folks may be wondering if they’re doing the same build a home is resale value. So especially when you get into perhaps unique pieces of land, unique customized properties, I could see an argument on both sides of that, either hey, it’s a unique piece, it stands out, there’s not a lot of other things like it. Or maybe not as many people are in the market for something like that. So is it a ‘it depends’ situation, just every property, every area where when you get into a customized home, customized piece of land, in terms of resale?

Nate Hedrick: Yeah. I’m stealing from Tim Baker, right? It definitely depends. But there is some speculation to draw in too. There’s actually a number of investors out there that will buy raw land for the sheer purpose of saying, “OK, I know that this market is booming and it’s starting to expand. I think it’s coming this direction in the next 10 years, so I’ll go buy this property that I expect to be worth 10 times this, but I have to wait 8 years to get there.” So it can be very speculative in terms of that value. But the other thing that’s nice is that if you are in like a municipality or a city and there’s land there, you can often compare that land value on a cost per acre to other land in the area. So if you — especially like something where we live in Ohio, everything’s flat and easy to kind of figure out. If you’ve got a 1-acre parcel in x city, it’s potentially pretty similar to another 1-acre parcel in that same city. And here’s why. And so you can compare those somewhat easily in certain areas. But in others, it’s almost impossible.

Tim Ulbrich: That makes sense. And you know, you had talked about some key people of the team. And I think you do a great job when you’re talking about home buying or home building in this case and considerations, how important the team is. So we talked about the lending piece and we’ve mentioned the agent piece and the builder piece. But we haven’t talked about that in detail. So let’s start with the agent piece. How does a real estate agent support someone building a home? And how does this differ from those that might be looking to buy a pre-existing home in terms of who they might be looking for?

Nate Hedrick: This, again, kind of depends on if we’re talking about building in that development or building in the middle of nowhere or on raw land. But in both cases, you absolutely want to have an agent on your team. I think it’s obvious a lot of times if I’m going out and buying raw land and getting a builder that it might be helpful to have an agent in that case. But it doesn’t seem as obvious when you’re talking about, again, that concierge model we talked about where you’re going to a site plan, they’ve got a model home, their office is open, they’ve got all these friendly real estate agents there. It often feels like I shouldn’t even need anybody to help represent me. But the reality is you absolutely should. And it costs you almost nothing to do that. The agent being involved is your representative, right? The person that’s selling that property, they are trying to sell that property for as much as they possibly can. So even if you’re going to a development, 50 homes available, everything’s done for you, you absolutely want to have that agent as the core member of your team to help with things like negotiating the contract. I’ll give you a great example. I have a client that I’m working with right now. And our early conversations with the builder, they cited this great, gorgeous rooftop deck, OK? And they said, the rooftop deck, you can add it on for I think it was — I don’t know — maybe $15,000. Let’s just say it was that. And it was this awesome like you could see downtown and you can see the lake from downtown. This place is gorgeous. And they quoted it at $15,000 early on. Well that property started blowing up in popularity. And it got really hot really fast. And so we were in but kind of negotiating the contract still. And so we get to kind of the closing bit of figuring out this contract, and they said, “Oh yeah, and that rooftop deck. It will be $22,000.” We said, “Hold on.” And you know, at the time, the buyers were like, “Well, that’s just what we have to do.” I said, “No, I’ve got some notes here.” So I went back and we looked at it, and we had clear indications from the buyer — or from the builder that it was a $15,000 add-on.

Tim Ulbrich: Yeah.

Nate Hedrick: And so I was able to help negotiate that back down and save them that $7,000. So having an advocate on your team, somebody that knows this stuff inside and out is absolutely essential.

Tim Ulbrich: Yeah. And not only an advocate, but an advocate that takes good notes and is ready to act on your behalf as well.

Nate Hedrick: Helps to have a detail-oriented pharmacist as your agent I suppose. But really, again, that agent is going to also grow the rest of your team from there, right? So if you need inspectors, if you need a lender, if you need a title company, again, most of the time the seller’s going to have the preferred title company that they’re working with or the preferred lender that they’re working with. But you still want someone on your team that can grow that, the rest of that process if you need it.

Tim Ulbrich: And for those listening to this episode, if you’re looking to buy or build a home in 2021, as you likely have heard us talk about on this show before, we’re excited about our partnership with Nate, The Real Estate RPh, for the Real Estate Concierge service that he can help get you connected with an agent that is local to your area but also be alongside for the process, talk to you at the beginning, walk you through along the way, be a second set of eyes, help you think about the beginning to the end, and work with that agent locally as well. So you can learn more at YourFinancialPharmacist.com. You can click on “Buy or Refi a Home,” and then “Find an Agent,” and that will get you Nate. And you guys can schedule a quick discovery call to see if that’s a good fit for what you are looking for. So we talked about the agent, Nate. The builder is one that comes to mind as well. You know, we’ve all heard horror stories of I was working with this builder, they went bankrupt, something happened. I feel like any neighborhood I’ve been in, there’s always been a story of like, oh this stopped here in the neighborhood because this happened. So talk to us about — of course it depends on some level, but considerations when working with and finding a builder.

Nate Hedrick: Yeah, this is exactly why I put together that blog post that you mentioned about the 20 questions to ask if you’re building a home because there are a number of things that I see my clients not even realize they should be asking up front. It starts very, very simply, right? You want to kind of get an idea of how long they’ve been in business, look at the number of homes they’ve built, look at the number of homes they’ve built in your area as well. So you know, if they’re brand new to Cleveland, Ohio, they’ve never built here before and they’re used to working in a different state, they may not be ready for some of the things that come up with building in this particular location. So getting questions about have you built in this municipality before? Have you dealt with the city, the planning committee, the zoning committee, this architect, you name it? All that stuff, you want to make sure there’s some sort of background going into that. So a lot of the questions that I often mention to my clients revolve around proving that that person is experienced enough to handle what we’re dealing with and then also licensed and insured in all those things as well so that if something does go wrong, you’ve got kind of this backup to make sure that you’re not going to lose your money or anything like that. And from there, it really grows to questions about the specifics in terms of are you looking for more energy saving features? Are you looking for more customization? Right? Because certain builders are going to be more customizable than others. Or perhaps maybe they only do certain types of appliances, and you really want the top-of-the-line. So those are all questions that you want to ask as you get into the weeds. But always start with those broader questions about experience and making sure that they’re appropriate for the job.

Tim Ulbrich: Great stuff, Nate. And again, to the community, the conversation we’re having today comes from an article that Nate wrote on the Real Estate RPh blog, “20 Questions to Ask if You’re Building a Home.” We’ll link to that in the show notes. And again, if you’re in the market for buying or building a home in 2021, make sure to head on over to YourFinancialPharmacist.com, click on “Buy or Refi a Home,” and we’ve got additional resources available to you right on that site in addition to an option to find an agent, which Nate can help you throughout that process. So Nate, as always, appreciate your time and your willingness to share your expertise with the YFP community.

Nate Hedrick: Absolutely. Thanks for having me, Tim.

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YFP 191: 10 Common Mortgage Mistakes to Avoid

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10 Common Mortgage Mistakes to Avoid

On this episode sponsored by LendKey, Tony Umholtz, a Mortgage Manager for IBERIABANK/First Horizon joins Tim Ulbrich to discuss 10 common mortgage mistakes homebuyers make and steps you can take to avoid them.

About Today’s Guest

Tony 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.

Summary

Tony Umholtz, a mortgage manager for IBERIABANK/First Horizon, digs into 10 common mortgage mistakes to avoid what he sees people make in the home buying process. The first is not fully understanding in advance the common loan types and considerations or differences of each. Tony breaks down what conventional, FHA, VA, and other unique products, like the pharmacist home loan, are and what borrowers need to be aware of. The second falls into the category of credit blunders, like overestimating your credit score, relying on third-party services (which often provide inaccurate credit scores), utilizing no interest credit cards which could negatively impact your credit, and waiting too long to resolve issues you have with it. The third common mistake is not shopping around for a mortgage lender. Tony expresses that it’s important to find the right product and that some internet-based companies may be great for a mortgage refinance but are hard to work with for a home purchase. The fourth mistake is searching for a house before you get pre-approved. Tony shares that a pre-approval letter shows sellers that you’re serious and can also make you aware of any red flags you may have on your credit report. The fifth is underestimating how much cash you need to close. Tony explains that not only do you need money for a downpayment, but you always need to have money saved for an insurance premium (as well as possible flood insurance coverage), taxes, and closing costs.

The sixth is delayed communications with the lender, title agency, and real estate agents which can make or break a transaction. The seventh is making a home buying decision before you’re ready. Tim shares that you can’t make a decision about any part of your financial plan in a silo and have to consider how each will affect another. Number eight is not thoroughly evaluating how home buying fits in with other financial goals you may have and number nine is not thinking about the money you’ll need after you close for items such as furniture, lawn equipment, etc. The last common mortgage mistake to avoid is misunderstanding or misevaluating mortgage discount points. Tony explains that you should always ask for a no-point quote initially. He shares that points are essentially prepaid interest and that by purchasing a point you’re buying down the interest rate. However, he says that you really have to evaluate this decision and that it’s not always the best move to make.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tony, welcome back on the show.

Tony Umholtz: Tim, thanks for having me.

Tim Ulbrich: Excited for this discussion here in 2021 as we have you back, talking about 10 common mortgage mistakes homebuyers make and steps that folks can take to avoid these mistakes. And many of these come from either personal experience or ones that we know are often being made, so we’re going to go through these one-by-one and certainly lean into your expertise to hopefully give folks a guide of what are some things that they can be aware of going into the lending process, whether that’s a first-time home buy, second time, third time, or refinance and then hopefully put in some steps to prevent those from happening in the future. So Tony, the first one I have here that I know often comes up is that folks may not fully understand in advance the common loan types and the considerations and differences for each. And so before we talk about the pharmacist home loan through IBERIABANK/First Horizon aka “the doctor loan,” give us an overview at a high level of conventional, FHA and VA loans as I suspect those are the main ones our community will already have some familiarity with and perhaps some experience with. You know, generally speaking, how do these work? What’s the difference between them? And what are some important considerations for lendees when pursuing these types of loans?

