Tony Umholtz from First Horizon Bank returns to tackle the top 10 questions first-time home buyers often ask.
This episode is brought to you by First Horizon.
Episode Summary
Tony Umholtz from First Horizon Bank returns to tackle the top 10 questions first-time home buyers often ask. With over 20 years of experience in the mortgage industry, Tony covers essential topics like when it’s better to buy versus rent, the various lending options available, hidden costs beyond the down payment, how student loans impact your mortgage application, and more.
About Today’s Guest
Tony Umholtz is the Senior VP of Mortgage Banking at First Horizon. He 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.
Key Points from the Episode
- Introduction and Sponsor Message [0:00]
- Tony Umholtz’s Background and Introduction [2:55]
- Deciding Between Buying and Renting [4:05]
- Preparing for Home Purchase: Steps and Pre-Approval [6:17]
- Understanding Down Payment and Closing Costs [14:06]
- Details of the Pharmacist Home Loan Product [20:47]
- Defining PMI and Its Impact [24:35]
- Considering Down Payment and Other Costs [29:37]
- Impact of Student Loan Debt on Home Buying [38:51]
- Buying Down Points and Its Benefits [42:16]
- Credit Scores and Their Impact on Home Loans [46:38]
Episode Highlights
“One of the things that I’d always recommend when you’re looking at whether to buy or rent is, how long do you intend to stay in that city or that location? If you’re going to be in a location for five years or more, it’s normally going to make sense to own a home.” – Tony Umholtz [6:27]
“Pre approval is number one. You’ve got to be ready and have a pre approval in place. Know what your thresholds are, what can you afford? What are my closing costs? What’s my down payment requirement? Have all the facts in place.” Tony Umholtz [9:09]
“I typically don’t like points right now because of where rates are. Rates are at this point where the Fed is about to cut, and I think it’s going to be a very gradual reduction in interest rates. It’s not going to be unless we see a recession. I think it’s going to be more of a gradual lowering of rates.” – Tony Umholtz [20:21]
Links Mentioned in Today’s Episode
- YFP Home Buying Resource Page
- YFP Episode 380 – Understanding & Improving Your Credit
- Tony Umholtz
- First Horizon
- Tony Umholtz on LinkedIn
- Tony Umholtz on Instagram
- Tim Ulbrich on LinkedIn
- Subscribe to the YFP Newsletter
- YFP on Instagram
- YFP Facebook Group
- YFP Planning: Fee-Only Financial Planning for Pharmacists
- YFP Disclaimer
Episode Transcript
Tim Ulbrich 00:00
Hey everybody. Tim Ulbrich here and thank you for listening to the YFP Podcast, where each week, we strive to inspire and encourage you on your path towards achieving financial freedom. This week, I welcome Tony Umholtz back onto the show to cover 10 Frequently Asked Questions for first time home buyers. Tony has over 20 years experience in the mortgage industry and is currently a mortgage loan officer with First Horizon Bank who offers the pharmacist home loan product to pharmacists living in the lower 48. During the show, we discuss common questions that first time home buyers have, including when to buy versus rent, the different lending options that are available, upfront costs beyond the down payment, how student loans are factored into the lending equation and more. Before we jump into the show, let’s hear a brief message from today’s sponsor, First Horizon. Does saving 20% for a down payment on a home feel like an uphill battle? It’s no secret that pharmacists have a lot of competing financial priorities, including high student loan debt, meaning that saving 20% for a down payment on a home may take years. For several years now, we’ve been partnering with First Horizon, who offers a professional home loan option, AKA a doctor or pharmacist loan that requires a 3% down payment for a single family home or town home for first time home buyers, has no PMI and offers a 30 year fixed rate mortgage on home loans up to $766,550 in most areas. The pharmacist home loan is available in all states except Alaska and Hawaii, and can be used to purchase condos as well, however, rates may be higher and a condo review has to be completed. While I’ve personally worked with First Horizon before and had a great experience with Tony and his team, don’t just take it from me. Here’s what Peyton from Tyler, Texas had to say about his experience with First Horizon: “Aaron, Cindy and Marilyn were very easy to work with. As a first time home buyer, I shopped around for lenders at the onset of the process, Aaron was always very quick to reply and provide me with any details I requested in order to move forward in my decision to select a lender. Once I selected First Horizon, Marilyn and Cindy did a great job of keeping my wife and I informed of the process. Closing was a breeze yesterday at the title office, and I sincerely appreciate the team going above and beyond to keep my interest rates locked despite extending closing due to negotiations with the seller. I’ve already shared my positive experience with many pharmacists-only groups, and I look forward my brother, also a pharmacist, refinancing with you guys when he decides to.” So to check out the requirements for First Horizon’s, pharmacist home loan and to start the pre approval process, visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com,/home-loan.
Tim Ulbrich 02:41
Tony, welcome back to the show.
Tony Umholtz 02:42
Hey, Tim, good to be here with you.
Tim Ulbrich 02:44
Well, we’re excited, excited to have you back, and we’re going to be talking about frequently asked questions, 10 of them for first time homebuyers. And we’re excited to dive into those in more detail before we get into those. I don’t want to assume that everyone knows who Tony is, although you’ve been on the show several times before, especially for our new listeners to the podcast. So give us a brief introduction to your background and the work that you do with First Horizon.
Tony Umholtz 03:08
Sure, sure. Tim, yeah, it’s a, well, it’s been a number of years here with you, so I’ve enjoyed it. But you’re but you’re right. There’s probably a lot of new listeners out there. So I’m a mortgage banker. I’ve been in the mortgage business now for over 22 years, which is crazy. I started in October, 1 of 2002 so it’s been a while. I run a team. We’re based in Florida, but we can lend nationally, and we’ve been working with healthcare professionals for gosh, I mean, 20 years, and we, you know, we’ve, it’s been a great partnership, working with you guys and and your community.
