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YFP 169: Helpful Tips for Getting a Mortgage

Posted on by yfpadmin


Helpful Tips for Getting a Mortgage

Tony Umholtz, a Mortgage Manager at IBERIABANK/First Horizon shares helpful tips for getting a mortgage and what you need to know when financing a home purchase or refinancing your home. Tony also breaks down the difference between pre-approval and pre-qualification, how interest rates are calculated, different types of home loans and everything you need to know about escrow accounts.

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 at IBERIABANK/First Horizon joins Tim Ulbrich on this week’s episode to dig into a huge piece of the home buying or refinancing process: financing. He breaks down several key components of financing such as the differences between pre-approvals and pre-qualifications, loan types and how interest rates are calculated.

Tony recommends that someone begins talking to a lender before they begin looking for a house so that they can learn about different loan products and get a pre-approval letter. A pre-approval letter is needed from the lender when you make an offer on a home. It communicates to the seller that you are able to finance a home and that your credit has been checked. If you’re not quite ready to shop for homes, Tony mentions that a pre-qualification can be run as a cursory overview of someone’s income and debt. A pre-qualification doesn’t pull credit, however it does use your debt to income ratio and could be helpful in the beginning stages of the process.

Tony talks through different types of loan products including conventional, FHA, VA and jumbo loans. Regardless of the loan product you chose, your mortgage will have an interest rate. That interest rate fluctuates based on many factors, like the market itself, individual factors such as credit score and the type of property (single family vs condominium).

IBERIABANK/First Horizon offers a loan option for pharmacists called the Pharmacist Home Loan (aka the Doctor’s Home Loan). This loan allows you to buy a home for 3% down if you’re a first-time homebuyer (5% down for subsequent homes) and pay no mortgage insurance. Full disclaimer: this is not the case for every homebuyer. There are certain restrictions to qualify (maximum loan amount and minimum credit scores) and certain property types where the down payment rates can differ.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tony, welcome back to the show.

Tony Umholtz: Tim, thanks for having me.

Tim Ulbrich: It’s almost like you’re a regular now, number three that we’re doing this. So glad to have you back. How are things going down in Florida?

Tony Umholtz: You know, we’re doing great down here. And Tim, always good to be here with you. And you know, it’s hot and humid down here in Florida.

Tim Ulbrich: We are finally on the tail end of that heat here in Ohio. I feel like we’re getting the beginnings of some fall weather, which I’m biased, of course, but some of the best weather I think in the country comes in September and October in Ohio. So excited for that time of weather here and just enjoying that with the family. So Tony, before we jump into I think what’s going to be a great discussion on helpful tips for those that are going through the financing part of the process, looking at obtaining a mortgage, I don’t want to make an assumptions that our listeners heard both of our previous episodes that you were in, so give us a little bit of background on you and the work that you do at IBERIABANK/First Horizon

Tony Umholtz: Yeah, sure, Tim. I’ve been with IBERIABANK/First Horizon now, gosh, two and a half, almost three years with IBERIABANK/First Horizon and I run a team that handles mortgage originations for purchase transactions, refinances, across the country. We can handle most states, 48 states. And I’ve been in the industry now almost 20 years — I can’t believe I’m saying that, Tim. But I’m aging myself — nearly 20 years. And my background, of course, through college was finance. I was a finance major and did an MBA as well. But I’ve just really enjoyed helping people, helping families, with the home buying process. I have several kids. I have three children. I have a daughter who’s about to turn 12, I have a 10-year-old, and we recently adopted a 2-year-old girl last fall.

Tim Ulbrich: Always appreciate having you on, sharing your expertise, I know a topic that is of interest to so many of our listeners that may be in a first time home buying position, might be moving, might be in a refinance situation, especially given the market and the landscape of what we have. And we had you on, as I alluded to, Episode 136, Ins and Outs of a Pharmacists Home Loan, and Episode 154, Getting a Home Loan in a Pandemic, so I’d reference our listeners to those two episodes for more information. But today, we’re getting a bit more specific in the home buying to talk about mortgages and to learn tips really when navigating the financing part of the process when it comes to home buying and refinance. And just for some background, the nature of how we came to this idea for an episode is I was reflecting, you know, having gone through the home buying process twice and having gone through the refinance process twice, most recently just a couple months ago here with our home in Columbus, which I’ve talked about on a previous episode, honestly, I feel like I still have a pretty elementary level understanding of everything that is involved with the lending process, and I feel like each time I have gone through that, I’ve learned something new. And so just like we do with much of our content on the Your Financial Pharmacist podcast, I feel like any education we can share with pharmacists so that they’re better prepared as they’re going through it, hopefully the better. You know, we believe firmly that the more educated you feel, the more empowered you are in the process, the more involved you are in the process, the better the outcome is. So that’s really the nature and the background for this week’s episode. So Tony, I want to in a moment start jumping into some terminology that I think often folks may get hung up on or wondering about, but my first question for you, as somebody who is perhaps listening looking for their first home, so going through the home buying process the very first time, when do you typically recommend somebody begins engaging in a conversation with the lender? As they’re out perhaps looking at homes or looking at Zillow or Redfin or wherever, when do you want to get the lending piece of the process moving forward?

Tony Umholtz: Tim, great question. I always believe that you want to get the dialogue with the lender going immediately, even before you’re out there looking at homes. I mean, it’s OK to be looking around on Zillow or Realtor.com a little bit, but before you start entering into homes, a majority of realtors out there are going to want to before they show you a house, a listing agent will allow you into the house, they’re going to want to know you’re pre-approved. And I always find knowledge is power. You know, knowledge is power. Knowing what you can and can’t do as far as affordability is critical. And you might be surprised, with the rates where they are today, you may be able to afford more home than you realized. But I would always engage with a lender first. I think that that’s a critical first step.

Tim Ulbrich: I’m glad you said that, Tony, because the other thing that jumps out to me here, as we’ve talked about before on previous episodes that you and I have discussed on the show is really the importance of you as the individual setting your home buying budget and really understanding how this fits into your monthly cash flow as you’re looking at all of the other goals when it comes to your financial plan. So you know, as you begin to get serious of looking at homes and you’re starting to obviously get excited about the process, I know through firsthand experience, the budget can quickly go out the window as you start looking at homes, or at least that can be challenged. And so having a good pulse on that and really understanding what would that loan look like and talking to the lender, what might that mean from a down payment, from rates, from month-to-month payment I think can really help understand and set expectations as you’re going into the actual process of evaluating homes and hopefully getting excited about what lies ahead. Tony, you mentioned pre-approval, and that was one of the questions I had for you is I know the terms pre-approval, pre-qualification, often get thrown around. Talk to us about the difference of those terms and why that’s important to lenders.

Tony Umholtz: Sure, sure. So the pre-qualification is actually — a lender will just do a cursory overview of your income and then your stated debts. So typically, a client will say, “I don’t want my credit pulled at this time, but I’d like to know what I can afford.” The risk here is we don’t — when we run your credit report, we know your actual score, we know exactly what those debts are. But we get an estimated amount or what you’re paying on it, and then we take usually a pay stub or a client will give us a tax return, and we can see what their earnings are and we can run what’s called a debt-to-income ratio. And if it meets that property, in that loan on the property, it meets the debt-to-income ratio, you can get a qualification. And a pre-approval is really just a little deeper dive. We actually run credit and then we review a pay stub or a tax return if you’re self-employed. So it’s really the difference between the two is the credit report is added on the pre-approval.