Tony Umholtz: Yeah, sure. Great question. And that’s definitely the most common types of loans that are out there and that you’ll hear about. Fannie Mae and Freddie Mac, we call them the GSEs, which is Government-Sponsored Entity, they provide conventional financing. And thank God we have them, right? I mean, they really keep our housing market alive. And then we have of course FHA and VA loans, which are backed by — we call it Ginnie Mae, which is HUD, which is also a government program. And those are the main key loans that are out there. There’s also portfolio products, unique, nichey products such as the pharmacist product that we’ve discussed that banks, individual banks, can hold on their balance sheet as well, which don’t have a traditional investor, government-backed sponsors. But not to get too into the weeds here with that, but high level, I would say is conventional products, the main differentiation on that is they will allow a loan amount up to $548,250 in most markets. There is some markets around the country where that’s a higher number. So it’s just around San Francisco, Los Angeles, there’s going to be higher loan limits in certain counties in higher priced areas. But that’s one of the main pieces with them. And a conventional loan above 80% loan-to-value, PMI is required. And that mortgage insurance is required to deliver the loan to Fannie and Freddie. So that’s why it’s so important that you have this mortgage insurance, lenders require it, and that can be costly, right? That can be very costly. FHA and VA — let’s just kind of pull the two apart here — FHA, the Federal Housing Administration loan, is designed for a little bit more flexible credit. Although conventional loans can get pretty low on credit score too, FHA tends to be better if you have lower credit scores because it will allow lower interest rates, for the most part. FHA loans, though, typically don’t have a loan amount max as high as conventional. So for example, if a market’s $548,250 for conventional, it might only be like $325,000 for FHA. So I usually utilize FHA as a last resort, only when it’s the best loan for the client. And then VA of course is for veterans. And the VA loans are great. They allow 100% financing with no PMI. The only downside with VA is there’s a funding fee that’s rather expensive. So I’ve actually had a few veteran clients that we’ve actually gone conventional because it’s cheaper overall. But I could talk a long time on this subject. But hopefully that clarifies the main points.

Tim Ulbrich: Great overview. And to our listeners that want to learn more on each of those, you can check out Episode 169, Tony and I talked through helpful tips for getting a mortgage, going through different loan products, talked about the pharmacist home loan. And tony, we’re going to segue here and talk about that for a moment as I think your discussion on PMI is a good lead-in. And so as we think about the pharmacist home loan, you know, Tony, common barriers to pharmacists being able to purchase a home that I’ve seen is student loan debt, which of course can impact debt-to-income ratio, as well as their ability to save for a down payment. You know, they’re coming out of school, looking to buy a home, six figures or more of debt, and I think that’s where the pharmacist home loan can have its values. Tell us more about the pharmacist home loan option that IBERIABANK/First Horizon has, including minimum down payment, terms, requirements to qualify, PMI considerations and so on.

Tony Umholtz: Sure. The product we offer to pharmacists, it allows very little down payment and there’s no PMI. So it’s probably the key point to it. If you’re a first-time home buyer, you can actually put 3% down and have no mortgage insurance. And if you’ve owned before, it’s 5% down again, with no mortgage insurance. The minimum credit score is 700. And the one piece to this — and again, I don’t — I always try to avoid interest rates because they’re volatile and the market can move, bond market can move, but I have found over the last 18 months that I can offer better rates on this product than if I had a non-pharmacist customer come and put 20% down. I mean, it’s very strong interest rates. So it’s kind of — that’s been the few lead pieces that I’ve noticed. It’s just very strong 30-year fixed loan rates. And that no PMI is just huge. I mean, in some cases if you’re buying a $500,000 home and you’re putting 3% down, you’re talking about a $400 a month savings just for the PMI. So it’s a pretty substantial number. In regards to student loans, it has a — it doesn’t completely waive them. And I find most of my clients that I work with are under an income-based repayment plan anyway. And that’s what we’ll use in calculating a debt-to-income ratio. But in the case where there isn’t a payment, it uses a factor that’s lower than a traditional conventional loan or an FHA loan. So it enables more buying power.

Tim Ulbrich: Very good. And we covered the pharmacist home loan in a fair amount of detail, Episode 139, Ins and Outs of the Pharmacist Home Loan. Also, if you go to YourFinancialPharmacist.com, click at the top “Buy or Refi a Home,” you’ll see more information there to the IBERIABANK/First Horizon product as well as to the real estate concierge, Nate Hedrick, for those that are looking for an agent as well. And we’re excited about the partnership that we have with IBERIABANK/First Horizon because it’s nationwide. And we’ve got a nationwide community here in the YFP community. I have had the chance to work with Tony now for the better part of a year, love what he’s doing, his passion to educate and help folks on this decision and understand how it fits in with the rest of the financial plan. So that’s No. 1, not fully understanding in advance the common loan types and considerations and differences for each. No. 2 here, Tony, is credit blunders. And I’m thinking of those that perhaps may overestimate their credit score or perhaps not have a good understanding of how credit scores impact rates, maybe waiting too long to resolve credit issues and so on. What are some of the common mistakes and blunders that you see related to credit?

Tony Umholtz: The credit and the overestimate — you mentioned overestimating credit. I see that a lot. And you know, I think a couple things I’ll just touch on here with credit. One of the things as a lender, I try not to run credit unless we absolutely have to, right? There’s a lot of clients that’ll call and just want some high level information, but credit is so important because it’s such a critical part of the product. If you have a minimum credit score of 700 and you’re under that, it’s good to know why. And some lenders can — and we offer this service as well — we can give you ideas on how to improve it. We actually have score models that tell us what your score could go to by doing certain activities. But anyway, one of the big blunders I see is just totally following like a third-party monitoring service. And I don’t want to name too many names because there’s a lot of them out there, but traditionally, these third party services are going to overinflate your credit score more than what we would see. You know, like us as a — so for example, a creditor can see a score that is maybe 30 points on average lower than what you might see on one of these services. And I’m even — I subscribe to a service. I will say I do. But it gives me good trends as to what I’m doing, but it’s not what a creditor would see. So in my lifetime of lending, the highest credit score I’ve ever seen was 820, and it was an 80-year-old gentleman who had perfect credit his whole life. So it’s one of those things where, you know, a customer will say, “Hey, my score is 850!” Well, that’s what the monitoring service says, but it’s really not going to be that way when we see it. So that’s one thing, a blunder that I see. The other is a misconception on an inquiry as well. A lot of inquiries is not good. But a couple inquiries at one time for a loan is not going to have an effect on you. There’s a window of time where you can do this. That’s another piece. And then the other really important one — and I can’t stress this one enough — is the no interest for a year type cards and promotions that are out there. And it’s very tempting to go to Best Buy and they’ll offer a $5,000 credit limit for $5,000 worth of stereo equipment and maybe a CD or whatever it might be. And you don’t have to pay interest for two years, which is great, right? It sounds great. But what they do, they report that to the credit bureaus, to Experian, Equifax, and Transunion, as a 100% maxed out credit card. And I’ll confess as a young man, I was in my early 20s, I bought furniture for one of — my first house with a store called Rooms To Go, and I did this. And that’s how I learned. And of course, I’ve seen many clients do this since that time. But it actually happened to me personally. I said, “Wait a minute, why did my credit score go from 750 to 660?” And that was one of the things that happened. I did this credit, you know, it was a maxed-out credit card. That’s how it’s reported to the bureaus. So that’s another big blunder, Tim, that I’ve seen.

Tim Ulbrich: Yeah, and credit — great summary, Tony, great insights there as well. Credit, credit optimization, credit security, such an important part of the financial plan. Obviously we’re talking about here related to securing a mortgage, but generally just an important piece to consider. Tim Baker and I talked about this on Episode 162, Credit 101, talking about what is a credit score, breaking that down, six factors that can impact scores. So if you want more information and better understanding your credit, we’ll link to that episode in the show notes. So that’s No. 2 here, credit blunders. No. 3 is not shopping around. And I know, Tony, that rates, especially in a market where I feel access to information has become easier to find, if you will, that rates may be not necessarily what I’m referring to as much here, although that of course is a consideration. And I think in some cases, if you’ve got good communication with a lender and rates are changing that they’ll be in communication with you. So I think that relationship certainly is important. But obviously we know not all offerings are created equal. So here, we’re talking about the pharmacist home loan. Folks may or may not be aware of that. And so looking at a few different institutions, understanding the products that are out there, but what else, Tony? What are some things that folks may notice beyond the offering and perhaps beyond the rate that would be different from one bank from another? I’m thinking about things like application fees, document fees, other things like that that folks should be thinking about as they shop around.

Tony Umholtz: I really think the — and it can be very challenging sometimes with the shopping around because there’s different levels of knowledge out there. And some of the companies are just set up as call centers as they funnel internet leads in. You know, so there’s different knowledge bases that you’re going to speak to sometimes. So I find that that sometimes adds some confusion. But I think it is very important to find the right product. I think that is very much a critical element, so finding the lender that has the right product for you is important. And I never want to — I’m very sensitive to relationships. So I have people call me and say, “Hey, I have used this lender for 10 years and they’ve always been good to me,” and we’re a competitive industry but sometimes if I think something’s better, I’m very quick to tell that person, “This other lender has a better product.” So I think — and I actually have a lot of lenders that love to send me clients that they know we’re better fitted for. The fee part is important because there’s only really one set of fees the lender controls, and that is there’s a lender portion of fees. The rest are third party. So they’re going to be through third parties. It’s going to be the same, really no matter who they use. So that’s one thing I find that confuses a lot of people is consumers will lump in the prepaid expenses, taxes, insurance, title insurance as well, and doc stamps for the state we’re in or the county recording fees. But those are going to be the same costs no matter what. There’s really only one line item of lender fees that are going to be different, that could vary. So that’s one way to look at the lender is just lender fees and interest rate. Really, it’s as simple as that. But the big things I find when you’re looking, when you’re out there — and again, I’m not going to name names of companies — but when you’re looking to buy a home and you have a — there’s a lot of companies that have popped up, especially internet-based companies that are really just feeding off the refinance market. It’s hard to be equipped for purchases because when you go under contract for a purchase, you have a commitment letter date, right? There’s a commitment financing contingency, there’s appraisal contingency, there’s all these contingencies in a contract, and you want to make sure the lender is watching this and can meet these milestones. A lot of lenders that are set up for refinances just aren’t set up for purchases. It’s OK to use one of these lenders if you can wait 90 or 120 days to close your loan for a refinance, but on a purchase, you can’t do that. So service is very important when you’re buying a home. It still can be with refinancing, but you can always just wait longer, you know? It’s one of those things. But I would just say, you really have to be careful with the service aspect when you’re buying because it’s a very competitive housing market right now, and a lot of these sellers have backup offers. I get calls a lot too because people are under contract and something went wrong with their lender, and I have to jump in sometimes. So I see it even as a secondary lender when things go wrong with the original lender. So I would just say the big thing is a comfort level with that person and that organization. The best rate and product is important too but also making sure that you’re in the best fit for you because one other thing I will say is, you know, if you can get a better rate putting 30% down than you could putting 5% but that’s going to use up all of your liquidity and maybe impact other financial planning aspects of your life, well, the 5% is much better, even if the rate’s a little higher. So I think it’s very important to plan, look at your overall plan. That’s why the folks at YFP are so great to work with because they can look at everything and say, “Hey, this is better for you in the long run because of this.” So I hope that’s helpful. I mean, there’s a lot of components to it. There is a lot of things to think about, but I think it’s really finding a comfort level with the group that you want to work with and especially if you’re buying a home.