Tim Ulbrich 03:46
Well, we really appreciate it, too. As you mentioned, it’s been several years. I know you’ve added a ton of value in education our community, and we’re going to do exactly that on on today’s episode. So let’s jump right into our 10 questions, starting with our first one, which I know is a common question we’re getting, especially in in today’s competitive market that continues to be which is, how do I know when I should buy versus whether I should continue to rent? Disclaimer, of course, every market is different, but as you’re talking with prospective home buyers, Tony, how are you helping them think through this decision of when does it make sense to buy versus potentially continuing to rent?
Tony Umholtz 04:23
Well, one of the things that I’d always recommend when you’re when you’re looking at both and comparing both is, how long do you intend to stay in that in that city or that location? If you’re, if you’re going to be in a location for five years or more, it’s normally going to make sense to own a home. I mean, because even with zero appreciation, we know historically, homes appreciate, you know, if you look at historical averages, they typically appreciate three to 6% a year. But even without any appreciation, just your amortization, your tax breaks, if you itemize, you’re usually going to come out way ahead, because most of you guys who have rented know rents don’t stay stagnant. They normally go up every year. So their cost of renting goes up, and then rental insurance goes up. There’s costs that continue to escalate there too. So I normally say, if it’s a time thing for most people, if you’re going to be in the home for more than, more than, you know, five years or five years or longer, or in that area, sorry, I would say that that that’s going to be one reason to put down roots and to own a home versus rent. In the cases where you think you may be moving in a couple of years, then renting might be a better solution, you know, because then you’re, you know, not locked into the house, and you have some more flexibility to move quickly and renting can be a better solution if you’re going to be there or more of a temporary time time frame. But I mean, if you go back in history here, it’s very hard. I mean, I’ve had this question many, many times, and I remember in 2010 people were so hesitant to buy because we just went through the credit crisis, which was just a very, very strange time where we had so much inventory built by builders. It was just very, very it was unlike anything I’ve seen and that, and there was a lot of fear. People did not want to buy. They did not want to buy. And you look back, and that was the best time to buy, you know. So it’s one of those things it’s hard to always pinpoint. I wouldn’t time the market, just like in the equities and stock market, but I would say, if it’s more of a lifestyle choice, right, are you planning to be there for the long term?
Tim Ulbrich 06:27
Yeah, I’m glad you gave that example of not trying to time the market like if the equity in the stock markets, I was thinking the exact same thing, right? We see that on the investing side. I even think about when I was buying our home here in Columbus back in 2018 right? And I remember when we moved here at the time, interest rates were at 4.625% I remember that was the 30 year fixed rate, and it was like, Ah, so high, right? So high. For that time, home prices were the highest they’d ever been in Columbus. And now looking back like that was a steal, right? So I think you kind of look at the long term trajectory of what have the markets done over time, just like we do on on the equities and the investing side and and, of course, in addition to the timeline piece, which is really important for first time homebuyers, we might have people that are in transitions, residencies, fellowships, other things. So, you know, first job, or really making sure we’re in that place where we feel good about laying down roots for a period of time, but also making sure that, hey, we’re ready. We’ll talk about down payment and other factors here in a little bit, but looking at the timeline, looking at the readiness to buy, and making sure we’ve got the financial means, and looking at other parts of the plan as well. Second question Tony, I’ve got for you is for folks that are in that position to say, Hey, I’m ready to buy. I’m looking at my first home. I want to make sure that I can act quickly on that home purchase when I find the right home. So what are some steps that people can take? I’m thinking of things like pre approval, making sure they’ve got their their documents, pay stubs, all the things that lenders are going to are going to request and require, so that they are ready to act quickly when they find that right home.
Tony Umholtz 08:05
Pre approval is number one, Tim, you got to be ready. Have a pre approval in place. Know what your thresholds are, what can you afford? What are my closing costs? What’s my down payment requirement? Have all the all that those facts in place and in but the pre approval is going to solve a lot of issues. Because if you have a credit problem where you need someone to help you with your credit, you know, my team, we often do that, you know, to help prepare folks to get either better rates or qualify, that gets you in line to be ready to move quickly. Because, because when you find that home, sometimes it can be competitive, even in this market, especially when you find the right home, the right price, but definitely being pre approved. I think you know, also having, you know, a good real estate partner, if you’re looking you’re working with a realtor, have identify one that you trust. I think that’s important. But between having, you know, the lender side and maybe in a very good real estate agent in your corner. I think that would be the best way to prep so you know which areas you’re interested into what parts of town. That’s very important as well.
Tim Ulbrich 09:09
Tony, how long does that pre approval typically last? Reason I asked that is I talked with many first time homebuyers. I remember this was the case for Jess and I where, you know, you might have that feeling of, hey, I’m not, I’m not there yet where I’m ready to, you know, work with a lender, go through the pre approval. I’m thinking that I’m going to buy, you know, 6-12, months out, and then all of a sudden we start looking, and we’re ready the next day, right? That happens all the time. So I think that begs the question of, you know, do I wait for the pre approval? How long does that pre approval last? Where, where I can feel confident that, even if I don’t think I’m ready today, but that changes in a month,when I get to that point I’m ready to go.
Tony Umholtz 09:46
You know, that’s good question. I so typically, the the pre approvals are good, the numbers and that we’ve been provided the credit report, they’re good for 90 days, typically. But it’s very easy for us to update them. It doesn’t take long. It’s a very. Simple exercise to to update the credit report, and to update, you know, financials, if needed. So it’s a very easy exercise.
Tim Ulbrich 10:09
Since we’re talking pre approval, let’s go to the third question, which relates to that, which is, what? What’s the difference between a pre approval and a pre qualification? I think with a lot of people, you know, searching online, there may be some readily accessible tools and things that are out there where take click a button, you’re pre qualified, ready to go. But what is the difference between those two, and why the pre approval is so important?