Tim Ulbrich: OK, Tony, so we have the difference then there between the pre-qualification and the pre-approval, so my natural question then as I’m thinking about this from the view of somebody that may be in the buying process is which is better? And does that matter in the process?

Tony Umholtz: Well, you know, typically most real estate professionals, realtors, are going to want a pre-approval letter that the buyer’s credit has been reviewed. So typically, that’s going to carry more weight in the real estate world. In today’s day and age, it’s a very competitive market, and knowing that you have a pre-approval is going to carry a lot more value when you’re up against other people who have a pre-approval and cash buyers. So I would say it carries a lot more weight. But if you’re still a ways out from purchasing, there’s nothing wrong with a pre-qualification. But if you’re serious and you’re really — you may make an offer, I really would advise, you know, I think having a pre-approval is the right way to go.

Tim Ulbrich: I think it’s worthy, Tony, that we’d spend a few moments talking about the different types of mortgages or loans that are available. Obviously we started the conversation with talking about when we might work with a lender, we talked about pre-qualification/pre-approval, but there’s more than one option that is out there that could have significant implications on not only rates but also down payments, how inspections are conducted, so talk to us at a high level about the different types of mortgage lending options that are out there for a home buyer.

Tony Umholtz: Great question. So we have the three main products that you’ll hear out there are conventional loans, FHA loans, and VA loans. And then of course there’s jumbo loans. And I’ll kind of go through at a high level what each of these are. Conventional mortgages are typically backed by Fannie Mae and Freddie Mac, not to get too technical and boring on this call. I don’t want to — I won’t get into the details of the secondary MDS market. But they’re essentially insured by government-sponsored entities because Fannie Mae and Freddie Mac are generally considered as government-sponsored entities, so when they insure a mortgage, an investor who buys that security has the — basically the intrinsic value, knowing the intrinsic value that the government’s going to back that investment. So if the home buyer were to default, the government’s going to reimburse the investor. So they are pivotal to the keeping our home mortgage market vibrant. Fannie and Freddie purchase so many loans. If we didn’t have those, it would be very much in trouble. The FHA is the Federal Housing Administration, can be very attractive. It has some programs for home buyers that may have a little bit of a challenge with credit or a little bit more flexible situation. So the FHA serves a big need. Typically, there’s home, there’s a cap per county, meaning that each county in the U.S. has a cap on the size of an FHA loan that’s allowed. And again, this is a government-backed mortgage as well. Then there’s VA loans, which VA loans are a great program, but it is kind of isolated to just a small sliver of the population who served our country. It would be for any veteran or active military. So that’s kind of what a VA loan would be. And it has its own guidelines as well. And then there’s jumbo loans. And what those are are loans that are above the conventional or conforming loan limit for a county or area. So the majority of counties in the U.S. had a $510,400 loan cap currently. Now that may change the beginning of the year 2021, but currently, that is where the limit is in most counties. You know, for example, in California, areas in California around San Francisco, Los Angeles, northern Virginia, Alexandria, Washington, D.C., New York City, you have a higher conventional loan limit in those markets, sometimes up over $700,000 depending on the county. But anything above — generally above $510,400 loan amount is considered a jumbo loan amount. And the significance of that is it’s not backed by Fannie or Freddie. So it’s not backed by one of those government-sponsored entities. It’s more private capital at risk, whether it’s a mortgage REIT, private like investment fund or a bank’s balance sheet. So a lot of jumbo loans are written by banks and are held on the balance sheet like just any other asset. So they’re just viewed with a different lens. So hopefully that was a high level, I didn’t want to get too technical.

Tim Ulbrich: No, that was great. Succinct. And I would reference our listeners to if you go to YourFinancialPharmacist.com/homeguide, all one word, we have a home buying guide that goes through several steps of the home buying process but also talks about each of those loans in more detail and I think builds upon the quick summary that you gave, Tony. And I think as I alluded to, it’s so important that our listeners understand these options. I think ideally before they even get too far down the path of searching for homes and beginning to think about where this home buying decision fits in because it will have significant implications on things like down payments, on rates and other types of factors. And so it’s an important decision to weigh and to understand. And we’ll talk in more detail about the pharmacist home loan option as I know that’s going to be of interest to many folks that are listening, how that compares to some of the options that you discussed, what that means in terms of down payments and credit scores and maximum loan amounts, which you already alluded to here a little bit, so hang with us and we’ll get there in just a little bit. Tony, you threw out the term REIT, and I know that’s something we haven’t talked a lot about on the show before. So I don’t want to go down a REIT discussion necessarily — we can cover that in more detail on a future episode — but for those that heard and may be wondering or hearing that for the first time, can you quickly define the REIT concept?

Tony Umholtz: Real Estate Investing Trust is what a REIT stands for. And again, we won’t go down too much into this rabbit hole, but that can encompass — a REIT can actually own real estate, right, can be publicly traded. They can own apartment complexes and all these different real estate assets, tangible assets, office buildings, shopping malls, data centers, you name it. There’s different sorts of REITs out there, and some are publicly traded, some are private. But there are actually what’s called a mortgage REIT. And there’s many that are publicly traded. And I’ll just throw out one, it’s called the Redwood Trust and it’s publicly traded. They are known for buying nonconforming jumbo mortgages. So that’s when I referenced that, there are actually REITs that buy mortgages that they have to originate them per their guidelines. But they are — they will essentially, if you originate it following their underwriting guidelines, they purchase the loan. That’s for jumbo mortgages.

Tim Ulbrich: And I want to spend a little bit of time talking about rates and something that it’s obviously a part of the lending process, people focus on it for good reason as I talked about on sharing my most recent experience refinancing our home with IBERIABANK/First Horizon rates matter. And we were able to go from a 4.625%, we bought here in the peak really of the market and rates in Columbus back in fall 2018 and refinanced that to a 30-year 3%. And my usual disclaimer will be inserted here as we talk about rates as we’ll talk about the makeup and nature of rates, it obviously can be and is very different based on the time period, based on what’s going on with rates and the economy, as well as based on factors that are specific to the individual. So as I mentioned, 3%, in no way am I trying to imply that that is what somebody may or may not get. We actually may see rates that are lower. Currently, some may be higher based on their own situation. But a general discussion about the makeup of rates is warranted as I know that’s such an important part of this process. So Tony, how is a rate determined? Kind of building off my point that it can and is different from person to person. And what factors are considered when somebody’s rate is being calculated?