Tim Ulbrich: Absolutely. So point No. 3 there, not shopping around, I can speak from personal experience working with more of a big box company, obviously having the opportunity to work with you guys, open communication lines, feeling comfortable with the process, getting questions answered, all of that really matters. No. 4 here is looking mistakes — again, we’re talking about here looking beyond the simple Zillow or Redfin search before you get preapproved and know what you can borrow, which is not necessarily, of course, the same thing as what you can afford, right? We talked about this with Nate Hedrick on the podcast a lot, the Real Estate RPh, what you can borrow, what you get approved from the bank, is not necessarily what you can afford. And that connects, Tony, to what you just said about connecting this home buying decision with the rest of the financial plan. So talk to us here briefly about the importance of the preapproval process.

Tony Umholtz: The preapproval process is critical just to know what you can afford both ways, right? To see if that Redfin search popped up a house that you can’t buy. I’ve also seen it the other way around where, you know, with the rates being so low, clients have said, “Hey, I’m paying $2,900 a month for rent and I can buy more house than I thought I could.” So it’s really just critical in the education process. You know, knowledge is so important. And just knowing what you can and can’t do is important. And the preapproval process will allow us to see if there’s any red flags as well. We’ve had lots of clients that we’ve been able to help get their credit scores up a little bit higher, we’ve had lots of clients that both ways have said, “Hey, I don’t want to buy a home this large because I didn’t realize that this is the cost and the taxes are this.” On the other side, I’ve seen it the other way too, like I mentioned. It’s very important to get pre-approved before you start walking into houses. And I will say that the realtors are very proactive right now because of the tight inventory. We get a lot of phone calls from the listing agents, even. And of course, we can’t give much information away, but they’re calling us, “Hey, are these clients approved?” I mean, it’s a different market in a lot of parts of the country right now.

Tim Ulbrich: That makes sense given where we’re at and the climate of the market. So No. 5 is underestimating the cash to close. So what I’m referring to here, Tony, speaking from personal experience in our first home purchase a little over a decade ago is I think many folks when they’re looking, you know, look at the sale price of the home, they might say, “OK, I’m going to be able to negotiate this or this,” which might be overconfidence, especially depending on what’s happening in the market. And they’re probably thinking about the down payment, whatever that would be, 5%, 10%, 15%, 20% down. But they might not be thinking about other costs that they’re going to need to consider having cash to come to the close. So tell us about not numbers, per se, but what are some of those other things that folks need to be thinking about when it comes to cash to close beyond just the down payment?

Tony Umholtz: One of the big pieces too outside of the down payment is your insurance premium. And insurance is due upfront, full year premium upfront, even if you paid cash, you have to pay for your insurance premium upfront if you want your home insured. And I find that — and this is flood insurance as well if you’re in a flood zone, that’s due as well — but the insurance component is something you have to take into consideration. The other piece outside the down payment is your tax allocation. So normally, lenders will take anywhere from 3-4 months of your property taxes for the escrow account. And for example, the reason for 3-4 months is there’s always a two-month cushion that’s collected. But there’s also, you know, let’s say we were to close today, right, on a house, Feb. 5, your payment is not going to be due — your first payment’s not due until April 1. So we have to collect February and March to be on pace to pay it for you, so we’re going to collect four months of taxes at closing to kind of cushion things. And then of course you have closing costs as well. So there’s a prepaid element and then we have the closing costs. So in addition to the down payment, you have those elements as well. The other thing to keep in mind too that is some confusion that I see a lot with first-time home buyers especially is when you give a deposit on the home, so let’s say when you give your realtor, your realtor goes to help you with the contract, you have to put $5,000 in escrow or deposit — terminology is about the same but different parts of the country call it something differently. That $5,000 gets credited back to you at closing. OK? So it’s a contribution to the overall transaction. It’s not something that you lose or gets lost in any way. It comes back to you. So if your cash to close let’s just say was $10,000, and you’ve already given $5,000, well, you only are going to bring $5,000 to the closing. So that’s another piece just to — questions that come up.

Tim Ulbrich: Very good. And I think the point here I want to make, especially for folks that are on the home buying process for the first time is making sure you’re appropriately considering what might be the cash needed, down payment, closing costs, you mentioned the insurance, the taxes, and some other things as well. So making sure to plan for that in advance and of course thinking about how that impacts other parts of the financial plan. So we’re halfway through our list of 10 common mortgage mistakes to avoid. We’re going to rapid fire these last five. No. 6 here is delayed communications with the lender, title company and agents. Lots of folks involved, Tony, in this process, lots of moving pieces and parts, and I suspect this is the time to overcommunicate and set communication expectations with the team in advance. So talk to us about from your perspective, you know, what you’re expecting of your — obviously your team but also in terms of folks that are working with your team when it comes to communication.

Tony Umholtz: I mean, communication is critical. And that’s what makes the transactions — makes or breaks them in a lot of ways, the communication. So we really try to communicate — overcommunicate with the client. The title companies can be tricky because some of them are, you know, larger, big box, and they’ll just send blanket emails out and it’s hard to get in touch with someone individually. But I think it’s — you know, one of the things that I think is critical is that we know who the realtor is, and we know who the title company is. And then we know the individual in contact. And it usually goes very smoothly if that’s the case. So just having everyone on board. Normally the realtors are very important for us to know because we have to coordinate, we have to give the appraiser their information typically, just to show the house. But yeah, the title company portion is very important, especially as we get closer to closing because the bank or lender’s closing department is going to communicate with them and balance the figures for closing.

Tim Ulbrich: Very good. Yeah. I think with lots of parties involved, communication — always two-way, but making sure that you’re being proactive in that and of course if there’s questions that are outstanding, making sure you’re reaching out and vice versa to stay on time and on track with closing. I’m going to take No. 7, 8 and 9 because they hit home for me personally. And then we’re going to bring back Tony here to talk about No. 10 related to mortgage discount points. No. 7 is making a home buying decision before you are ready just because “rates are good” or because I’m renting and “throwing money down the drain.” Now we’ve talked about this extensively on Episode 113, Is Your Home an Asset or a Liability? We’ve talked about not only the pressures to buy a home but also the costs of home ownership and comparing renting versus buying. And so I would encourage folks, as we say on the show over and over and over again, to avoid the trap of making any financial decision in a silo. So here, if you’re talking with somebody and rates are good or you see commercials about rates or that’s the center of the conversation or somebody says, “Hey, why are you renting? You’re just throwing money down the drain,” now, you may conclude that it is the right time to buy. But the point I’m making here is to take a step back, what else do we have going on in the financial plan, working with hopefully a financial planner to help you evaluate that decision, look at all pieces of the puzzle, and then proceed with the home buying decision and the budget to buy a home if it makes sense in the context of your plan.

And that really is No. 8 in terms of these mistakes is not thoroughly evaluating how home buying fits in with other financial goals. And so I think as we talk about extensively, you know, if you’re looking at six figures of student loan debt, you’re looking at investing goals, you’ve obviously got other competing priorities for your finances, home buying just being one of those, how does it fit in? And of course, YFP Planning, our fee-only comprehensive financial planning team can help that. You can schedule a free discovery call, learn more, at YFPPlanning.com.

No. 9 mistake here is not thinking about available cash post-close. So we talked about how much money you’re going to need to be able to come to closing. But what about things like a rainy day fund to make sure that if something goes wrong in the home? What about things like furnishing the home? What about things like yard equipment? And so thinking about not only the cash that you’re going to need to bring to closing but also do you have some reserves? Do you have some cushion? What will that look like month-to-month as well as some funds that you have in reserves to be able to handle some of those expenses that will inevitably come after you move in?

And Tony here, No. 10 in our list of 10 common mortgage mistakes I think is misunderstanding or evaluating mortgage discount points, especially as folks are comparing rates among institutions or even within a lender. So talk to us exactly about what are discount points? And ultimately, how folks and tips for folks as they’re evaluating discount points as an option.

Tony Umholtz: I would recommend that you always ask for a no-point quote initially because, you know, some lenders will put that into their pricing. It’s funny, even the Freddie Mac that are posted in the Wall Street Journal, they typically have .6% points in the quote. So you know, I always say that if I put that in there, the rate would be even lower. But that’s really the important element is discount points — let me explain what those are. They are actually — it’s defined as prepaid interest. So you’re basically buying down the interest rate and for a finance person, it’s like you’re buying down the bond rate over time by paying the points at a premium. It sometimes can be a good investment. But most of the time, I don’t recommend it. And the way that you can tell if it’s a good investment is traditionally, on a 30-year fixed, 1 point will typically buy down a .25% in rate, typically. Sometimes ⅜ of a point. Well, over — let’s say it’s .25%. Over four years, you basically pay off the point you paid and then you’re kind of in the money, so as long as you own the home more than four years, you’re in the money. And then a lot of times, depending on your tax bracket and everything, you can write off that point in the year that you pay it. So if it was 2021 and you paid 1% on a $300,000 home let’s say, that would be $3,000. But you know, the spread in rate is important in determining if paying points makes sense. But I find that it typically is not the best way to go unless there’s a big spread. Like I had a — there was a time earlier in the year, especially on jumbo mortgages, larger loans that are above the conventional limit, where we were getting a half point for 1% fee. Well, that made sense all day because you had a two-year payback period on a 30-year fixed. Then you were in the money for a remaining 28 years if you stayed there. So for long-term people who are going to be in the home or own the home long-term, it can make sense sometimes. But to compare lenders, you really just want to ask, like if one lender offers you 2 — this is just throwing out numbers — 2.75% with 1 point and the other one offers you 3% with no points, you can ask the 3%, “Hey, if I was charged 1 point, what could I get? What could my rate be?” And if they came back and said, “It’s 2.625%,” well the offer from the higher rate person is actually better. So that would be one way to compare. But that’s a quick summary of points.