Tony Umholtz 10:31
Sure. So the pre qualification, like you said, very easy to access. There’s many links online that’ll you could put in your income and it’ll spit out a number for you and what you think your debts are, but the lending world is different, right? And in the respect that it’s not always that simple, and it can actually to be to your benefit too, because different liabilities can can account differently against you. So for example, your insurance premium on your car. That’s not something we look at, you know, lenders look at, right? We look at what, what are called creditor expenses, which would be student loans, car loans, credit cards, you know, any mortgages you have, you have a boat loan, any installment loan, installment debt, those are going to be the things that that the lending community would would look at as in your debt to income ratio. Okay, so a pre qualification is just you putting those numbers into the system. They’re not being validated. Your income is not being validated. So yeah, for example, if, let’s say you’re a 1099, employee, and you say, well, I make $100,000 a year, well, you plug that into the pre qualification, but in reality, you take $20,000 in expenses, you know on your schedule C of your tax return. Well, you really only make 80,000 in the in the eyes of a lender, right? But you just put 100,000 in so it doesn’t carry a lot of weight, plus there’s no credit report that’s been reviewed. So the real estate community is wised up to this. So they they call me all the time. Is this a pre approval or pre qualification? That they always call because they want to know that this buyer that’s buying their listing, or they’re about to work with on from a buyer’s, you know, perspective, is able to buy and is been pre approved. A pre approval carries a lot more weight, because that means a lender has validated the income, has validated the credit report and valid, validated the liabilities. So we also look at that means we looked at a pay stub, right? Or maybe even a tax return, and shed these people do earn what they earn, and this number is valid. So that’s the extra step that a pre approval takes, over a pre qualification,
Tim Ulbrich 12:41
And for those that maybe are listening have gone through this process, you know this right? When you go through a pre approval, you upload all these documents, pay stubs, and it has a much more in depth look at your overall financial picture, the schedule, C example, the 1099, income is a great one. And we can appreciate why the pre approval carries more weight. Tony that that that has me thinking, wasn’t a question on my list, but for those that are listening that you know, maybe we’re in a period of postgraduate training residency fellowship where they were earning $50-$60,000 now they’re out earning more of a full, full pharmacist income, $121-$130, but it’s only been maybe three, six months or less. How does a lender typically look at the earnings history and the length of history? So right now, my w2 show is, I’m earning that higher income, but it’s only been for a short period of time.
Tony Umholtz 13:32
It’s a great question. Well, you just mentioned something. It’s W2 income. Okay, so if you, if you’ve been in training for several years, even earning $50,000 a year. And then you jump to that $120 to $130 salary on a W2 basis, the lender can use that immediately. So we can actually use that W2 salary immediately. It’s only when it’s incentive based pay that it can be a problem. So it’s really a good question, because the incentive based pay is different, right? So if it’s if you’re coming in, you say, well, I make a $50,000 salary, but I’m incentivized based on the number of procedures I do. This isn’t as much applies to the pharmacist community, but a lot of physicians it applies to. The contracts have changed where a lot of it is based upon, you know, how many patients they’ve seen, and there’s a revenue component. So we do have to know what that floor income is in order to qualify them, unless they have a two year track record. So when you have a two year track record of variable earnings, we we average that. So if someone’s 100% commission employee, or are they making mostly their most of their income via bonuses? Yeah, average those incomes together. So that’s how that works. That’s how the formula works. But if you’re coming right out of school or training and you have a base salary, the lender can use that right away in most instances.
Tim Ulbrich 14:57
I think for most of our listeners, it would be that w2 income. Um, may not have the the length of history. We do have some folks that may have be more commission based, bonus based, I’m thinking about some of the industry pharmacists that are out there that receive, you know, larger bonuses, or maybe even the self employed individuals that are listening where there’s a longer track history of earnings that are going to be needed to be able to prove that qualification when it comes to the pre approval process. Number four on my list of top 10 questions for first time home buyers relates to the different lending options that are available. So we know there’s conventional loans. People might have heard of FHA loans, pharmacist home loan products, VA loans that are out there, and all of a sudden the questions are swirling of, you know, what are the differences? And how do I go about finding the right loan product that’s available? So what are your thoughts there, Tony?
Tony Umholtz 15:50
So there are a lot of products out there, and this is what makes our job fun, is, is finding the right solution for each individual person, because everyone’s different. And there’s pros and cons to each product. I will say that even a number of of of your clients, in the past, we’ve even used FHA, and the reason why is, depending on your credit score, depending on your situation, sometimes that pricing is much better. The rate is much better. Even though there is PMI, there’s exceptional rates sometimes, which, for some borrowers, is better. So if your credit score is not above 740 that can be a better solution. So we look at, you know, everyone individually. I will kind of give a quick summary of each just to just to help, because I know these are, these are floating around out there. So conventional loans are probably the most common mortgage out there, and those are loans that are, are basically backed by Fannie Mae and Freddie Mac so, and I’m a, I’m kind of a finance nerd. We’ve talked about that. Tim, I don’t want to, I don’t want to bore people here. I don’t want to bore but I will give you, for those that are analytical and like some information, I’ll give you a little more detail. So they’re called the GSEs, Government Sponsored Entities, and they back the majority of mortgages originated in our country, and thank God we have them. They they do a tremendous amount for our housing market, supporting our housing market this country. So those most conventional mortgages are written through them. They’re backed by them, okay? So that means they have very little risk to the investor and so though, and the investors, I’ll tell you who the investors are. A lot of them could be you guys, right? If you buy a mutual fund, yeah, but invest in bonds or Ginnie Mae’s securities, that’s what or, or mortgage backed securities, that’s what it is. So they’re basically, you know, mortgage instruments that are turned into investments. But conventional loans do have PMI if you don’t put 20% down, and that PMI can factor can change based upon your loan to value your credit score, even some geographical implications based upon your income level. There’s some products that they offer based upon your income level and zip codes and things like that, but, but sometimes it’s a very compelling product, because that PMI factor can be very sometimes not a big number. And given the interest rate and the fact that you can pull it off in two years, sometimes paying the PMI is fine. It’s not a big deal, because you’re going to have a chance to pull it off in two years anyway. So that’s conventional loan programs. 20% down. There’s no PMI above that, there’s a there’s a factor, and it’s basically skewed towards your loan to value, how much you put down, and your credit score, and actually your debt to income ratio as well, is a is a component, too. Then we have what’s called FHA loans. FHA loans are, are basically a Federal Housing Administration loan there. There’s a lot of restrictions on FHA as far as loan size. Every county has a different loan size in this country, and they’ve gone up with the housing market. But, you know, there they can be a lot of times they’re capped in the 500 to 550 range for most areas, sometimes lower, sometimes higher, for higher cost. The beauty of FHA is it allows three and a half percent down. It does have a PMI component that is lifetime though. No matter what you do, you cannot get rid of it. But often the rates are subsidized and are pretty attractive so, and they’re very much, they’re much more flexible on credit score as far as rate. Conventional, if you have a lower credit score, the rate gets impacted heavily, and it’s not as much on FHA. VA loans or Veteran Administration loans are really only they’re only available to veterans, right, who have served, and they’re a great product, and we, we love doing them for veterans. It’s just there’s only a couple we’ll do here and there per month, typically, just not as many out there. But there’s a great product, 100% financing, no PMI. There is a VA funding fee, but excellent rates and then there’s unique products, right, like niche programs, like our product for pharmacists, right, with no PMI limited amounts down. We have Doctor loans with no PMI limited amounts down. Those are more loans that are going to be derived from the balance sheet of a bank or a lending institution. They’re not something you’ll find as much on the mass market, so they’re more of a niche program.