Tony Umholtz: Great question. There’s a lot that goes into the interest rates. And the big factor is the market itself. So the interest rates are calculated really not by the Fed. Now, the Fed has a huge influence. And traditionally, I mean, I go back when I first started in the early 2000s in this business, the Fed had less power than it even does today as far as what they’re doing as far as mortgage securities. And that’s what they’re doing with buying bonds directly, which really keeps rates down. But the trading of the mortgage-backed security market is what dictates interest rates. So that is really why it can move from day to day. Right now, we’re in an economic crisis. I think the Fed has done an amazing job coming in and just stopping what could have been — as bad as things are, imagine if the Fed didn’t do what they did providing PPP to business owners, doing all of these things that they did to really backstop the economy. And I think that that’s been a really blessing for the U.S. But as a result, rates are very low, and the MBS market is what controls interest rates. We hear talk about the Fed Funds rate. The Fed Funds rate might be pretty much 0% right now, but that’s not really what dictates the mortgage rates. So it’s called MB — Mortgage-Backed Securities is what dictates where interest rates are going to go. But there’s a lot that goes into it. So the other big piece is of course the borrower themselves.

Tim Ulbrich: Yes.

Tony Umholtz: So their credit score is going to matter. It’s very highly sensitive to credit score. It also can be sensitive to loan-to-value. And what that means is what your home is worth compared to the mortgage amount. That can influence the interest rate you receive. A refinance compared to a purchase, oftentimes purchases receive a slightly better rate than a refinance will. The other factors are the property type. Condominiums are considered a riskier asset in the eyes of the lender than a single family home generally. You see a small increase in interest rate for a condominium. You also may see a small increase in interest rate for a multifamily property versus a single family property. And what I mean by that is a multifamily is considered to be a duplex, which is two units, a triplex, which is of course would be three units, and a quadplex, a four-unit property. Those can carry slightly higher interest rates than a single family home because of the property type. But even as a buyer, you know, if you purchase a condominium, there’s potential for risk for any of us. So the due diligence a lender does in assessing the condo’s what’s called warrantability, meaning its approvability as a condominium, just supports the buyer. It’s really like Big Brother looking over your shoulder when assessing a condo because the lender is going to assess the budget, they’re going to assess the viability of the project itself, make sure that the condo docs are in order. Essentially, they’re going to make sure it’s a viable project and protect both the buyer and the lender, but especially the buyer from special assessments. So condos are just looked at a as a little bit of a riskier asset class versus a single family home, generally. Also then the multifamily properties, duplex, quadplex, triplex, as we referenced, they’re going to potentially have other renters in the project and could add a little bit of a risk rate. So that’s why they have a slightly higher rate.

Tim Ulbrich: And I’m glad you differentiated that, Tony. I know — I feel like in a time period like this where rates are so low and it’s garnering so much attention, so many news articles out there about great time to buy, great time to refinance, everyone’s talking about rates. It almost becomes like a cocktail conversation, you know, where people are like, oh, you got what rate? You got what rate? And I think just reminding folks that at the risk of perhaps oversimplifying, what I heard you say there is that the rate, really three main buckets I hear is determining the rate: the market factors, which are changing of course day-to-day, you talked about the mortgage-backed securities, the individual factors of the borrower themselves in terms of their — looking at their credit scores, their debt-to-income ratio and obviously we know that’s different from one individual to another. And then the third bucket I heard there would be the actual type of lending and what’s unique to that specific property, whatever they’re looking at. So single family home versus the multiunit versus condos and then you even mentioned how it can be different on a purchase versus a refinance. So again, great summary and a good reminder that of course we’re looking at rates, we should be thinking about them, we know how they can impact a monthly payment, but really understanding that that can be different from one individual to another. So if I’m in a position, I found a house I want to purchase, and I’m looking to move forward with essentially writing up a purchase agreement, what things can or cannot be included in a purchase agreement? And the reason I’m asking this question, Tony, is I know we have had a couple folks from our community working through this process that may have realized some of this for the first time. And it’s worth talking to others about as well. So things that can or cannot be included in a purchase agreement.

Tony Umholtz: You generally when you’re going to — this is pretty universal for all lenders, you want to try to keep your purchase contract to the collateral, which is the actual piece of real estate that you’re looking to purchase. And you know, oftentimes, you’ll see a lot of other furniture, stereo systems, whatever, you name it, referenced in the contract, other items outside of the real estate that aren’t tangibly connected to the property. You don’t want to keep those in the contract for the appraiser or for the lender because we’re not there to finance personal property. We’re there to finance the actual real estate. So you have to be careful to keep that out. You can have another agreement for personal property with the seller. But you don’t want that to be part of the collateral for the appraiser view or for the lender. A lot of more experienced realtors will know this, but not everybody is aware of it. And if you’re buying a for-sale-by-owner and you’re working directly with a seller, it’s very common to see that.

Tim Ulbrich: Yeah. Tony, I want to go one step back before we talk about escrow accounts and then dig into the pharmacist home loan product in more detail. One of the things you mentioned that I think is of interest to our listeners is you mentioned the impact of credit scores on rates and how sensitive that can be. Can you give us some more information about what do you mean when you say how sensitive it can be? And perhaps that can help also guide or get folks thinking about strategies as they look at improving their credit and how that can impact the lending process.

Tony Umholtz: Another good point. So credit scores are — especially in conventional loans, especially on long-term fixed rates, so 30-year fixed especially — are going to be highly sensitive to credit. So someone that has a 680 credit score compared to a 740 credit score is going to have a different interest rate, clearly. And it’s even as granular as 700 to 720 or 740.

Tim Ulbrich: OK.

Tony Umholtz: There can be different movements in rate. One could have an eighth or a quarter higher rate because their score is 20 points below that 740 factor or if you start going into the 600s, it could be much lower than a 740. So it is highly correlated to credit score. And we actually have a program that we use for our clients where we’re able to boost the client’s credit score about 30 points in the processing time. Again, it just allows them to see — we have a program that will allow them to when we run their credit or give us what their credit score could be if they handle a few things on their credit, whether it’s paying down a credit card, paying down an installment debt, and that’s been a really good tool to help maximize not only qualifying but getting better rates. It’s highly, highly sensitive to — and certain programs have credit score minimums, right? You can’t go any — and it’s very sensitive on jumbo loans. A lot of jumbo loans will not go below a 700 credit score. It’s a big adjustment to both qualifying and interest rate.

Tim Ulbrich: Yeah, and as you mentioned, an eighth or a quarter of a point, that’s a big deal on $300,000, $400,000, $500,000, you know.

Tony Umholtz: Right.

Tim Ulbrich: Obviously people can run the numbers. So really being able to see that difference or being able to do some things to shore up that credit score could make a big long-term impact on the amount of interest that they pay over the life of the loan. Tony, let’s talk escrow. I know I mentioned this in detail when I talked and shared my refinance experience with IBERIABANK/First Horizon, but I think it’s one of those topics that for many, myself included, is just still kind of fuzzy in terms of really understanding how escrow works, pros and cons of pulling out of escrow, who may or may not have that options, what that would look like, what they should be thinking about. So give us kind of the main talking points around escrow. What is it? What’s the purpose? And what pros or cons may come from somebody looking to waive escrow?