Tim Ulbrich: Yeah, great discussion there of points. I know that comes up a lot, and I think what we’re trying to get to, Tony, is an apples-to-apples comparison the best that we can to evaluate it. And I think you bring up another good point in that discussion, which is the longevity that you may be in the home. And I know that’s an important consideration, one that folks may not be able to predict in advance but to try to objectively evaluate that the best you can because that’s going to impact when you think about rates of the loan, you think about things like points, when you think about down payments and other issues and having to be able to expense a move in the future and closing costs and selling the home, you know, if that runway’s going to be long versus that’s going to be potentially short, that could have a significant impact on many parts of the home buying process. So there you have it, 10 common mortgage mistakes home buyers make and steps that you can take to avoid these mistakes. And to learn more about considerations when getting a home loan and to get more information about the pharmacist home loan offered by Tony and his team at IBERIABANK/First Horizon make sure to check out the post on the YFP site titled, “Five Steps to Getting a Home Loan.” And you can get there by visiting YourFinancialPharmacist.com/home-loan or if you just go to the main page, YourFinancialPharmacist.com, top you’ll see “Buy or Refi a Home,” and that will get you there as well. So Tony, appreciate your expertise as always and appreciate you taking time to come on the show today to talk about this important topic.

Tony Umholtz: Tim, thanks for having me. Really enjoyed it. I always do, and you know, appreciate being a partner with you.

Tim Ulbrich: Thank you very much. And as always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please do us a favor and leave us a rating and review on Apple Podcasts or wherever you listen to the show each and every week. That will help other pharmacy professionals find this show. Appreciate you taking the time to join us. Have a great rest of your week.

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YFP 190: 7 Ways to Reduce Your Monthly Housing Costs

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7 Ways to Reduce Your Monthly Housing Costs

On this episode, sponsored by Insuring Income, Nate Hedrick, the Real Estate RPh, joins Tim Ulbrich to discuss 7 ways to reduce your monthly housing costs.

About Today’s Guest

Summary

It’s no secret that housing costs, whether that be your mortgage or rent payment, make up a large chunk of many people’s budgets. For some people, housing can be 30% or more of their income. Nate Hedrick, The Real Estate RPh joins Tim Ulbrich on this episode to share 7 ways to reduce your housing costs. Reducing your housing costs allows you to have more disposable income to fund your other financial goals. It’s a win-win, right?

The first is downsizing your home. Many people think downsizing means moving into a tiny home or to an apartment that’s drastically smaller than where they currently live. If that’s what you want to do, that’s great, however downsizing can simply mean moving into a house that’s a bit smaller to help reduce the costs of taxes, insurance, utilities, and maintenance. The second way to reduce your monthly housing costs is to house hack. While house hacking may not be for everyone, this is a great stepping stone into real estate investing and can allow you to, hopefully, live for free. The third strategy is to get a roommate. Like househacking, this may not be an option for everyone, but having a sibling, friend, or even stranger live with you can allow you to significantly reduce your housing costs.

The fourth is geo-arbitrage, a concept that’s been picking up some steam over the years especially among those in the FIRE community. Essentially, in order to save money on housing costs, healthcare, or the general cost of living (think gas, food, taxes, transportation, etc) and get more for your dollar, you pick up and relocate to a new place. We know that the cost of living can vary greatly between cities but that your income may not increase or decrease accordingly, so this can be a powerful way to save money if it’s an option for you. The fifth strategy is to use Airbnb to increase your income. Although COVID-19 may make it difficult to put this in action at the moment, this is one to definitely consider when state’s start to re-open more in the future. Renting out your home, in-law suite, or room in your home can bring in extra cash and help you pay down your mortgage. The sixth way to reduce housing costs is to re-evaluate your homeowner’s insurance policy. Just like you’d shop around for car or disability insurance, you can do the same with homeowner’s insurance. You can also check in with your current company to see if there are any discounts available for installing certain security measures or for paying yearly vs monthly. The last strategy is to refinance your mortgage. With historically low interest rates, you may be able to significantly reduce your monthly mortgage payment. However, it’s important to keep in mind the total cost of the loan and any additional fees and costs you may incur when refinancing.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Nate, excited to have you back on the mic. How you been?

Nate Hedrick: Good, Tim. Thanks for having me.

Tim Ulbrich: It’s been I think a hot second since you were last on the show, Episode 178, where we talked about 5 lessons learned during your most recent investment property purchase. But I don’t want to assume that everyone listening knows who you are and what the Real Estate RPh is all about. So give us a brief background of you, your role in pharmacy, and how and why you started the Real Estate RPh.

Nate Hedrick: Absolutely. So I am a full-time pharmacist. I work with an insurance company here in Cleveland, Ohio. But I also moonlight or side hustle as a real estate agent. So I have my real estate license, have had that for four years now. And I work with local pharmacists and other health care professionals to help them buy and sell property here in Cleveland. And then that expanded a couple years ago into Real Estate RPh, which is a website that I run to educate pharmacists about the real estate process, help them find agents all over the country through our concierge service that we’ve partnered up with YFP for. So we do a lot of interesting stuff. And that’s really what my focus is on this year is really growing that network and being able to help more pharmacists around the country.

Tim Ulbrich: Yeah, it’s been fun to see that grow and more and more that are reaching out to you that are in that home buying process. So we will link in the show notes, obviously, to your site. We’ll also have some more information about the real estate concierge service for folks that want to learn more. We’ll come back to that throughout the episode. So today we’re talking all about ways — specifically, 7 ways — to reduce monthly housing costs. And I don’t think it’s any secret, I know from personal experience, that housing costs, whether that’s your mortgage or rent payment, make up a large chunk of many people’s budget. Now, check this out. According to the U.S. Bureau of Labor Statistics, people that fall into the top income quintiles, many pharmacists of course would be included in this, spend around 30-32% of their pre-tax income on housing. 30-32%. That’s a big chunk of your earnings that immediately are being spent on housing each and every month. And when you think about other competing financial priorities, the ones we talk about all the time on the show: student loans, child care, food costs and so — it may feel like there isn’t much money left to put towards other goals. So of course, thinking about strategies for reducing monthly costs I suspect is relevant for many. So Nate, when working with clients looking to buy a home, do you ever give them any insight on how much of their income they should aim to allocate toward those housing costs? And how do you determine that?

Nate Hedrick: Yeah, so you have to be a little bit careful as an agent, right? We are not financial advisors. You know, I don’t want to step outside my shoes a bit. But we always — whenever I’m meeting with a new client, I do make sure we talk early on about the importance of budgeting and making sure that they’re the ones setting the budget. I’ve had numerous clients come to me and said, “Hey, Nate, I got pre-approved for $600,000. What do you think about that?” And I said, “That’s great. What is your budget, though?” It’s a totally different question. So I always make sure that I bring that up, make sure that they understand that they need to set their own budget and then it’s my job to help keep them on budget. So if they come to me and say, “My budget is $300,000. I don’t want to spend a penny over that,” it is very easy for them to fall in love with a house that is $350,000. And it’s my job to make sure that they don’t go that direction, right? Especially if they’ve told me upfront, “This is our number. We want to stick to it.” I’ve seen it time and time again where if you start looking outside of your price range, all of a sudden, your price range goes up. So what I take my own role as is, “Look, I’m not going to tell you how to spend your money, but I’m going to help you stay on goal if that’s what you want me to do.”

Tim Ulbrich: Absolutely. And I can’t overemphasize enough, you know, what you’re pre-approved for and what the budget is likely are two different things. And so really taking some time up front, you know, what are you looking for? How does that fit in with the rest of your financial goals? Obviously biased on our end — working with a financial planner to help do that. And then you go through the home buying process and make sure that that home buying purchase fits in with everything else that you want to do. Nate, when you heard that BLS statistic, you know, 30-32%, of course we recognize we’ve got listeners all over the country. Cost of living here in the great state of Ohio is very different than cost of living up in the Northeast or out West. So we recognize that. But generally speaking, is that statistic, 30-32% of pre-tax income on housing, is that pretty common what you see among pharmacist clients?

Nate Hedrick: Yeah, if not a bit higher, right? I think that’s probably about right, but it tends to be that or more, I would say.

Tim Ulbrich: OK, makes sense. And of course, we have friends, family that are spending much more than 30% of their income on housing, maybe even spending 50% or more. And again, sometimes that’s subject to cost of living in certain parts of the country. So Nate, why is spending this much money on housing something that folks should — you know, I don’t know if avoid is necessarily the right word. Obviously for everyone it’s a personal decision. But that they should at least be aware of the impact that this might have on other parts of their financial plan.

Nate Hedrick: Yeah, absolutely. I think sometimes it’s easy to look at it and say, “Well, I can handle that payment today. It won’t be a problem. But what does that look like in five years? In 10 years? You know, are you going to be working as much? Are both of you going to be working if you have a spouse? There are a lot of things that you want to plan for the future, and getting yourself into the highest possible payment right up front kind of cripples some of the opportunities you have later. So you could easily become house poor, you could — honestly, I’ve seen pharmacists, I’ve talked to pharmacists, who feel like they’re living paycheck to paycheck because that housing cost is so darn much that they have to commit such a large portion of their income to basically staying on track. Up front, if you can make that decision to pare that back a bit, it makes your options that much better down the road.

Tim Ulbrich: Yeah, makes sense. And I think we have a bias and a tendency — I know I do — to tend to look at our future state through the lens of today, right? It’s just natural. So of course things could change, you know, incomes could go up, but also incomes could go down. So do you have margin? You know, what about financial emergencies and being ready for those things, things that we may not be able to anticipate happening at this point in time? So it’s obvious that reducing monthly housing costs, if we’re talking about 30% or more of pre-tax income, can have a huge benefit on your financial plan. We know that when it comes to the financial plan, obviously income and disposable income is what we need to be able to allocate towards our goals. So whether that’s short- or long-term goals. So let’s dig into seven ways that people can reduce their housing costs. No. 1, Nate, we’re going to talk about is downsizing. And I think when people hear that word, they immediately think of living in a tiny home, moving to an apartment that’s drastically smaller than where they currently live. And if that’s what people want to do, great. You know, we’ve talked with several pharmacists that have had very creative housing situations. I think of Rena Crawford that we had on this show talking about her housing situation out in San Diego and her creativity with renovating a van while she was completing residency. And certainly those are exceptions probably to the norm. But what do we mean here when we talk about downsizing? And why can this be such an impactful way to reduce housing costs?