Tim Ulbrich 20:21
And I’m glad you outlined them the way you did, because it becomes obvious, hopefully to the listener, that, Hey, can I find a lender that I trust, that I like, that I feel like has a as an understanding of my situation, obviously an awareness of the different products that are out there, and they can help me kind of mesh together these variables of where do I live? What do I have available for the down payment? What’s my credit score? And really look at the total package and then be able to say, hey, for you, we really feel like the best loan product is x. So I know you’ve given an example before that some of people from our community might come to you and say, Hey, Tony, I’m really interested in the pharmacist. Home loan product makes sense. I’m a pharmacist. I like the idea of a low down payment, hopefully no PMI. I’ve got a higher credit score. But there might be variances where you look at the total package and decide you know what an FHA loan does make more sense. And I’m so glad you framed it the way that you did, because I think we tend to look at these things in silos or black and white, that hey, PMI is always bad, not necessarily true. I mean, when you zoom out and you look at, you know what, what’s the interest rate, what’s the cost of the loan over the life of the loan? You know, just like we talk about other areas of the plan, you might give a little bit of here, but get more there where it makes sense. And so I think really having that relationship with the lender is so important that we can hopefully guide the person in the direction and path that makes the most sense for them, even if they maybe that’s different than what they came in with an idea of where they would go.
Tony Umholtz 21:49
That’s exactly right.
Tim Ulbrich 21:51
For the pharmacist, home loan offered through First Horizon, I think some of our listeners are privately familiar with the physician, doctor loans that are out there. Similar type of product or offering. Here we’re focused on our community audience of pharmacists. Tell us more specifically about that in terms of down payment required, minimum credit scores, maximum loan amounts.
Tony Umholtz 22:12
Sure. So the minimum credit score is 700 for the product, and obviously, the higher your credit score, the better pricing you’ll get but there is no PMI, so that that’s been very attractive for a lot of folks. So you have no mortgage insurance, you can put very little down. If you’re a first time home buyer with this product, you only have to put 3% down. If you’ve owned before, it’s 5% down. There’s no prepayment penalties, really, no reserve requirements either. So that’s another big, big piece for younger buyers, especially that haven’t had a chance to save as much, you know, cash. The the max loan amount is typically matches up with the conventional loan amount for the area. So like, as of today, it’s seven, 766, 550, but guys, it’s going to be over 802,000 very soon. So Fannie Mae is basically made that announcement. We’re going to, we’re going to kind of be in coattails with that. So it’ll be over 800,000 and it already is higher than that in higher cost markets now.
Tim Ulbrich 23:19
And that’s not, that’s not purchase price, that’s the loan amount you’re talking about.
Tony Umholtz 23:23
That’s the loan amount so that it’s going to be, I think we can start taking those applications here pretty soon, even though it’ll be official like January 1. I think they’re going to allow us to start taking those applications in November. So, you know, that’s kind of a nice, nice benefit, to start that early, get a jump start, but, but, yeah, that’s the minimum. That’s the, sorry, the maximum loan amount, the minimum credit score, again, I’ll mention is 700. The no prepayment penalty, no PMI, is really the big pieces to this product, and the, you know, but also the flexibility to do, to do loans all over the country. Yeah, it’s not really. There’s not a geography base outside of Hawaii and Alaska. We can offer this product pretty much everywhere.
Tim Ulbrich 24:12
Yeah. And again, for folks that want to learn more about that product, get in touch with with Tony and his team to see if that’s a good fit, and go to yourfinancial pharmacist.com/home-loan. We’ll link to that in the show notes. We’ve got a great educational page. It talks a little bit more about the pharmacist home loan products, break down some of the math of what’s involved there. Talks about the maximum loan amounts, what are the features, benefits of that product? And then again, an opportunity to make that connection to Tony. So we’ll, we’ll link to that website in the show notes. Tony, we’ve talked about PMI, you and I have both thrown around the term. So let’s go there with our next question. Define PMI for the first time homebuyer who maybe hasn’t heard that that term, and what the purpose and point of PMI is.