Tony Umholtz: So escrows are just simply going to be your taxes and your insurance. Another word that is floating around are impounds is another word you’ll sometimes. But escrow essentially is just the taxes, your homeowners insurance, your flood insurance if you’re in a flood zone. So things that you’re going to pay no matter what, right? Even if you paid cash for the home, you’re going to owe your county or municipality or your state, and you’re also needing to pay for insurance to make sure your asset’s insured. So essentially, what lenders look for is typically at a 80% loan-to-value, a lot of lenders, I don’t want to say it’s universal because not all programs will allow it. But you know, some programs will allow you to actually waive escrow. What that means is you are paying the taxes and the homeowners insurance on your own. Now I want to say one thing about flood insurance. If you’re in a flood zone and you have a mortgage, even if you waive your escrow, like your homeowners insurance and your property taxes, you still have escrow for flood. That’s a federal mandate that lenders can’t get around. But you can waive the other two. You can have the homeowners — homeowners insurance is also called housing insurance, and you can waive those two items if you’re under 80% loan-to-value. If you’re over 80% loan-to-value, which a lot of first-time home buyers are, a majority are, you cannot waive them. The lender is required to escrow them. There really is pros and cons to having escrow. The majority of, again, of first-time home buyers are going to be over the 80% limit. So they’re going to typically be required to escrow. And a majority of people, even below 80%, I find want to have the escrow. And the reason behind that is you’re responsible for paying those lump sums on your own if you waive your escrow. So if you have an $8,000 annual property tax bill, and let’s say it’s due in November, which a lot of municipalities are, you’re paying $8,000, right? And if you have a $3,000 homeowners insurance bill around the same time, you’re paying $3,000. So most people like to have that spread out over the 12 months. And all the lenders doing is collecting each month 1/12 of your payment each month. Now, the cons are — of that is you don’t control it. Right? Meaning the lender does, and they’re holding the money for you. And right now, it doesn’t matter as much because interest rates are so low on deposits. So if you hold your money in the bank, you’re not really making much on it. But when interest rates go up and you can earn 2.5% on a Money Market account or more, the bank is holding your money and you’re not. So you can essentially earn interest off the money. That’s one of the cons I would say. And then the other thing would be just when you’re going to refinance, especially late in the year — and this is a key point I think people who are refinancing need to understand — if you’re getting close to the time when your taxes are due, the lender is going to have to collect a lot of tax. And it’s going to look like they’re rolling — I mean, if you were to refinance now, you’re almost rolling a year’s worth of tax into your mortgage. Now, the existing lender is going to give you back a check for everything they’ve built up in the escrow account.

Tim Ulbrich: Right.

Tony Umholtz: Right? So it will be a wash, but it’s going to look like a lot of money. Where if your escrows are waived, it’s a little bit cleaner. You don’t have all of that lump sum being moved back and forth. So that could be another pro to waiving escrow. But majority of people like the simplicity of having the lender take care of it, it’s one less for them to have to worry about, and just the ability of not having to stress over having to make lump sum payments on time.

Tim Ulbrich: Yeah, and I think, Tony, great points. And for those that do decide to pull out of escrow, you know, you mentioned being ready for that big payment or here, it’s divided into two payments. So you know, obviously there’s some strategies that can help that in terms of essentially creating a sinking fund for your taxes and insurance and every month contributing to that so you’re not caught off guard by that. But I think for everyone, individual situation, weighing the pros and cons and evaluating that as you’re going through the process if they have that option available to you based on loan-to-value.

Tony Umholtz: The one thing I did want to mention about escrow — sometimes, you’ll hear hey, there’s an escrow waiver fee or my rate is a slightly higher if I waive escrow.

Tim Ulbrich: Right.

Tony Umholtz: And some programs do have this adjustment. And the reason why is I mean, if you technically didn’t pay your taxes or your insurance, there could be risk to the lender. I mean, in some counties and states, if you don’t pay your taxes, someone could buy your tax deed. So there’s risk to the lender potentially if you didn’t do that. So I just wanted to make sure I outlined why there’s that fee that you’ll commonly see in the industry.

Tim Ulbrich: Great stuff. I’d like to wrap up our time together by talking about the pharmacy home loan as one option that folks may consider as they’re going through the home purchase process. And we’ve talked about it before on episodes 136 and 154. But I think it’s an opportunity that many of our listeners likely will want to consider and evaluate as they’re looking at all of their options. And what we know is one of the biggest barriers to pharmacists being able to purchase a home is student loan debt. And for most conventional types of loans, this obviously can greatly impact their debt-to-income ratio and certainly could affect someone’s ability to even get a loan or greatly reduce the amount that they could get approved for. So Tony, talk to us about the professional mortgage loan that IBERIABANK/First Horizon offers in terms of what it is, minimum down payments, term, max loan amounts, and things that they should be thinking about as they’re evaluating this among other options available to them.

Tony Umholtz: The product for pharmacists is going to — it’s going to be under that conventional loan bucket, essentially, even though it’s kind of a specialized product, because it’s not an FHA loan or a VA loan. But what it is is it’s got the ability for a pharmacist to purchase a home, if you’re a first-time home buyer, you can put as little as 3% down. If it’s a subsequent purchase, it would be 5% down. So very little down payment, and there’s no mortgage insurance. And I find that the rates tend to be better than normal conventional products by a bit of a spread, which can vary. But I find that can be a better rate than you can get ordinarily, even if you put 20% down. The max loan amount if $510,400, so it does kind of follow along — currently, that’s what the product we offer has a max of $510,400. It’s eligible for both a purchase transaction and a refinance transaction for both. But the real benefit’s just very little money out of pocket and the no PMI and a very competitive interest rate. So kind of the ability to have both of those makes it a very viable option for many. So that would be the biggest pluses. There is a biggie — you referenced student loans. It’s a little bit more lenient on the student loan calculation versus like some of the normal conventional products, I would say, like Fannie Mae-backed. It has a little bit more of a lenient way that they look at the student loan debt as well.

Tim Ulbrich: And talk about credit score impact here as it relates to the pharmacist home loan product.

Tony Umholtz: There is a minimum credit score of 700 with the pharmacist loan product. So you would have below 700, we couldn’t do the loan program. But 700 is the minimum. That is one thing we do have to keep in mind. So credit is important.

Tim Ulbrich: And I’m assuming just like other lending options, obviously the better the credit score, you get above 740 and beyond, I would assume then, you know, again, different person-to-person, but rates would be expected to get better.

Tony Umholtz: Right, right. The rates are going to be better at 740 up. I’ve even seen sometimes when you get higher credit, people will even get what’s called a lender credit for their rate too, which is kind of a rebate from the lender towards closing costs because there’s some add-ons or adjustments that are positive for better credit scores. So you’ll see that sometimes even as well, Tim. I think that yeah, credit scores really do impact the pharmacist product. 700 is going to be not quite as good as 740 or 720. Also as a kind of mini — if you are putting 3% or 5% down on a condominium, it may have a slightly higher interest rate than if one of your colleagues bought a single family home. So it’s something else to be aware of with the pharmacist home loan. And then same thing with a multifamily. I think this might be a good time to address that too is the — a multifamily is going to require a little bit more money down on the pharmacist product as well. It’s not going to be 3% down let’s say. A duplex might be 15% down. So you have to be very prepared for a much larger down payment if you try to buy a multifamily type property with this program.