Nate Hedrick: Yeah, I mean, anytime you’re talking about a larger home, more expensive home, it’s not just the house itself, right? You’re talking about more utilities. If you have more square footage, you’ve got more to heat, more electricity, all those different things go into it, more maintenance costs. If you’ve got a larger footprint of house, there’s more stuff that can break. So all of those things start to stack up. It’s not just a bigger house is it. So that’s kind of important. And what I find is that it’s not always about necessarily downsizing but making sure that when you start, you’re not upsizing, right? So downsizing can be a good move if you’re already in a house where you’re like man, this is really crippling our budget. We need to make a decision. But what I see most often is that people who take this ahead of time, before they ever buy their first house and think about OK, I don’t want to have to downsize later, what can I start with now and then work my way up down the future?

Tim Ulbrich: Yeah, that makes sense. And I think your point is a good one, being proactive — and not even just focusing on necessarily things like the square foot and the mortgage, of course, and those things but other things. You know, you mentioned taxes, you mentioned maintenance, you mentioned utilities. What about the lawn care? And really considering everything that’s involved — could be association fees and other things. How do clients that you work with — you know, I know one of the things folks may not necessarily be as obvious is OK, what is it going to cost me all-in per month? You know, of course you’ve got the mortgage and insurance and they’re thinking about those things. But they may not necessarily be thinking as much about utilities and other things. Of course, taxes are readily available information. I mean, is this information that’s typically forthcoming from the seller? Do people have to prod to try to get some utility payments and things like that to be able to best estimate what this is going to be for their budget?

Nate Hedrick: Yeah, I usually recommend to my clients to ask. I’ve seen some sellers — and I’ve done this once — where we actually posted, not our bills exactly, but I had the seller pull their previous utility bills and say, “Look, let’s just put this number out there. That way a potential home buyer can feel good about it, that it’s going to be $300 a month for all this,” or what have you. That’s definitely something that we’re seeing people ask for, and it’s a great way to get a true estimate of what that particular property might be costing someone.

Tim Ulbrich: Awesome. And I think it’s worth mentioning here, of course when we talk about real estate transactions, you know, there’s costs that are involved. So making sure you’re factoring that in. If you’re going to pick up and move, how great — this is a conversation my wife and I have all this — you know, what’s the true net difference, right? So you might look at, hey, we’re going to sell for $350,000 and we’re going to buy for $250,000. But when you really consider the transaction costs, obviously the fees involved, the moving expenses, really trying to evaluate this and understand what the net difference is. So that’s No. 1, looking at downsizing. No. 2 is house hacking, I think a topic that you and I love, love talking about, one that we have both said on this show several times, “Man, if I could do it all over again, I would have house hacked.” So something we talked about Episode 130, I had Craig Curelop on from Bigger Pockets, episode talking about house hacking your way to financial freedom. And that episode I thought was a great overview in his book of the house hacking process. And it’s a real estate investing strategy that we love but also can serve your primary home needs. So Nate, break it down for us. For those that aren’t aware or perhaps a refresher, what exactly is house hacking? And how can it be a powerful way to reduce housing costs?

Nate Hedrick: So house hacking at its core is the idea that you are buying a property in some way, shape, or form that you are going to live in part of it and you are going to have a renter live in another part. And so traditionally with a house hack, you’re looking at like a duplex, a triplex, or a quad, which you can buy as a — the bank looks at it like a single family home. But you can live in one unit and then you can rent out the others. And ideally, with a proper house hack, you’re having that renter basically pay for your mortgage or pay for your mortgage and your taxes in an ideal world. But the idea is that if you can live in part of the house, rent out the other part, you’re going to have far less housing expenses because you’ve got someone else paying for it for you.

Tim Ulbrich: Absolutely. And I think it’s certainly can look very different for the reasons you mentioned. And one of the things I like about Craig’s book on house hacking, he gives a lot of different examples from his personal situation, others that did it, that I think will give folks a variety of ideas about what house hacking may look like for them and how it may or may not fit into their home buying goals. So Nate, have you worked with clients that have done a house hack? And if so, what was their motivation?

Nate Hedrick: Yeah, actually, I’ve got one right now that I’m working with locally here in Cleveland that’s looking to house hack, which is fun. We’ve been doing — running numbers on houses recently and looking for opportunities. And right now, this pharmacist is actually living in a house with a couple of roommates, wants to buy his own place but doesn’t want the housing prices or the housing expenses to jump dramatically, right? If you go from living in a $400 a month room or whatever the cost is there to this big housing payment, it might be a shock to your budget. But if he can transition to only a couple hundred dollars because the house hack is paying for some of that cost, you can get your own place, start building equity, all the advantages of owning a home without this huge uptick in expenses. So I’ve been working with him to try to find that opportunity. And then we’ve got a ton of concierge clients throughout the country that have done this. I think we’ve talked with a couple here and mentioned a couple in the past that have primarily been searching for a house hack when they’re looking for their first house.

Tim Ulbrich: Love it. And speaking of roommates, let’s talk about roommates. No. 3 here on our list of seven ways to reduce your housing costs, No. 3 is get a roommate. Nate, I thought this wasn’t college anymore. So similar to house hacking, getting a roommate obviously could be a way to reduce housing costs. Talk to us about the role that this can play.

Nate Hedrick: Yeah, especially again, I think people overlook this because like you said, once you buy a house, like I can’t — I can’t go backward, I can’t have a roommate now. But it’s a great way — if you’re in a personal situation where it makes sense, it’s a great way to reduce your expenses for both people. And you can take this as simply as, you know, I’m going to have my brother move back and he’s going to pay me a little bit of rent, or is as severe as putting an ad on Craigslist and having a stranger come live with you. You know, we’ve actually gotten a chance to talk to a couple of individuals here that are experts in this, I would argue. Ryan Shaw on Episode 173 knows all about how to deal with roommates and keeping them sane. And then Bryce Platt, one of our concierge clients that actually went out and bought — Episode 160 for those that are looking for it. He actually went out and bought a condo basically that had — was set up to have three other roommates with him. And so that’s part of that process. So it’s not uncommon anymore, and it’s a great way to reduce your overall expenses.

Tim Ulbrich: Yeah, and I think it’s worth, you know, the reminder or maybe the obvious statement of your first housing situation will likely not be your forever situation, right? So whether it’s a roommate directly living with you or in a situation like Bryce, that may work for awhile and then you decide you may move on. But now you’ve got an investment property that perhaps you can hold onto as well. So that’s No. 3, get a roommate. No. 4, perhaps the most interesting, my favorite on the list, but also likely very unpopular to some folks that love where they live. This is geoarbitrage. And Scott Rieckens, author of “Playing with FIRE,” mentioned this on the podcast last week, Episode 188. And I think it’s such an interesting way to reduce your housing costs. And I think this actually stems back to some of Tim Ferriss’ work talking about geoarbitrage. So Nate, what is geoarbitrage? And how can it help someone’s budget?

Nate Hedrick: So it’s a concept that basically you are — and we’re seeing a lot of this grow in the FIRE community, like you mentioned Scott but many others in the FIRE community are embracing this idea that in order to save money on housing costs or the cost of living based on a certain area, you basically you pick up and move to a new place. And we’re seeing this really taking off, especially with the changes in how people are working during the pandemic and hopefully after the pandemic is over. Work from home is just totally different than it’s ever been before. And you can basically do your job from anywhere now. If Option 1 is to live in downtown New York in a tiny apartment for a huge, huge cost, but Option 2 is to do that exact same job in Cleveland, Ohio, here, your costs go down dramatically. And so a lot of people are looking at this like, are there other areas that I can live in that I can either find a better job or keep my same job and work remotely that are going to improve my overall housing costs without dramatically impacting my life?

Tim Ulbrich: Yeah and again, I think this is not a forever situation, right? I know I’ve brought this up to various groups when I’ve been speaking before. You know, often you get that look of like, Tim, are you really suggesting that I pick up and move? You know? And it’s not necessarily for everyone, right? Sometimes there’s family situations, other things, where this is not even a possibility for a variety of reasons. But I think sometimes, this is a way to think a little bit more creatively, especially for those that might be in an area where jobs are also saturated. You know, if you could get to a lower cost of living area and perhaps open up some additional job opportunities, this might be something to consider while also accelerating your financial goals. And I think, again, it really depends on one’s personal situation. But I think what makes this so attractive for pharmacists, Nate, you know this, I know this, our community knows this, we do see incomes change slightly in higher cost of living areas but nowhere near what they should proportionally to the expense of those areas, right?

Nate Hedrick: Right. Absolutely.

Tim Ulbrich: So an ambulatory care pharmacist in Cleveland, Ohio, and an ambulatory care pharmacist in San Diego, that salary difference — while there likely is one from my experience in talking with folks — it does not represent the cost of living differences between those two areas.

Nate Hedrick: Definitely.

Tim Ulbrich: And so you know, I think that because of the nature of how that is treated with pharmacy jobs, this concept might also be attractive. And check this out for a minute, Nate. We pulled some data from RentCafe. The average rent for a 700 square foot –703 square feet, to be exact — in Manhattan is around $3,800. But the average rent for a slightly larger place, 883 square feet, in Little Rock, Arkansas — shoutout to our community in Arkansas — is $830.

Nate Hedrick: There you go.

Tim Ulbrich: Of course, Manhattan and Little Rock are not the same thing. Very different cities, right, in terms of what people are looking for and so on. But it just highlights, you know, what does that mean for monthly cash flow, what are your options. And you know, when I see $3,800 a month for 700 square feet, you and I both know what $3,800 a month can buy in Ohio, right?

Nate Hedrick: Seriously. Yeah, it’s crazy.

Tim Ulbrich: It could go a long way. So again, you know, obviously leaving family, friends, your job can be tough. Certainly not for everyone, but I think it’s one thing to consider and for — you mentioned the reasons of mobility now with some jobs having some more remote capabilities. So that’s No. 4, geoarbitrage. No. 5 is Airbnb. Nate, this is one that I think really pushes people to be creative in how they are cutting expenses or bringing in additional income. And we had Hillary Blackburn on Episode 121, where she talked about creating another stream of income as an Airbnb host and specifically talked about how her and her husband rent out their Nashville home for about $600 a night. So talk to us about how folks can use Airbnb or a similar model, of course, we’re just mentioning Airbnb, and use their home to bring in some additional money.

Nate Hedrick: Yeah, I think it’s gotten a little trickier during COVID having somebody in your house or what have you. But still, the idea there is really solid. If you can use the space that you already have — and maybe this is an extra bedroom or maybe it’s a whole extra in-law suite or a pool house or you name it, right — if you’ve got a way to rent out some of that portion of that property that you already have, and it’s a desirable area especially, you can pull in a lot of extra income to offset some of those housing costs. And again, like you talked about Nashville being $600 a night, if you’re in an area that people want to travel to, especially as things start to open back up, I really think that there’s opportunity there for you to get some serious income for that place.