Tony Umholtz 24:53
So PMI private mortgage insurance is what that stands for, private mortgage insurance. So. So what it what it means is, you know, when you when a mortgage is under 80% loan to value, there is actually, if that loan were to default, there is recourse for the lender on the balance above the 80% so like if you were to sell as a as a mortgage lender, let’s say we had $100,000 mortgage that we or purchase price, and we lent 95% for simplicity, $95,000 on this mortgage to in Fannie Mae insured it or bought or accepted it right, 80% LTV, there’s no risk If it defaults. But that $15,000 tranche above the 80,000 between the 80 and the 95 that would be a liability for the lender. And what PMI does is basically, is it ensures the lender that, if it did default, that you would no longer that the lender would not be responsible for that. So that’s the reason there is that you know that that premium is an insurance premium on the mortgage, and again, the higher the balance of the loan, the higher the PMI typically, right? The higher the loan to value, the higher the PMI. So it’s risk based adjustment. It’s just like any insurance, like, if you’re in auto insurance, right? If you’ve gotten in a lot a lot of speeding tickets, premiums higher, well, it’s kind of the same thing with PMI, right? If your credit score is lower, if your debt to income ratio is higher, right, things that are deemed risky, or your loan to value is high, 95 versus 85 Yeah, and that’s going to increase your premium slightly. Now, we mentioned this earlier. PMI comes in different forms, so PMI through the Federal Housing Administration, FHA loan, that ensures that pool of FHA loans, right, that is lifetime of the loan, right? And there’s an upfront component and a monthly component.. Doesn’t go away. And you have the upfront component. Now on conventional, you only have the monthly component that can go away once you’ve paid it for two years, and you can prove that the LTV is below 80%. The other thing I’ll say, I’ve had clients do this. I had a client one time put 5% down conventional loan. They sold their house, and they got extra money, and they put the additional 15% down based on the original purchase price. They were able to get the PMI waived so you can get it inside that year, if you go back and and get the LTV under 80. So mortgage insurance is just a tool to help people afford, you know, homes with less down. It’s been around for, you know, forever, and it’s something you don’t want to pay. If you can get around it, it’s just saves you money, right? So it saves you a lot of times. It can be a car payment per month for some people, but it is. It can be a useful tool to get into a home with less down.
Tim Ulbrich 28:01
So give us a for instance. No one’s going to hold you to exact numbers, but let’s say someone’s buying a half million dollar home. Let’s assume a conventional loan. They put 10% down, so 50 down, they’ve got a $450,000 loan. What are we talking about roughly, for PMI on something like that?
Tim Ulbrich 28:19
And I’m thinking back to our first home, and again, this was an FHA one, back in 2009 before I knew about what you shared of, you know, some of the indefinite nature of PMI and FHA loans. And I want to say it was in like the 131-140 range, if I remember right now, lower purchase price, right? This was 2009 so, you know, we’re not talking about a half million dollar home.
Tony Umholtz 28:19
Well, I got to be careful here because there’s so many variables, credit score, right, loan value, you know, debt to income ratio, usage of home, second home versus primary home, there’s all these different factors. I mean, it could be a couple 100 bucks depending on the risk profile. I mean, I’ve seen I can tell you, for risky folk, riskier folks, I have seen those premiums approach 500 a month. Pretty sizable, right?
Tony Umholtz 29:11
I would say two, 250 ish to 350 depending on your profile, probably, you know, it’s probably a good range on that, I would think. But the, you know, one, one thing is there, there has been a regional effect, Tim, and again, this was a while ago. I don’t want to say but, but I remember, there was a couple areas that had more foreclosures, and others, I remember, for some reason, the PMI was higher regionally. I don’t know if that pricing is still around. I don’t think so. But there was some things like that, like macro effects as well. That was more after the credit crisis, it’s been a long time, so I think it’s, it’s changed, but it’s mostly based upon, you know, your loan to value again, your debt to income ratio, and you know what your credit score is, right? So someone with a 660 score. Versus a 760 score is gonna pay a different premium, you know as well.
Tim Ulbrich 30:05
Let’s talk about down payment as our sixth question. We mentioned this briefly when you talked about the different loan products, but I still talk with a lot of prospective home buyers that you know they’ll share with me. Hey, Tim, I’m thinking about buying a home in the next six or 12 months, and ask a couple other questions, and one of them being, Hey, what are you thinking in terms of down payment? Because we know that for many first time homebuyers, this can be the biggest barrier right to getting started, depending on the loan product that they ultimately choose. And it’s one of those questions I think that catches people off guard of like, Oh, I haven’t thought about, you know, if it’s 20% down or 10% down or 5% down. But if we’re talking about something like a half million dollar home, these are big savings numbers, while people are often trying to prioritize other financial goals as well. So, you know, the question here is, how much should I be ready to put as a down payment for a home purchase? And I know in part, the answer is, it depends, right? Based on the products we talked about.
Tony Umholtz 31:00
Yeah. I mean, it’s, it’s, it’s, you know, down payment is going to vary, right? I would say that normally, let’s say you’re going to utilize the pharmacist product. If you’re a first time buyer, you could put 3% down. So 3% down is all you’re going to need. In that scenario, I would say five, 5% down if you’ve owned before I have, and some in our community, in your community, have have put 20% down. So it is something that we we see, and they just want to do that from a payment perspective, right? Because obviously the more you put down, the lower. But the you know, I would say planning ahead to have at least 3% down, right? If you’re a first time home buyer in and then also, you have to budget for closing costs, right? You closing costs and prepaids. And sometimes the prepaids can be more than the closing costs, depending on the state you’re in. Okay, for example, in Florida, closing costs are a little higher. Ohio is less than Florida, but your prepaids might be higher in Ohio. So it just depends on what you know. Prepaids are insurance, homeowners insurance and your tax escrow. Okay, so you’ll pay one year of your insurance premium up front. So depending on where you are in the country, that can vary, if you have an older home versus a newer home, that premium can vary, but those are some of the things you have to be prepared for. Your down payment, closing costs and prepaids. You want to make sure you’ve got a good number of what all of those are, and reserves, if you require them. We don’t look at reserves for the programs I mentioned earlier, really isn’t a reserve requirement here, but some, some do. Some have very strict reserve requirements, six months, 12 months, you know. So there are requirements out there. You want to make sure you’re prepared for for all of that.