Tim Ulbrich: Tony, one of the things you mentioned before we hit record that I think is — it would be helpful for our listeners to hear a brief overview that just highlights I think some of the unique circumstances that can happen based on trends that are occurring in the market at the time. Currently, you mentioned some of the things that you’re seeing around the quality of appraisals and how that can impact the lending process and the timeline moving forward. So tell our listeners a little bit more about that.

Tony Umholtz: Yeah, you know, in our dialogue there, Tim, just some of the things we’re seeing — and we do loans in a lot of different areas of the country, so it’s not subject to one market. But we’ve been seeing this inventory type. We don’t have quite enough inventory out there.

Tim Ulbrich: Right.

Tony Umholtz: I think home builders will eventually catch up, but right now, that’s the situation we’re in in many markets around the country. And you know, appraisals are starting to be done and they might be coming in a little bit higher values, and values are kind of going up at a pretty good rate right now as far as property appreciation. And in certain markets, there’s just not enough sales. And you’ll see some appraisals, every appraisal is scored. So they have a scoring mechanism that a lender’s analysts will look at, and that’s based upon comps in the area, adjustments in the appraisal, time since the last sale, so there’s a multiple things — I don’t want to get too technical on the appraisal side. But that’s how appraisals are scored. And oftentimes, lenders are required to do like a secondary review, which is called a field review or sometimes they’re required to even order another appraisal, depending on the lender or the situation. I’m kind of speaking in general because I’m trying to think of my whole industry here holistically. You know, the one thing that we have to be aware of is these field reviews. And appraisers are so busy with the volume right now between the purchase market and then the refinance market that they’re not always as timely as they used to be. So we used to be able to get a field review within a few days or two days. It might be a week. So it’s not that I’m seeing it on every transactions, by no means the case, but we’re seeing more of them lately. And it’s just — I think it’s because of where we are in the market cycle and the fact that there just isn’t that much inventory. So one thing to keep in mind is the appraisal is reviewed and is reviewed for quality. And sometimes those things come up too. So there is a multitude of factors in the lending process. And that’s why I always joke with people about this. There could be some — it’s like the airline flight with turbulence. There could be turbulence in the flight, right?

Tim Ulbrich: That’s right.

Tony Umholtz: But we’ve got to land safely is the key. And you never know. Sometimes it’s perfectly smooth sailing, but then there’s other things like this that are out of everyone’s control. But it’s just something to be aware of, you know, that these things can come up, even around the quality of the report. And if you hear that word, field review, that’s what it is. It’s a secondary look, and lenders are required to do that.

Tim Ulbrich: Tony, as always, great stuff. I feel like you provide great education, you succinctly explain what could be a very difficult process and appreciate you taking time to share your expertise. What is the best way for our listeners to reach out to you if they have questions or considering the pharmacist home loan product with IBERIABANK/First Horizon. What’s the best way to get in touch with you?

Tony Umholtz: Email is fine. I’m also old school, I do like phone calls, so I’m always welcome a phone call. I have a team of staff, some very hardworking and diligent individuals on my team that can also answer questions. Phone or email are always welcome. Those would be the best ways to reach me.

Tim Ulbrich: Awesome. We’ll link both of those in the show notes for our listeners, which you can access by going to YourFinancialPharmacist.com/podcast, find this episode and you’ll see that information listed in the show notes. And to learn more about the steps in consideration to getting a home loan, make sure to check out the post on the YFP site titled “Five Steps to Getting a Home Loan” by visiting YourFInancialPharmacist.com/home-loan. And as always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please leave us a rating or review on Apple podcasts or wherever you listen to the show each and every week. And if you’re not yet a part of the more than 6,000 pharmacy professionals across the country that are joining us in the Your Financial Pharmacist Facebook group, please make sure to check that out, join a community that is committed to helping and empowering one another on their path towards achieving financial freedom. Have a great rest of your week.

 

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YFP 154: Getting a Home Loan in a Pandemic

Posted on by yfpadmin


Getting a Home Loan in a Pandemic

Tony Umholtz, a Mortgage Manager for IBERIABANK/First Horizon, discusses the impact COVID-19 is having on the housing market, the current landscape for those purchasing or refinancing a home, and the role of the Professional Loan Program (aka the Doctor’s Loan).

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, Tony Umholtz, a Mortgage Manager for IBERIABANK/First Horizon, talks through the landscape of the housing market due to COVID-19, the professional loan product and answers questions from the YFP community.

Tony begins by saying that this period of time in the real estate market reminds him more of the recession after 9/11 versus the 2008 housing market crash. In this case, real estate is fairly stable during the pandemic and, in general, folks have more equity in their home, so if they lost their job due they are more likely able to sell and walk away easier than if they had no equity in it. He also shares that interest rates are down and it’s a great opportunity to refinance or buy a home if you’re in the position to do so.

Tony then discusses the professional mortgage loan (aka doctor’s loan or pharmacist home loan) that’s available through IBERIABANK/First Horizon. First time home buyers can get a 3% down payment with no mortgage insurance, no reserve requirement and and strong interest rates. If this isn’t your first home, you’re required to have a 5% down payment. There are requirements to get the professional mortgage loan, like having a 700 or more credit score and falling into a certain debt to income ratio. If you’re interested in exploring this option further, you can find more information here.

To wrap up the episode, Tony answers several questions from the YFP community.

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 before we jump into the meat of today’s interview, I would be remiss if I didn’t emphasize that the decision to buy a home and how much home should start well before digging into the financing options. This starts with No. 1, knowing your budget and No. 2, knowing all the costs involved with home ownership to figure out whether or not you are ready. And of course, this must be considered in the context of all of your other financial goals such as student loan repayment, building an emergency fund, and investing, to name a few. So if we fast forward and you’ve determined that the decision to buy a home fits within your budget and the rest of your financial goals, now we are ready to evaluate the financing options. And one of the options that exists is a doctor of pharmacist home loan, which is some unique features that can be attractive, and we talked about that on Episode 136 of the Your Financial Pharmacist podcast, and I’ll revisit that briefly today with Tony. Now, full disclosure, IBERIABANK/First Horizon is not the only lender offering a doctor type of loan. And these loans are generally defined for higher income professionals that are at lower risk to the bank and therefore, the lender requires a lower percent down, offers competitive rates and has no Private Mortgage Insurance. And we have explored several other options that are out there, but the rate-limiting step of bringing these forward to the YFP community has the limited availability of these loans in terms of the number of states that are serviced. Therefore, as we recommend with everything else, please shop around to find the best option for your personal situation. Also, full disclosure, we do have a sponsorship relationship with IBERIABANK/First Horizon, and as with our other relationships want to be fully transparent with you. We remain committed to bringing you solutions that we have vetted and we have the chance to bring value to your financial plan. And yes, while we do get paid for promoting several of these solutions, whether that be solutions for life and disability insurance or here with a lending solution for home buying, we are committed to maintaining this approach of vetting solutions and ensuring their value to the YFP community. Alright, without further delay, let’s bring Tony back onto the show. Tony, welcome back onto the Your Financial Pharmacist podcast.