Tim Ulbrich: Yeah, and again, this is one that may make sense for some, not for others. We’ve got an Airbnb calculator on the site. You can see, you know, roughly what you may be earning as an Airbnb host. That’s YourFinancialPharmacist.com/airbnbcalculator. We’ll link to that in the show notes. So that’s No. 5 on our list of seven ways to reduce housing costs. No. 6, Nate, re-evaluate your homeowners insurance policy. I just did this, so this one is top of mind for me. But I think this is something, you know, we haven’t talked a whole lot about on the show but certainly could be a way that folks may be able to shave off money off of their monthly budget, especially if their policies may have creeped over time. And because of escrow and other factors, they may not be aware or as closely aware as they could be of that. So talk to us about re-evaluating your homeowners insurance policy.

Nate Hedrick: Home insurance policy, if you have a mortgage, right, it’s really one of the only things that you can change. Your taxes are consistent, right? The county’s going to set those. The mortgage and the lender payment is set by the lender. HOA fees, that’s all fixed costs. But the home insurance policy, kind of the other piece that usually gets wrapped into that, is somewhat flexible. And it’s not — it’s not as common to mess with the home insurance policy as someone might shop around for like car insurance or disability insurance or life insurance.

Tim Ulbrich: Right.

Nate Hedrick: But realize that you can actually make quite a bit of difference with your home insurance policy. And it can change dramatically based on a number of factors. So if you change your deductible, for example. If you go from a $500 deductible on a home insurance claim to $1,000, you might save 25% on your home insurance policy in some cases. The other thing I’ll see a lot with home insurance is that if you are what’s called escrowing your home insurance or your housing insurance, a lot of times that bank will say, OK, well, we’re going to pay — and escrowing, just briefly, is that you actually pay the bank, you pay the mortgage lender to handle paying your insurance company for you. So usually you’re giving them money every single month as part of your normal housing payment. They’re taking a portion of that, setting it aside in an untouchable account called an escrow account, and then from that account, they basically pay your insurance company. But what I’ve found is that if you have that money in escrow, you don’t get a lot of flexibility with how that payment works. And if you can pull that out — and some lenders will allow you to do this free, some may charge you a small amount — but if you can pull that out, you can get even more creative with how you pay it. I’ve noticed that if you pay your home insurance premium monthly versus yearly, you can get a huge discount by paying it all up front. And so if you know you’re going to be there and you have the funds to do so, you can actually pay it Day 1 of the year and get a whole year’s worth of that payment taken care of at a much lower rate. So there are more flexibility here than I think people really realize, but a lot of it comes down to what are you allowed to do with your lender? And what are you willing to do in terms of that negotiation process?

Tim Ulbrich: Yeah, and I think too — great stuff there, Nate — I think it’s important to note, as you mentioned, these policies vary, you know, in terms of what they coverage, what the coverage includes, obviously personal belongings, other features of policies, and one thing I notice in this process, which certainly makes sense for those that have gone through this one or more times before, is that it’s easy to get focused on price shopping and not necessarily do an apples-to-apples comparison on coverage. So you know, some of these policies may present themselves as oh, well, you know, we could save you $300 a year or whatever. But when you look at the close details of the policy, you might be changing some of your coverage components. So I found it helpful, if you want to keep coverage the same, essentially as you’re going out and getting quotes, say, “This is my coverage. These are the eight things that are included. Here’s my deductible, here’s what’s covered in the policy. And basically give me a quote for this coverage.” You know? So you can do an apples-to-apples type of comparison.

Nate Hedrick: And watch because some will call things something different, right? They’ll have this special feature with Company A versus Company B and it’s literally just the same thing but with a different name. So watch out for that. The other thing I wanted to mention too is that some of them will offer discounts based on certain parameters of your home. So if you live in a disaster-prone area, ask them about what you can do to your homeowners insurance policy by doing some disaster-proofing. Maybe it’s adding storm shutters or maybe it’s actually a security discount. I’ve seen where if you put in electronic locks or deadbolts, just simple deadbolts versus a regular door lock, they will give you a discount on your overall insurance policy. So there are a number of things you should ask about too, like is there any way for me to get a discount on this? What can I do to improve this?

Tim Ulbrich: Yes. Always ask for a discount, right? Yeah, and as some of you are looking to shop around, you know, certainly many ways that you can go about this. Policy Genius is somebody we’ve talked about before, allowing you to compare life and disability insurance quotes, now also has a platform to compare homeowners insurance quotes. Also, renters insurance as well. If you go to PolicyGenius.com/YourFinancialPharmacist, you can learn more. So that’s No. 6 on our list of seven ways to reduce your monthly housing costs. No. 7 is refinance your mortgage. Again, something that’s near and dear to me. We went through this process last summer. We’ve talked about how low rates have been recently for purchasing a home, for refinancing your mortgage over the last year. Nate, talk to us about what mortgage refinancing is and how this can ultimately lower monthly housing costs.

Nate Hedrick: Yeah, so think about refinancing as basically resetting or getting a new loan. Effectively, what you are doing is you are clearing out your old loan, someone is paying that old loan off, and you’re establishing a brand new loan. So it’s similar to — we’ve talked about student loan refinancing. It’s the same idea, right? We’re paying off what you currently have with Lender A, and we’re moving that to Lender B at a new rate or at a lower monthly payment. And so the goal here would be obviously to lower the interest rate and then hopefully as a result, your overall payments are going to go down. So you’re going to eliminate your — hopefully maybe eliminate PMI if you have that in place today. You can, again, drop your interest rate from maybe a variable to a fixed rate that is much lower. You could lower the term over which you’re paying that loan. So you could go from a 20-year rate to a 15 or a 30-year to a 15. And now your overall expenses for the longevity of that house are going to go down. So there are a number of ways that you can use refinancing to cut your costs. But if you’re looking to lower your monthly housing payment, a lot of times it comes down to finding an interest rate that is lower than what you have today and finding a term that makes sense for your financial plan and is less than what you’re paying already.

Tim Ulbrich: Yeah, and I think it’s, although obvious, worth reiterating one of the traps that I see folks often falling into is yes, you know, you can lower the monthly payment, but if you’re extending out the term, keep in mind the total cost of the loan, right?

Nate Hedrick: Yep.

Tim Ulbrich: So trying to make this as apples-to-apples as you can. If you’re already five years into a 30-year term, and you refinance out to a 30-year, obviously you’re tacking on five more years. So yeah, monthly payment might go down, likely will if interest rates are lower, but what does that mean in terms of the total amount paid over the life of the loan? And keeping that in mind as you’re evaluating various options.

Nate Hedrick: And don’t forget, you’ve got closing costs as well in there, right? So you’ve got to make sure that the actual process of buying that loan, you’re getting a new loan but there’s going to be closing costs associated with that to factor in as well.

Tim Ulbrich: Absolutely. Great stuff, Nate. Seven ways to reduce your housing costs, certainly a topic for the reasons we mentioned at the beginning I think folks are interested in. This won’t be the last time that we hear from you and so if you’re listening and you’re looking to buy your first home or you’re looking to move and you want to work with an agent, you don’t currently have one, as Nate alluded to, we’ve got the concierge service working with Nate. It’s free to our community to work with Nate, who will help get you connected with a realtor in your area. And you can go to YourFinancialPharmacist.com, click on “Buy or Refi a Home” at the top, and once you do that, you’ll see an option to find an agent and that will get you connected up with Nate. Also, if you’re looking for a loan, looking to refi your mortgage, want some additional information, again, YourFinancialPharmacist.com, and then you can click on “Buy or Refi a Home” and get some additional information. So Nate, as always, appreciate your time and expertise and thanks for your contribution on the show.

Nate Hedrick: Thanks for having me.

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YFP 185: 10 Financial Moves to Make in 2021

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10 Financial Moves to Make in 2021

Tim Ulbrich talks through 10 financial moves to make in 2021. It’s time to turn the page on 2020 and start 2021 off the right way and that’s with an intentional plan.

Summary

The start of a new year brings an opportunity to reflect, reset, and start fresh. It’s also an incredible time to dig into your finances and become really intentional with your 2021 financial plan. Tim Ulbrich talks through 10 financial moves you should consider in 2021 and how to make them happen.

Here are the 10 financial moves you should consider for 2021:

Simplify and clarify your goals for the year
Revisit the big questions and discussions with your spouse
Take advantage of any low hanging fruit to get a win or two and gain some momentum
Put your goals on automatic…and get out of the way!
Revisit your student loan game plan
Take your tax strategy to the next level
Button up the insurance part of your financial plan
Evaluate where real estate may or may not fit into your financial plan and goals
Update your legacy folder
Set your learning plan
BONUS: Find a community and get a coach for accountability and guidance

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Tim Ulbrich here, and excited to turn the page on the New Year. Here we are, 2021, hard to believe we’re at the start of the new year. And we know that 2020 was a hard year for many, and I’m hopeful that 2021 brings a better year for everyone.

OK, let’s do this. 10 financial moves to consider for 2021. And spoiler alert: I’ve actually got 11, so we’ll have a bonus one at the end. Now, we know every new year, it’s a chance to turn the page, a chance to reset, and yes, it’s just an artificial point in time, a day that is really no different than any other day except obviously for tax reasons and of course, if something is changing at the 1st of the year, whether that be compensation or benefits. But regardless, those aside, it’s an opportunity to turn the page and let’s take advantage of the opportunity to reset. Now, perhaps resetting means that you’re someone who’s on track and it’s just reminding yourself of the plan that you have in place and celebrating the success and the wins that you’ve had thus far and wanting to keep that momentum going forward. Or perhaps the new year means that you feel like you’re not on track. Maybe you’ve got a plan or a plan that you need to dust off, and it’s a chance or an opportunity to reset course and to recorrect for the new year. Or perhaps you don’t have a plan, and it’s time to get one in place and it’s a time to evaluate what are the different parts of the financial plan and considering all of the things that are out there, what are the low-hanging fruit and what are the areas that you can begin to get some momentum on to be able to have longer term success as it relates to your finances?