Tim Ulbrich 32:50
And that was my seventh question. I’m glad you you addressed that with the down payment, which was, what else should I be considering beyond the down payment? Because I think that becomes the primary focus and goal for right reason. I mean, even if it’s 3% which isn’t the 20% we’re talking about conventional, that’s still a big savings goal, right? Again, if we go to a half million dollar home, you know, we’re looking at $15,000 that we need to come up with and have saved, that’s, that’s no small amount, but, but other things I hear you saying could be closing costs, prepaids, reserve requirement, if they exist. And then we’re, of course, seeing about more of the ongoing things that could be PMI, that could be, you know, property taxes and obviously upkeep maintenance in the home, HOA fees, etc. So we’ve got to kind of zoom out here and look at the budget, but more of those one time costs upfront, in addition to the home payment closing costs, prepaids. Tony, funny story with that. I remember the first time we bought our home going through this when you don’t know things like escrow, right? You’re not thinking about prepaids of homeowners insurance and taxes. I remember seeing those, and I, I had to ask a question four different times, I think, to the lender, because, like, is this? Is this? Right? Like, I just wasn’t expecting it. I wasn’t anticipating it, and it caught me off guard. But if you put together closing costs and prepaids that that that can be another sizable amount of money that someone has to have ready at the point of close,
Tony Umholtz 34:10
Absolutely, yeah. I mean, it’s a depending on where you’re located, it can be very sizable, right? Premiums can be pretty high. Yeah, absolutely. And you know, a couple things just about, you know, we’re talking about all these things. Tim about, okay, down payment, closing costs, prepaid, it’s very intimidating, right? It sounds intimidating like, wow. So a lot of lot of cash out, out of the pocket, and it is, but the amount of clients that like, for example, your $500,000 home example, where they put 3% down. And I’m not talking about during COVID, when things were shooting up, but yeah, that put think about $15,000 down, and maybe you had another six to 8000 for closing costs and prepaids. And now that house is worth. 550,000 a year and a half, two years later. Where can you get a return like that? Let’s say you put 25,000 into a home, and you have 50,000 a year later in equity. That’s, that’s a remember, this is on top of, you still have the equity in the home, right that you put down, plus you’re amortizing the loan, you’re building equity, paying the note down. Now your home’s worth 550 and I can’t tell you how many situations I’ve had like that and seen and you know. So on a positive note, home ownership is very powerful, and it’s one of the best returns you can you can get as and it’s not looking at this as an investor. It is a home, it’s a lifestyle, but I’ve also argue it’s one of the best investments I’ve ever seen, the leverage wise. I just I’ll give one example. He was a physician, and I met with him his first day. His mother came in the office with about 15 years ago, he had just got into his residency at the University of South Florida, and he wanted to buy his first property. And he bought a town home at the time, it was maybe 140,000 or so, and it was a big deal to get that. He sold that town home after his schooling was over for like $270-$280,000 rolled that equity into another home, and he just bought a home for 1,000,001.4 5 million that we helped him with. It’s just a great story of just utilizing equity. And that’s what he told me, he’s like Tony. I just built my my sem I had all the student debt, I did all these things, but I built up the down payment through owning property. And it’s a good example of how just, you know, we’re not talking about flipping property, but owning for a set number of years and paying down the note and you roll to the next one. So I think I didn’t mean to get off on tangent, but to you, I was like, you know, I don’t want this to come across as like, oh, it’s all these things to worry about, and it’s, there’s a lot of positives too and you have to be prepared. You have to have the down payment ready. You have to have the prepaid and closing costs. And a good lender is going to tell you exactly what that’s a good estimate of what that’s going to be, yeah, and then, then you can go out and you can start house hunting, but you just know that that that power of ownership can really, really provide a great financial return for you as well.
Tim Ulbrich 37:22
Yeah, I really appreciate saying that, right? Because there’s a balance here, which is true of many parts of the financial plan. You know, obviously, what we want to avoid is someone getting in way before they’re ready, and then we’re over our head and we’re not, not ready to take on that expense, or we’re, you know, a job loss or job cut hours away from, you know, being underwater on a home that’s one end of the spectrum. But the other end of the spectrum also is being too conservative. You know, in the decision, ultimately, there is an investment here. There is an asset that hopefully is going to build in value over time, even potentially an asset that we could leverage, you know, the equity in the future, if and when that were to make sense. And so, you know, I think that’s where the conversation comes in, which is an interesting one of does 20% does making extra payments on your home to pay off the mortgage early? Does it make sense? Does it not? It depends, right? It depends on what else is going on in the plan, or the interest rates and so forth. So, good reminder that here we’re talking about expenses and cost, but also, yeah, an asset and an investment that we’re going to grow, hoping over time.
Tony Umholtz 38:22
That’s right. And Tim just remember, there’s guard rails on the lending community too. I mean, we do not typically allow debt to income ratios, right, without compensating factors above 43% right? It’s going to be, you’re going to have to have compensating factors to get it above there. So there are guard rails. But everyone you got to be prepared to once you sign on that mortgage you’re obligated to pay, and so you got to understand what your costs are and what you’re getting into, and plan properly. You’re exactly right about that.
Tim Ulbrich 38:54
Since you said debt to income ratios 43% let’s go there with the next question, because I think many of our listeners that are first time homebuyers also have student loan debt. And so naturally, the question is, how does my student loan debt, along with any other debt, could be a car debt, could be credit card debt as well. How does that get factored into the equation, and how that’s looked at by the lender?
Tony Umholtz 39:15
Yeah, great question. So yes, the student loan debt is just like a car payment, just like a credit card, all those things, count on your debt to income ratio the student loan typically, we’re going to look at that income based repayment amount. So even if you owe a large number, we’ve seen 250,000 or more from folks you if that payments only 900 a month, that’s what we’re using, so or 800 a month, or 1000 a month, whatever that number is what we’re going to use. Now, in instances where there’s no payment, there is a factor we use, but I’m seeing less and less of that, Tim They have a an income based payment that we know what the obligation is going to be, and that’s how we’re calculating themajority of debt income ratios. So it’s not the balance. And that’s what some of our clients have said in the community, is like, Hey, I owe this amount. What is how’s that going to impact my affordable ability to buy home? Well, again, it’s just coming back to whatever that income based repayment is. That’s the liability we’re going to use.