Tony Umholtz: Tim, thanks for having me. Great to be here.

Tim Ulbrich: Excited to have you back. And in Episode 136, which seems like forever ago, that was pre-COVID life, we talked about a decent amount about the types of lending options available to a home buyer, including conventional loans, VA loans, FHA loans. And so we’re not going to spend more time on that here today, but I would encourage that didn’t catch that episode or that want a refresher in that area to go back to 136. And so we’re going to spend our time together really in three areas: First, we’re going to talk about the landscape and the housing market as it relates to COVID-19. We’ll then talk about the professional mortgage loan option that’s available to folks and to many pharmacists. And then we’ll wrap up by answering questions from you, the YFP community, and I’m going to tee those questions up for Tony. So let’s jump into the landscape of the housing market as it relates to COVID-19. Tony, generally speaking, how have you seen COVID-19 impact the housing market?

Tony Umholtz: Yeah, Tim, since our last call in January, it just seems like a lifetime ago. You know, just everything we’ve went through as a country, it’s been just unbelievable in such a short amount of time. The landscape has changed very, very quickly. There’s been a lot of different things that have impacted financial markets. Obviously the stock market liquidity and the high-yield debt market, all of these came under immense pressure. Mortgages were a part of that. You know, in March when most all asset classes were selling off, many mortgages got hit hard, so mortgages on the secondary market really lost a lot of value and a lot of the REETs and aggregators that weren’t backed by the government really had gone out of — shut down operations for the most part, especially on the jumbo loans, the larger loans that aren’t backed by Fannie Mae and Freddie Mac and Ginnie Mae. Those REETs aren’t lending right now or taking loans. So been a very big hit to the mortgage market.

Tim Ulbrich: And what do you see, Tony, you know, I lived through 2008, as many of our listeners did. I was doing residency at the time and can remember so much of the housing market being tied to 2008 and that recession. What’s different here as we think about COVID-19 and its impact on the housing market? What’s different in 2020 than what we experienced in 2008?

Tony Umholtz: Yeah, great question, Tim. I started my career back in coming out of the 9/11 recession and the dot-com recession in the early part of the 2000s. And this really — as far as real estate goes, this correction and downturn reminds me more of that one in that real estate has been pretty stable throughout this. ‘08-’09 was just so devastating because of the leverage in the market. There was a lot of things that — I didn’t do a lot of the non-prime loans myself, but there was easy approvals to things like that back then. I mean, the process of getting a loan was pretty easy. It was too easy, right? And that led to this steep correction. But the big indicator in ‘08 and ‘09, Tim, was the inventory on the market. There was so much speculative building, there was so much property and vacant housing and vacant unoccupied housing that that just — and then of course we had short sales and all these things that hit. So it was the perfect storm in the real estate world where this time around, we came into this with a very healthy financial system, and we came into this downturn with a very healthy housing market in most parts of the country. Obviously every housing market is different, but on average, the U.S. housing market was very, very strong. And we were actually under normal inventory levels in the majority of the markets of the country. So that’s really been one of the catalysts for what I’m seeing is a very, very strong real estate market.

Tim Ulbrich: And do you see — you know, I know we’re projecting here a little bit — but I think of things that are unique to COVID-19 like the enhanced unemployment benefits and some of the protections that lenders have in terms of forbearance and other factors. I wonder, are we going to see challenges that may come and it’s just delayed 4, 5, 6 months from now where we might see the unfortunate situation of people that are foreclosing on homes and those types of things? Or do you see it as really a big question that’s largely dependent on what happens with unemployment?

Tony Umholtz: You know, I think it’s all about unemployment. I really think that’s the key metric here. And there has been a lot of really sad situations out there. It’s a very tough thing to go through for many, many people. And when you take a step back and just look at everything, I don’t know for sure obviously, but just kind of looking at the numbers and the data that’s out there, we have homes on average are not overleveraged like they were in ‘08 and ‘09. So most people did not have a lot of equity in their home, so it was very easy to walk away from them. This time around, you know, you may have lost your job, but you may be sitting on substantial equity in the house. So I think it’s just going to be a different situation where if you had to sell, I think you could sell and you could get out of the home. I hope that we are through this sooner than later, but obviously the more time it goes on, that’s going to cause more pain.

Tim Ulbrich: And we’re going to stay away from talking about rates in the moment because we know these can change literally by the day and sometimes within the day. But generally speaking, what have we seen that’s been unique with rates? And I know the big news obviously, the Fed cut the interest rate to 0%. I think there’s an automatic assumption that we’re going to see mortgage rates kind of hit a floor, but we’ve seen some interesting trends here over the last few months. Talk us through what we’ve been seeing, generally speaking, on interest rates?

Tony Umholtz: Well, obviously when the Fed cuts rates, the short-term rates, it doesn’t correlate exact with mortgage bonds. Mortgage bonds are calculated off the long-term trading of long-term mortgage bonds, which are actual investment bonds traded on the secondary market. So that’s really what’s going to dictate what our pricing is on mortgage, not what the Fed does on the short end of the curve. But I mean, anytime we see something like this, there’s going to be a compression in rates. And rates have come down, and I think it’s created a great opportunity for people to refinance and lower their payments and consolidate debt. And we’ve had a lot of success with debt consolidation and of course buying a home. I think it’s created just a very, very good opportunity for buyers with rates low.

Tim Ulbrich: And there’s been some interesting — you know, I’ve been reading some articles in the Wall Street Journal and New York Times about kind of the situation we’re in that’s unique that the supply, for perhaps a variety of reasons, isn’t really out there. And it’s been maintaining the prices of homes for the most part. You know, as we perhaps start to open up the economy on some level and people are getting back out, do you think part of that supply issue is just hesitancy of people listing homes and having people come in their home? Do you think we’ll see that turn around in terms of more people putting their home up for sale?

Tony Umholtz: I think so. I think as more counties and states open up, I think you’ll see that people ease up, especially into the summertime more homes will be opened up for sale. I think that will provide a little bit more inventory. But there is a lot of buyers looking. It’s a good opportunity now. And if you’re renting, you’re looking at the numbers and saying, I can own for what I’m paying in rent. You know, the other thing — I think it’s more of the major cities, I think this isn’t for sure trend, but I think you’re going to see a little bit of a move more in the suburbs just in open spaces a little bit more than the crowded cities potentially. And I think that could benefit some suburbs, newer cities and maybe even some rural areas too just as people desire more open space. It could change the desire of what people are looking for too.

Tim Ulbrich: And for those that are listening that might be struggling to make a payment or perhaps find themselves in that situation in the future, what options do borrowers have to explore? And how does that differ even between the types of loans that are out there?

Tony Umholtz: Well, the — and I’m not an expert on the forbearance.

Tim Ulbrich: Yeah.