So No. 1 — as we go to this list towards 10 financial moves to consider for 2021 — No. 1: Simplify and Clarify Your Goals for the New Year. Now, notice I didn’t say set your goals as I suspect that many of you are already doing that. We talk about that on the show all the time, the importance of having an intentional plan heading into the new year or just in general, an intentional plan as it relates to finances to know your compass and know where you are going. So rather, what I’m referring to here is bringing them into focus and getting specific with those goals to make sure that you’re laser-focused on how you’re going to achieve those. So we know, I know, you know, that there are lots of competing financial priorities, regardless of the stage that you are at within your financial plan. So perhaps you’re somebody who’s listening that has been out of school for a decade or more and you’ve worked through maybe the student loan debt that you’ve had, you’ve paid that off and you’re kind of on a next evolution or phase of your financial plan. There’s lots of competing priorities, even after getting rid of those pesky student loans. Or perhaps you’re someone who is a recent graduate or a student that’s listening and you’re trying to figure out, OK, I’ve got this behemoth of my student loans, and how do I begin to think about other things as I also face what is, of course, this big priority that’s right in front of me? Or perhaps you’re someone who’s nearing the retirement age or you’re in the latter part of your career and you’re trying to identify, OK, I’ve done all of this work, I’ve put these things into place and I want to make sure I go into this next phase of my career, next phase of my financial plan, and I do that in a way that is intentional and I do that in a way that is efficient to make sure I achieve the goals that I want to achieve and of course, lots of tax and other considerations that are there as well. So regardless of the stage that you’re in, whether it’s mid-career, end of career, new career, there are lots of competing priorities. And I’m convinced that the priorities, you know, don’t go away. But it’s a matter of how you can identify those and prioritize those to make sure you’re intentional with what you’re trying to achieve in any given period of time. And here, of course, we’re talking about heading into the new year. So if you haven’t already done so, put them down on paper. And my encouragement for you is to leave this to just a few financial goals that you want to make sure that you prioritize and achieve for the year. So I’m going to encourage three goals and that you write them in a way that provides you with the best opportunity to achieve that goal. So making sure you’re specific about the what of the goal, the when you want to achieve that goal by, and the why — what’s the purpose, why does that matter in terms of the rest of your financial plan and why is this specific goal important?

So let me give you an example here. If I were to say, you know, “Beginning Feb. 1, I’m going to allocate an additional $200 per month towards a Roth IRA so that I can grow my long-term savings in a way that aligns with my retirement goals or plan.” So when I get that specific with a what, with a when and a why — so here, we’re talking about what are we doing: an additional $200 per month towards a Roth IRA. When: by Feb. 1. Alright, how does that look in the budget? Now I’ve got an idea of when and how much. Why? So that I can make sure I’m achieving my long-term savings goals. That is a goal that we’re likely or increased likelihood of achieving because we’re getting specific and we can look at the rest of our financial plan to determine whether or not that is feasible and whether or not that is realistic.

Now, before you set your goals, you’ve heard us say this on the show before, you have to be clear on the why, the so what, the purpose. And we’ve talked about why finding your financial why is so important. And you know, really, what we’re trying to answer here is the question of why does this topic of money even matter to you? Or why does this specific goal and achieving this specific goal even matter? Why is this important? Why is this relevant? And that sounds like a relatively simple question, but if you have thought about this in depth before, you know that it is not. This is the “So what?” question. So before you get too deep into the x’s and o’s of any one part of the financial plan, whether that’s debt repayment, whether that’s investing or savings or insurance, whatever that would be, we have to first understand what we’re trying to achieve. And we talk a lot about our vision at YFP of helping pharmacists on their path towards achieving financial freedom. And my challenge to you is what does that concept, what does that term of financial freedom mean for you? There’s no one right answer. And that can certainly — will be certainly different for many folks that are listening to this episode.

So what’s the goal? So a few ideas to get things stirred up, hopefully to get you thinking about this topic a little bit more. I’ve talked with many pharmacists that say, “You know, when I hear financial freedom, I think about flexibility. I think about options of working or perhaps having the choice to work or how much I work or when I work. Even if I really enjoy the work I do.” Or perhaps it’s to be in a position of control with how you’re spending your time or your money. Perhaps it’s to be able to give, to be philanthropic. Perhaps it’s to leave a legacy or to travel without worry or stress or regret. Perhaps it’s to help family members or friends that are in need or be in a position to do that or to start a business or a movement or a foundation or a charity. You get the point. It’s the financial why, it’s the purpose, and that’s really going to help drive the rest of our financial plan. So that’s No. 1, Simplify and Clarify Your Goals. Set three financial goals for the new year. And then the background of those goals should be the purpose, the vision, the why of your financial plan such that if you achieve those goals, you’re one step closer to achieving your financial why.

No. 2, Revisit the Big Questions or Discussions with Your Spouse if this, of course, applicable to you and your personal situation. Could be a significant other as well. Now, I wrote a blog post way back when several years ago titled, “10 Financial Discussions that I Believe Every Couple Should Have.” And we’ll link to that blog post in the show notes. And you know, these are questions such as when you’re balancing financial priorities or making decisions, of all of the financial priorities you have to consider, whether that’s giving, saving for retirement, housing, transportation, paying off debt, and so on, do you and your spouse or significant other agree upon a plan for how you will balance these? How will you prioritize them? How will you fund those goals, in what order and when? Will you be focusing on several at once or just one at a time before moving on to another one? That’s an example of a big question or discussion to have. Another one, for example, might be around giving. How does each individual feel about giving? How much and where? How will this be budgeted for? Another one might be around the level of engagement. Is one individual taking the lead more than the other when it comes to managing the finances? If so, are both individuals aware of the overall financial situation? How do you talk about this topic? How do you communicate this topic? Are there shared accounts, individual accounts? So I’m just scratching the surface here, and I’ll reference you to that post. But my encouragement would be to look at these and maybe several of these you have had, maybe some you need to revisit, some you haven’t had. But the challenge here in No. 2 is to go back and revisit, discuss, rediscuss these questions with your significant other or your spouse with the understanding that the answers to these are of course going to be significant and inform the direction that you take with many parts of the financial plan.

No. 3, Take Advantage of Any Low-Hanging Fruit so that you can get a win or two and get some momentum early on in the year. Now, again, regardless of where you are at in the stage of your career or your financial plan, I think this is a very important concept for us all to consider. Is there any low-hanging fruit that we can get a quick win or two, get some momentum, so that we’re encouraged and motivated and want to be going on with achieving the other perhaps more audacious or bigger goals that we have set out for the year. So things that come to mind here, things that I evaluated myself in 2020, these could be shopping around auto or home insurance or have you looked at this in a while? If not, good chance to understand your coverage, shop these around, see if there’s any you can save without giving up on the quality of those coverages and policies. Perhaps you’re someone who has wanted to get a term life insurance policy in place or that is a need and it fits with your plan but for whatever reason, you haven’t done that. Relatively inexpensive, we’ll talk about insurance here a little bit in a few moments. Maybe it’s refinancing a mortgage. You know, I’m sure you all heard and read about where rates have gone in 2020, certainly probably into 2021, through the pandemic. And perhaps for whatever reason, you haven’t evaluated that. Is that something to consider? Are there any recurring bills that perhaps you’re not aware of or maybe have lost track of or bills that have gone up over time that you might be able to take a fresh look at and negotiate, things like cable and other services. Are you eligible for HSA savings? And we talked about this in episode 165, The Power of a Health Savings Account. But this is an example of a tax-advantaged account where there’s great benefits, the dollars aren’t enormous, but again, perhaps this small victory, this quick win, this low-hanging fruit that can help accelerate the rest of your financial plan. So do any of these resonate? Or are there any others that you would identify of things that you’ve been meaning to do that you know what needs to be done and you want to just take that next step and knock it out and to continue the momentum with other goals in 2021.

No. 4, Put Your Goals on Automatic and Get Yourself Out of the Way. Now, one of my favorite books, I’ve talked about it on the show many times, “I Will Teach You to Be Rich” by Ramit Sethi, he talks about this concept of automation, automation, automation. He goes through great examples of how to do it. We’ve also talked about it on this show, Episode 057, The Power of Automating Your Financial Plan. But the concept is simple: Once you set your financial goals, when your paycheck comes in, you have a system in place so that your goals are being funded right away and that you have a budget behind that to know that you’re not going to be putting yourself in a position where you’re overspending your income each and every month. Now, for those of you that have been doing this for some time, I think this concept of automation is also very important. It’s this concept of prioritizing your goals, paying yourself first rather than hoping you have money left over. And so perhaps it’s revisiting those goals, revisiting the amounts, the timeline, when do you want to achieve those, and building the systems — again, Ramit talks about that in “I Will Teach You to Be Rich,” we talked about it on Episode 057, how to build the systems so that once you get paid, once you have the goals, you’re automatically funding those accounts such that you are essentially assuring — hopefully — that you’re going to achieve those and behaviorally getting yourself out of the way, which often we individually are the biggest barrier to achieving our financial plan. So that’s No. 4, Put Your Goals on Automatic and Get Yourself Out of the Way.

No. 5, Revisit Your Student Loan Game Plan. Now, here we are at the beginning of 2021, ready to turn the page on a new administration in terms of the President and the President’s team, which may or may not bring additional changes around student loans. We don’t know that yet. But what we know of the first of the year, is that we know that the most recent stimulus package that was passed at the end of 2020 did not extend the administrative forbearance on qualifying federal loans that has frozen for the last nine months or so the interest that was due and any payments that were required on those loans. So it’s really been an incredible time period for those that have qualifying federal loans. For good reasons, payments were not due and interest was not accruing on those qualifying federal loans. So what’s going to come next? We don’t know. There’s been lots of hypotheses that have been thrown out there. There’s been several proposals that have been mentioned throughout the presidential debates and leading up to the election. But we don’t know. As of early January 2021, we don’t know what’s going to happen. Now, we do know that if nothing else happens at this point in time, this administrative forbearance is going to expire. But perhaps this could be continued through an executive order, perhaps there’s additional policies and legislation coming into the future. But we don’t know. So my point here is this is the time period, throughout the month of January, to take advantage of this administrative forbearance as long as it lasts — and if it goes on longer, great. If it doesn’t, you’re ready to go. Take advantage of this time period to come up with your student loan repayment plan or to evaluate or re-evaluate your options to make sure that you’ve got the plan in place that’s going to be the best fit for your personal situation. And we talked about this at length on several other episodes, we’ve got lots of resources on the blog, we’ve got, of course, one of our latest books, “The Pharmacist’s Guide to Conquering Student Loans,” which talks about A-Z student loan repayment for pharmacists. And you can get a copy of that book at PharmDloans.com, and if you use the coupon code “YFP,” that will get you 15% off. So this is the time period to take advantage of this administrative forbearance, as long as it lasts, understand and evaluate all your options, and be ready to go such that when this time period is done, you’re ready to hit the ground running with an intentional student loan repayment plan. Now, for those that don’t have student loans or paid them off, happy dance, right? We’re excited that we’re at this point in time, but perhaps this is also an opportunity to pay it forward and help those that are in this situation — it can be very overwhelming — through providing your input, your experience, maybe getting them a copy of a book like the “Pharmacist’s Guide to Conquering Student Loans,” or pointing them in the direction of some resources that could be helpful to them, things that you’ve learned through your journey, mentoring other folks, but an opportunity to pay it forward to those that are dealing with student loans and typically six figures or more of student loans front and center as they’re trying to attack this and come up with a plan in 2021. So that’s No. 5, Revisit Your Student Loan Game Plan.