Tim Ulbrich 40:18
So you mentioned the 43% we’re looking across all all liabilities. Obviously, student loans is a big part of that for many first time home buyers, but you’re, you’re typically looking at the income driven repayment amount. Let me ask you this. I’m getting in the weeds a little bit, but I’m guessing some of our analytical listeners are thinking about this. So if I’m listening and I have $300,000 of student loan debt, you know, if that person were to opt into the standard 10 year repayment plan, they’re looking at a fixed monthly payment round numbers, probably somewhere around 2500-2700 ish, I’d have to check my math on that, but it’s probably pretty close versus if they opt into an income driven repayment plan, even though they can make extra payments if they want to, the income driven repayment plan, by definition, is based off of your income, and has nothing to do with the total amount of debt that you have. So you could have $300,000 in debt, but because of your situation, your income situation, you might have a monthly payment, as you mentioned, of 800, 900 1000 so there is some strategy there to be had, potentially if you’re looking at buying a home of how does my student loan repayment plan selection and strategy align with my home purchase decision?
Tony Umholtz 41:11
Yeah, that’s an excellent point, absolutely. Because if you’re looking to buy a home and you have that option right Tim, you want to try to get that payment probably as low as you can in the interim so you have that affordability, and it won’t impact your ability to purchase and then down the road, you can influence that more after you’ve qualified for the loan that you want.
Tim Ulbrich 41:48
Yeah, and this is another example, I know we’re not talking about student loans, but another example where something like those that are on a public service loan forgiveness track, you know, has multiple benefits, because in that type of pathway, what we’re typically trying to do is pull all the levers that we can to minimize the monthly payment, get more forgiven and forgiven tax free. But here then that lower monthly payment would also have some peripheral benefits that it’s going to show as a lower amount when we’re looking at the debt to income ratio. Good stuff. All right. Number nine on our list is related to the topic of buying down points. This is a question I get a lot. So Hey, Tim, I talked with a lender, and they offered me this rate, and they mentioned something about buying down points. But I don’t really know what that means, or how I can actually evaluate whether or not that makes sense. Tell us more about that.
Tony Umholtz 42:33
Sure. So, so what points are is, I mean, some lenders will charge points, and it appears that they’re buying the rate down, but they’re not always buying the rate down, if that, if that makes sense to you, like it could be some margin built in. I mean, I don’t want to get into too much of of how all lenders work, but there’s different types of lenders out there. There’s banks, which is what we are, there’s there’s mortgage brokers, and then there’s correspondent lenders, and they definitely have different models. Typically, the products that we’re discussing are going to be through a bank, right? The broker community is a little bit I have some friends that are brokers that are great, but they normally will write more challenging loans, like lower credits for people. Typically higher cost to originate type business but, but points are something you can utilize to to your benefit. I’m, I will say this, I’m not in this environment. In my background is finance too. So I’m, even though I’ve been in the mortgage business long time, my degree, my masters, are in finance, I’m, I’m pretty analytical as well. I typically don’t like points right now because where rates are. Rates are in this in this point where the Fed is about to cut, and I think it’s going to be a very gradual reduction interest rates. It’s not going to be unless we see a recession. I think it’s going to be more of a gradual lowering of rates. If you look at the Fed dot plot, which is what the Fed is telling us they’re going to do with rates over the next few years. Early 2026 has rates substantially lower than they are today. So you know, if you’re going to pay points today, how are you going to get the payback period? Yeah, payback period is the most critical piece to paying points. How quick do I pay back those points? So for example, one point buy down, it might get you a quarter to three eights in rate. Right from what the par rate would be, par rate means no points. One point is a buy down in the rate. Now, if you say I’m going to stay in this home for let’s say it’s three eight of a point. So it’s point 375, percent. So at the point of three years, you’re going to more than pay back the loan at three years between your interest rate savings. If you’re only going to be in the home two years, you don’t want to do it right. But if you’re going to be in there over three years, it would make sense now, but the only argument I’d give is you’re likely going to have a chance to refinance in the next three years. So why pay those points now? I would rather see you pay them when the rates are lower and buy the rate down even further. Okay, so that’s that’s how points work. It’s a buy down of the interest rate, and it can be to your benefit in some instances. It also can be the way you qualify, right? If your debt to income ratio is a little tight, we’ve used that this year, where we’ve bought the rate down three eighths of a point or a quarter, whatever it is, and that got their payment a little lower to qualify. So there is times we will do it, but generally speaking, I don’t promote it to clients. There are some that ask, but majority of them, once I speak to them, they say, I get that just given where the deal curve is. But I did, I will say this during COVID, I had a few these, like, really low rates. And I remember the rates were low and I and they were going to stay in the home, and they paid a point, and they got the rate even lower, and are never going to refi that loan. So it’s like, you know. So there is some some, some instances where it makes sense. So, but also, the other big thing is, will it truly be a long term hold, just being, being in the business, as long as I’ve have been, I’ve seen a lot of families move up, and you think, well, am I going to be I’m going to be here for the long term, right? That I hear that, but then it really isn’t reality. You know, things change. Your family grows. You need a different school district. So, you know, I think those are the things you think through if you’re looking to pay points, because it’s a lot of times it’s a little bit better not to, you know, unless you really are getting a big time benefit.
Tim Ulbrich 46:35
Great stuff. Our last question for you on our top 10 FAQs for first time homebuyers, and then we’ll let you off the hot seat. Tony.
Tony Umholtz 46:43
No problem at all. The pressure, you know, I was a kicker a long time ago, so I like the pressure.