Tony Umholtz: But that has been a great tool I think for a lot of people that are in that position. I would stress, though, that this is only something you want to utilize if you’re in a position where you cannot make payments. If you can, it can have some adverse effects potentially. I wouldn’t do it if you can make payments. But that’s been a great tool I think to help a lot of people that are in a difficult spot. But you know, as far as the tools that are out there, the fortunate thing — you know, outside of the jumbo lending, which has been hit, those, some of the options I had in March, you know, I don’t have right now. And a lot of lenders don’t have any jumbos. I feel fortunate just to have the ability to write them. But the loan amounts that are backed by Fannie and Freddie on the conventional side, some of the programs that we have that are under a $500,000 type loans, those are very, very liquid. Those guidelines are very, very strong. And that’s been a blessing that that’s intact.

Tim Ulbrich: Great. So I think that’s a great overview of some of what we’re seeing in terms of the landscape of the market with COVID-19. And I want to transition to talking about the professional mortgage loan, kind of what is it? And more specifically, what is offered with IBERIABANK/First Horizon? And you know, I think this is an area that we’ve been seeing a lot of interest among the Facebook group. We’re getting a lot of questions about it, and I’m going to bring some of those questions forward to you at the end. But what we see certainly is that one of the biggest barriers to pharmacists being able to purchase a home, you know, is typically student loan debt. And for most conventional types of loans, this greatly impacts their debt-to-income ratio and certainly could affect someone’s ability to get a loan or greatly reduce the amount that they could get approved for and often we see has a significant impact on what they’re able to save in terms of down payment. So I think that’s a good segway into where the professional mortgage loan may come in. So tell us a little bit about that loan option, generally what it is and a little bit more about the program of what IBERIABANK/First Horizon offers.

Tony Umholtz: Sure. So the program essentially allows a first-time home buyer to finance 97% of the price of the home. So you — and there’s no mortgage insurance, which is a huge benefit. And if it’s a subsequent purchase, if you owned before, it’s just 5% down. So it’s 2% more down, but the real benefit driver is that there is no mortgage insurance. There’s also not a stated reserve requirement, which is good too because a lot of these programs have reserve requirements that can be difficult when you haven’t been able to save money. I know some of our physician loan products have reserve requirements as well. And this one does not. It also carries very, very, very strong interest rates. I don’t want to get into them because everybody is different for everyone based on credit, but it tends to have some of the better rates that I can offer, even though you’re putting 3% or 5% down. But the main driver is that no PMI, I think limited reserves, and there is a max loan amount of $510,400. So that’s the cap to loan amount. You can always purchase higher than that, but if it’s more than — let’s say you found a home for $550,000 and you put 5% down, you might have to put a little bit more down to get to that $510,400 max loan amount.

Tim Ulbrich: So one of the questions, Tony, we actually had this come up in a webinar this week that we were doing with Nate Hedrick on home buying, and we were talking a little bit about this option. And as we were talking about the things that you just said in terms of competitive rates, obviously a very low percentage down that’s required, no mortgage insurance, not having to have the same reserve requirements, those types of things, the question of well, why wouldn’t somebody do it? What are the downsides to an option like this? And the only thing that I could come up with within my mind is that if for whatever reason the rate weren’t competitive, you know, with something else that they were looking at, obviously that’s a consideration or that it might put somebody in a position to buy before they’re ready to buy in terms of the low down payment. But if they’re otherwise in a healthy financial position, they’ve got a good emergency fund, they’re in a good position to buy a home, I really don’t see a whole lot of downside here. What are your thoughts?

Tony Umholtz: Yeah, I mean, we do have a debt-to-income ratios that we have to abide by. So you know, there is controls put in place. We also have a minimum credit score. It’s 700. So those would be some other things we would look at. I didn’t want to get too technical, but I guess those would be just some of the metrics. But I mean, again, it’s a very tight population that we can offer this to. It’s not everybody. So it’s got to be in these stable, this stable job position and this occupation. But yes, I think as long as you qualify, it’s not a stretch, and you’re in a good position, I think it’s a good thing as long as it makes sense for you to buy a home in your personal plan.

Tim Ulbrich: Right. Yeah, and I think it’s always a good reminder of what could be the potential downsides of having a low equity position. So if somebody were to have to move quickly for whatever reason and obviously they couldn’t use the equity to cover other costs or purchase of a new home, those types of things, but again, if you’ve got reserves or you have other plans in place to be able to account for that, then I think it’s certainly a great, great option to be looking at. Tony, one of the questions we had come forward from the community is obviously thinking about what’s happening in the economy related to COVID-19 and perhaps the lenders becoming a little bit more astringent on who they’re lending to. And even though we’re talking about a minimum credit score here of 700, do you expect that an option like this might go away in the future or change in terms of max loan amounts because of changes that might come in lending?

Tony Umholtz: I certainly hope not. I think, you know, I think — anything can happen. Risk profiles, things can change depending on how bad this downturn gets. But you know, fortunately we got through this pretty far and there’s been no changes. So hopefully it’ll stay that way.

Tim Ulbrich: Awesome. And we’ll keep our community up-to-date and we’ll provide some more information. And as a reminder, you can go to YourFinancialPharmacist.com/home-loan, get some more information about this offering. And you can connect directly from there with Tony and his team over at IBERIABANK/First Horizon. Tony, speaking of your team and what you guys have done, I want to thank you guys for giving our community members the time and attention they deserve. And I’m currently working through a refinance. It’s been a great, great experience working with you and your team. And I went on over to our Facebook group and wanted to see what some of the chatter was around their experiences with IBERIABANK/First Horizon because I knew more questions were coming up about this option, and I knew that I had seen more discussion on it. And I pulled a few of the comments from that community of people that have just posted really within the last week. And there was a lot of great, great things that people had to say. So one of our community members said, “Iberia is where it’s at.” I love the brevity of that. Somebody else said, “I’m working with Iberia now for first-time — as a first-time home buyer. They’ve been fantastic to work with. Their online system is the best, easiest I’ve used so far.” I would agree with that, very intuitive system. Somebody else said, “Iberia is great to work with, user-friendly website.” Another community member said, “We used Iberia Bank to refinance our loan last fall. Easy process.” And then I also noticed there was some feedback on RedFin that was quick, easy, great rate, and a great loan officer. So thank you for the work that you guys have done and for how responsive you’ve been to our community that has reached out to engage with you guys.

Tony Umholtz: Oh, thank you, Tim. It’s been fun. We always enjoy helping people. That’s our job, but connecting and helping people is why we do what we do. So thank you for that.

Tim Ulbrich: So I want to transition now, as I mentioned at the beginning, I want to put Tony on the hot seat. And I asked you all, the YFP community, for your questions in advance, knowing that I’d have the chance to interview Tony today. So we have several questions that have come in, and we’re going to work through those one-by-one. So Tony, the first question we have from the YFP community relates to escrow. And the question is, in addition to costs associated with title and processing of the loan, how much money does one need at closing for property taxes and insurance? And if you could briefly define escrow for those that may be hearing that term for the first time.

Tony Umholtz: Sure. That’s a great question because this can be one of the most complex parts of real estate is escrow accounts and how they work. Well, escrow what essentially is is property taxes and homeowner’s insurance and flood insurance if you’re in a flood zone would be added in then too. So property taxes can vary based upon where you live in the country. Different municipalities collect taxes a different way. I know that many states, you pay it once per year.