No. 6 is Take Your Tax Strategy to the Next Level. Now, Episode 184, just last week, we talked about how to optimize your tax strategy. I brought on YFP Director of Tax and our CFO Paul Eikenberg, who’s our tax professional at YFP. And we talked about the difference between tax planning and preparation, a very important difference. We talked about tax planning mistakes that he sees, we talked about strategies that pharmacists should consider employing to optimize their tax situation. We talked about strategies around legal tax avoidance, tax deferment, and then opportunities to take advantage of those accounts and strategies where you can have tax-free gains. And we broke down each one of these strategies and ones to consider, and so go back and listen to Episode 184 if you didn’t catch that over the holidays. And this is the chance — if you have been someone that has perhaps had your tax filing on automatic and haven’t really thought about understanding all of the different options being a little bit more strategic with OK, now that we’ve completed the filing, what should we be thinking about for the next year in terms of more of a strategic tax plan? Perhaps this is the year where you look at bringing somebody into your financial plan that can really help you be more intentional with your tax strategy. So Paul, as I mentioned, leads our tax planning and preparation services for clients of YFP Planning. And this year, we’re excited to make that service available to 50 more households. And so you can learn more about the tax planning and preparation services that we’re offering and secure your spot by visiting YourFinancialPharmacist.com/filemytaxes. Again, don’t wait. We’re capping this opportunity at 50 pharmacist households. So first come, first served. Again, that’s YourFinancialPharmacist.com/filemytaxes.

No. 7, Button Up the Insurance Part of Your Financial Plan. This is the defensive part of the financial plan. Now, there’s lots of insurance to think about, right? Health, auto, home, renters — but here, I’m really specifically talking about life, disability and professional liability. And this is a part of the plan that I think often gets overlooked because it can be overwhelming to understand what one does or does not need. It can be perhaps not necessarily very exciting, right, to spend money on things that may or may not happen when you look at other priorities such as paying off student loans or investing or saving for the future. So my encouragement is learn first, shop second, and buy last. So first, determine what you do need, what you don’t need. So what does your employer offer? What do they not offer? Where are there gaps? What types of coverage do you need based on your personal situation. We talk about this at length on Episode 044. We talked about how to determine life insurance needs, Episode 045. How to determine disability insurance needs in Episode 155, why you need liability insurance and there of course, talking about professional liability. So learn first, spend time, dig in, understand life, disability, professional liability, understand the nuances of those policies. Shop second. Find an independent broker, and we’ve got some resources on the YFP site that can help you shop the market of what you do and do not need after you evaluate what you do or do not have from your employer, what other coverage do you need, what gaps exist? And then finally, buy last once you’re confident in what you need and the options that are out there.

No. 8, Evaluate Where Real Estate May or May Not Fit into Your Financial Plan and fit into your long-term financial goals. Now, I’ve said this before that as we focused on more real estate on this show in 2020, we’ll be doing much of that in 2021 as well, I’m not suggesting that real estate is for everyone. But I do have a sense that for many pharmacists, evaluating real estate investing — and there’s a lot of different ways to get there — is something that folks are interested in, encouraged in for a variety of reasons, and maybe have been on the fence about should I look at doing real estate investing? Is this a part of the financial plan that makes sense based on a lot of different factors? So looking at the risks, the rewards, what’s the goal? What’s the point? Why do I want to invest in real estate? What’s the point of perhaps generating additional cash flow each month? How might you get involved? Or how involved do you want to be or not involved? Do you want this to be more passive? Do you want it to be more active? Do you have opportunities in your area? Would it be outside of your area? Are there mentors or resources in your community that can help you? And so we have — as I mentioned — featured several stories in 2020, a few that come to mind, Episode 173, Ryan Shaw, all these pharmacists, Ryan Shaw talked about the systems that he has in place for the investing that he does. Episode 178, Nate Hedrick, our real estate expert, talked about his experience flipping a home up in Michigan. Episode 182, Young Park talked about his experience with long-distance real estate investing, lives in Hawaii, invests primarily in Kansas City, and how he has developed systems and how he has built the beginnings of his real estate portfolio. So I recommend you check out those episodes and really determining what your plan is in 2021 if you feel like real estate investing is a good fit. What’s the plan for 2021? Is it learning more? Is it making a move on a property? Is it finding a mentor? Is it more than one of those? So make sure to tune in here, more to come in 2021. We’re going to have more episodes, more content focused on real estate investing. We’re going to be launching a real estate regular show, regular podcast on this YFP podcast. We’ll have more information coming about that throughout the month of January and February. And we’re going to continue to build out more resources for those that are looking to learn more as well as engage and connect with other pharmacist real estate investors. Now, of course another great place to learn — as I’m sure many of you have already heard of when it comes to real estate — Bigger Pockets has great content, great resources, they’ve got forums, the podcast, the blog. And one of my favorite books for those looking to get started, “The ABCs of Real Estate Investing” they published as a book. So lots of places to go here. No. 8, Evaluate Where Real Estate May or May Not Fit into Your Financial Plan and Goals and determine where you’re going to take action as it relates to this goal.

No. 9 is Update Your Legacy Folder. Now, we talked about this. It’s been awhile, but way back when, early on in the show, we talked about this concept of a legacy folder. And I think as we turn the page on 2020, heading into 2021, this is a good time to make sure that you’re updating your systems and your files and you’re making sure that what you have in place is most up-to-date and relevant information. So I first heard of the idea of a legacy folder when taking Dave Ramsey’s Financial Peace University through a local church several years ago. And I remember walking away thinking, wow, so obvious yet so important and at the time was something that I hadn’t yet implemented for our own family and our own financial plan. And essentially, the idea of a legacy folder, whether it’s physical, electronic, or both, is a place where you have all of your financial-related documents so in the event of an emergency, others would be able to quickly assess your financial situation and get access to all of the documents and accounts that pertain to your finances. So examples of items here could include things like insurance policies, wills and power of attorney, account information for savings or debt or could be mortgages, could be credit cards, could be student loans, various savings accounts you have, whether that’s brokerage accounts, retirement accounts and so on. Essentially, a one-stop shop for all of your financial documents and making sure those that should have access or could have access or would need to have access know where that information is and how they can get ahold of it in the event of an emergency happening. Of course, you’ve got to think about security and how you secure that information, whether that’s physical, electronic, or both. So that’s No. 9, Updating Your Legacy Folder.

No. 10 is Setting Your Learning Plan when it comes to personal finance for 2021. Now, at YFP, one of our core values for our team is encourage growth and development. And we believe that for ourselves, for our team, and for you, the YFP community, this concept of constantly growing, learning and developing needs to be at the front and center of one’s financial plan, regardless of where you are at on this journey. Right? There’s always something to learn on this topic. So podcasts, lots that are out there, of course, this one. We hope you’ll tune in. I mentioned the Bigger Pockets podcast, there’s other personal finance podcasts and some resources. When it comes to books, of course there’s the classics: “Rich Dad Poor Dad,” “Millionaire Next Door,” other books that come to mind as some of my favorite personal finance books: “The Automatic Millionaire” by David Bach, “Tax-Free Wealth” by Tom Wheelwright, “The Truth About Money” by Ric Edelman, “The Compound Effect” by Darren Hardy, “The Behavioral Investor” by Daniel Crosby, and one that I recently read that’s not as well known, “Happy Money: The science of happier spending,” written by Elizabeth Dunn and Michael Norton is a great resource, not on the x’s and o’s of the financial plan but more on when it comes to how we use our money, what are some of the things where when we think about our why and our purpose and driving value and happiness, how can money be used as a tool? And what does the science really have to say in that area? So set your plan, look at the options. There’s many out there. I’m sure the YFP Facebook group would have other suggestions as well. And set your learning plan for the year and be intentional about making that a priority in 2021.

No. 11, as I mentioned, I had a bonus here. No. 11 is Find a Community and Get a Coach for both accountability and guidance. Now, when it comes to the community aspect, I hope if you’re not already, you’ll be a part of the YFP Facebook group. I think this is a great community that is really encouraging in some regard, mentoring, helping one another on their path towards achieving financial freedom. I think we’re now a community of about 8,000 strong pharmacy professionals all across the country, so hope you’ll join us. And in terms of getting a coach, we really believe one-on-one comprehensive financial planning is what leads to the greatest accountability and the customization of all of these topics that we’re talking about to one’s individual situations. And so I think this derives the greatest results for the obvious reasons of it’s one-on-one, it’s intentional, it’s consistent, it has accountability, it’s specific to your goals and your plan. But we recognize that it may not be for everyone for a variety of reasons. But if you’re not yet already aware or participating in our comprehensive financial planning one-on-one services, you can schedule a discovery call today, no obligations, see if it’s a good fit for you, a good fit for us. And you can do that by going to YFPPlanning.com, click on “Schedule a Discovery Call,” and we’ll get you on the calendar here in the next month. We also talked about in Episode 181, for those of you that are thinking about is a financial planner a good fit, we talked about many of the topics of financial planning of what we do at YFP but also what are important to look at in general? Fee-only, fiduciary, comprehensive, making sure you’re finding the good fit of financial planning services that are specific to your individual needs. And that was Episode 181.

So there you have it, 10 financial moves to make for 2021 or to consider, plus one in terms of the bonus of finding a community and a coach for accountability and guidance. And speaking of that community, as I mentioned in the introduction, we’ve got an awesome giveaway to go along with this episode to kick off the new year. I mentioned how important it was for my own financial plan and journey to find good resources. And we’re excited to be sharing those with the YFP community. And so we’re going to be doing that through a giveaway in this early part of January where we’re giving two winners in the YFP Facebook group a one-year YNAB subscription, a pair of Apple Airpods, and a copy of “Your Best Year Ever” by Michael Hyatt. So two individuals will win each of those three things. And to enter, you have to be a part of the YFP Facebook group and then comment with your 2021 financial goal on the giveaway post at the top of the group.

So let’s have a great 2021. Let’s approach this year with intention, with purpose. I hope you’ll share your goals, your success, your wins, your questions, with the community in the YFP Facebook group. And as always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please do us a favor and leave a rating and review on Apple podcasts or wherever you listen to the show each and every week. Have a great rest of your day, and here’s to an awesome 2021.

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