Tim Ulbrich 46:50
I love it. How about kicking in the NFL these days? Man, they’re like, stretching the limits. It’s pretty fun to watch. It’s reminding me the four minute mile of like, once you realize something’s possible, right? We just keep going. Anyways, our last episode of the podcast, episode 380 just couple weeks ago, we talked about understanding improving credit. And so my final question for you relates to credit, which is, how much does my credit score impact, not only my ability to get a loan? We talked about that a little bit with a minimum credit threshold for something like the pharmacist element, but also how competitive my rate will be,
Tony Umholtz 47:26
right? Yeah. So, so remember, higher credit scores are always going to help your interest rate, that that’s going to be a benefit, especially like with the pharmacist product, a 740 score will be better than 720 and better than 700 so it does help you to have a higher credit score. Some products have a threshold. I mean, the pharmacist product 700 if you are 690 you you’re going to be too low, unless we can get your credit score higher, you know. And but there, you know, credit scores are important. You know, even FHA, like our our FHA minimum is 620 is what we have. Some lenders will go down to 600 you know, as well. But we have a 620 credit score floor to get qualified for FHA or conventional and those rates get impacted, you know, the higher your credit score, like, I’ve seen amazing rates with FHA on 760 and above credit scores, like, at one point, I mean, before rates went up again, yeah, memory. I mean, we had rates at 5% with no points, 30 year fixed. That’s why I had to write some FHA loans. The rates were so good, you know. So it was just one of those things where we had to look at the opportunities for people. And it made sense for, you know, 30 year at that level. But, yeah, credit scores are super important. You want to take care of them. One of the big pitfalls I’ve seen for the first time, home buyers out there. Let’s say you move into a new apartment, right? You’ve done a really good job. You keep your credit your credit cards, under wraps. You don’t charge over 50% of the limits. That’s a big thing that I find is a problem. But let’s say you go to Best Buy, right? You buy a TV, you buy this surround sound, you put like, 2000 $3,000 Oh, there’s no interest for zero a year through Best Buy credit. Well, what they do is they report it to the bureaus as a maxed out credit card. Yeah, a lot of furniture stores do this too. Just be careful of that. I’ve seen that happen when people furnish their apartments or their homes or, you know, it happened. Happened to me when I was young. I remember I bought my first time I did it, and I my credit score went down 60 points. I was like, Wait a minute. Went from 760 or 740 to like, you know, 680 or something like that. And that’s what happened, is I went and I did that, I bought furniture, and it didn’t know it, so I learned it firsthand when I was in my mid 20s. So I think for all of you out there, that would be one thing I’d watch. You know, don’t max out credit cards, even for those types of arrangements, I would keep your credit cards, just keep one or two good ones. You don’t need a bunch of them. You don’t need a Dillards card, A Macy’s card, a Home Depot card, you know, you name it, just take, you know, one or two good ones, and that’s, that’s all you’re going to need, and keep your, you know, pay, make your payments on time. That has the biggest effect, okay, that and the balances are the most critical pieces of your credit.
Tim Ulbrich 50:17
Tim and I talked about that on 380 and again, we’ll link to that, to the show notes of what are the individual factors of the credit score. And as you mentioned, on time, payments and percent of your balance that you’re using make up nearly two thirds of that of that credit score when you look at the total factor. So focusing on those areas to improve your credit, making sure you’re not making some of those blunders leading up to the home buying process. And then when you’re in the process of buying the home, the lender doesn’t want any surprises, not the time to be going out, taking out a car loan or other things. So go through the home process, and then you can think about those things.
Tony Umholtz 50:52
If I can, I’ll just expand on that real quick, and I want to point but the on during the process do not get further credit. We even know if somebody looked at your credit. So the services now lenders know if you’ve gotten any sort of, you know, additional, you know, credit. We know. I mean, I in the past, before we had that, I remember, I’ll never forget going to a closing and a guy bought a Porsche before closing. I mean, I saw some crazy things. This was a while ago, but like now we know everything that happens. So everything is going to be like, don’t buy anything till after closing, if you can. If you do have to buy something, just we have to add it in, because we’re going to find it. We’re going to see it on the report. The other thing that I would say is, and what it is, is, during the process, we get it’s not that even though we’ve closed, we’ve pulled your credit post the credit report poll, lenders know if we have any other liabilities that have that have been created, so we know about it. Now, the other thing I’ll just a point I’d make for first time homebuyers that might help is a credit questions I’ve gotten in the past is, I don’t really have a lot of credit. I have the student loan. Yeah, my parents paid for other stuff. I just I didn’t really have a credit card. What do I do to build my credit? And one thing I will say is getting a simple credit card, even if it’s like a $500 you know, limit, and charging some groceries or gas and paying it off immediately at the end of the month without any interest on the statement balance. Do that over a few months, and it’ll really help your credit score. So that’s one thing I’d encourage. Like, if you think you need to develop your credits credit, you’re younger and you just haven’t had a credit card yet, getting a small credit card, it doesn’t have to be anything crazy, and just putting a little balance on it and having a discipline to pay it off immediately and not carry it. Do that over a several month time frame, it’ll already start helping your credit
Tim Ulbrich 52:46
Great stuff, Tony. What a fun discussion. There you have it. 10 Frequently Asked Questions for First Time Home Buyers. Lots of great information that you covered during the episode. As a reminder, head on over to our home buying resource page at YFP, by going to yourfinancialpharmacist.com/home-loan. You can get more information there and then have the opportunity to connect further with Tony and his team. Tony, thanks so much for for the contribution. As always, we appreciate you.
Tony Umholtz 53:12
It’s great to be here. Tim, always enjoy it. Always have fun with you.
Tim Ulbrich 53:16
Thank you, Tony.
Tim Ulbrich 53:19
Before we wrap up today’s show, I want to again thank this week’s sponsor of the Your Financial Pharmacist podcast, First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home. A lot of pharmacists in the YFP community have taken advantage of First Horizon’s pharmacist home loan, which requires a 3% down payment for a single family home or town home for first time home buyers and has no PMI on a 30 year fixed rate mortgage. To learn more about the requirements for First Horizon’s pharmacist home loan, and to get started with the pre approval process, you can visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan.
Tim Ulbrich 54:04
As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. Furthermore, the information contained in our archive, newsletters, blog posts and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyzes 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.
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