Tim Ulbrich: Right.

Tony Umholtz: And others, it’s quarterly. Right? There’s different counties, different parts of the country do operate differently. So we need to be sensitive to that. But you know, overall, I’ll just also give one answer to a question that comes up about escrow accounts and what they are. Banks keep escrow accounts to help pay for taxes and your insurance let’s just say on an annual basis or quarterly basis. The insurance is generally due once per year, so the bank is actually collecting typically 1/12 of your tax, your insurance payment, each month to pay that annually. Generally, you do not have the option to waive escrow unless you have an 80% loan-to-value or bullet. So if you ever hit the — most people in the audience are not going to be in that position. But if you do, if you put 20% down or more on a conventional loan, you actually can waive it and pay it yourself. Now, there’s sometimes there’s a risk grade to the loan because there is a risk if you didn’t pay those things. So there could be a little effect to the interest rate. But that is an option, and I do see some people waive them when they do have a larger equity position. But the majority of Americans have an escrow account that have a mortgage. And the taxes and the insurance and how they’re collected I think is very important to understand. When you go to closing on a purchase, you’re typically going to owe one year of your insurance premium up front. So in a case of let’s say it’s a $1,200 insurance premium, well, you’re going to have to pay and bring that $1,200 to closing. The insurance company will want their funds. And then generally the lending institution — this is really universal for all lenders in the country — they’re going to collect a two-month cushion for the account. And then depending on what time of the month you close and so forth, let’s say you close in June and your first payment is due Aug. 1, they’re generally going to collect another month to cover that one month that you’re not making a payment. So it’ll look three months of insurance, 12 months of — three months of escrow for the insurance and then 12 months of your premium. So it looks like a lot of escrow, right? But that’s how it’s done. And the same thing for taxes. So in that example, property taxes would be a couple, probably three months of taxes collected: two months to establish the account and then the one month for the month you’re missing. But and then with refinances, it’s kind of a similar situation where — not to get too technical, Tim, but I think this is important. I think if you were to go refinance and you have your current servicer, loan servicer is collecting your insurance and your taxes, they typically will refund you the full amount within 30 days of your loan payoff. So the new lender is going to come in and they’re going to look like they’re collecting, especially if you close later in the year. Because most states and counties will want payment at the end of the year, right? So like November time frame. So if you close in the fall, in autumn, it’s going to look like your lender is collecting a lot of money from you that’s being rolled into your mortgage. You know, it could be 11 months of taxes. It could be whatever, 12 months of insurance.

Tim Ulbrich: Yes.

Tony Umholtz: It’s a big number being rolled in. But you have to realize that you have almost an equal amount being sent back to you. So that’s where that idea comes into place. Do I use that check to pay down my loan? So escrow is not something that costs you anything. You have to pay them as part of homeownership, but it can look like more is being collected than — it can look like your loan is being increased on a refinance to cover that.

Tim Ulbrich: That’s a great, great explanation, Tony. I know I found that confusing as a first-time home buyer back in 2009 but also, you know, especially I think for those that are moving from one property to another, especially if you’re moving from one area to another and timing is different, I think you very much can feel like you’re double paying. And I think that definition of escrow as really the holding place and there’s going to be a refund of existing as well as receive it paying forward and just keeping that in mind. And I think that’s an important consideration because if one is paying obviously at closing for future homeowners insurance and property taxes and then that refund check comes at a later time and you forget that and you go blow it on something else, well then obviously, you know, that can have the impact that you’re trying to avoid. So is there — while we’re on this topic, I’ve often heard as you alluded to, a small percentage of people that might pull out of escrow. And you know, you mentioned that might come with a little bit of a rate risk adjustment. What are the big benefits of that? I mean, I guess the thing that comes to mind when I think about that is, you know, the downside would be it’s now on my watch, I’ve got to make sure I’m making those payments on time for property taxes, homeowner’s insurance.

Tony Umholtz: That’s right.

Tim Ulbrich: But I guess the upside would be I feel like I’ve got a better pulse on what’s going on because it’s not rolled into my monthly payment. So you know, as my property taxes might inch up or I might be more apt to try to negotiate my homeowner’s policy. So talk us through why would that move be beneficial if it’s available to somebody?

Tony Umholtz: Yeah. You know, one of the things that I’ll mention just back to answer your question but also with refinancing, a lot of people will come to me, especially right now, and they’re telling me, “Hey, my payments went up a lot because there was a shortage in my escrow account.” Right?

Tim Ulbrich: Oh, right.

Tony Umholtz: And what really happened is the bank paid your taxes and insurance more than they had collected from you, and you’re basically getting an interest-free loan and you’re just paying that back. So that’s one of the — but your payment spiked. And what we do when we refinance, we true it up. We collect the appropriate amount. But that scenario if you’re able to waive your escrow, you can control, right? You can control. And I think the main thing is a majority of people with mortgages do escrow. But if you like controlling your money and you don’t mind making a lump sum, I think that’s an advantage, just having the ability to control it yourself. I’ll be transparent, I’ve waived mine for years. I’ve always done it, but I’m a finance major. You know, I’ve been a money person my whole life, so you know, if you’re good with money and think you understand it, I think it’s fine. One thing you did mention about insurance, I mean, you have the ability to check on your insurance, even if you have an escrow account. It’s very easy. The mortgage can be changed and the insurance company can still change. But I think the main advantage is you hold onto your money, you control it. And then right now, interest rates are low and you’re not getting much on deposit accounts. But if they’re higher, you can actually earn some interest on it while you wait to pay it.

Tim Ulbrich: Yep. Great stuff. Great explanation, Tony. Another question we have from the community is what options does IBERIABANK/First Horizon have for investment properties that are not owner-occupied? Anything creative on that end?

Tony Umholtz: Well, a couple things. First thing I’ll just mention on the investment properties — and this has come up a few times with the professional produce — with multi-family, if you’re buying a multi-family property, a duplex you can still put less than 20% down. You can’t do 3% or 5%. It’s generally 15% down. There is no MI. Rates are still very, very good even though it’s multi-family. But when you get to buying a three- or a four-unit, and a four-unit is the largest residential property that we can finance. Anything above that is considered commercial. That’s a completely different type of financing. But you know, you typically have to do 20% if you’re buying a three or a four. But we still do have quite a bit of investment property options that are conventional mortgages. There is one 85% that we have for investment. It does have PMI, and PMI can be tricky and a little expensive. So I usually recommend if you’re buying investment to put 20% or even 25% down if you can because then that’s where the best rates are for investment property. But there’s a lot of liquidity still for that type of thing. And the rates tend to be pretty good. We have — we’re still doing quite a few of those purchases people are making because rents are still high. It can be a good cash on cash investment.

Tim Ulbrich: Great stuff. And so for the house hackers out there, we’ve talked about that on previous episodes, it doesn’t mean it’s not a good option, doesn’t mean it’s not something you should pursue. But it just might mean a little bit more that you have to bring down to get that purchased.

Tony Umholtz: There is one thing I will say. There are — you know, for example, FHA, you can buy a multi-unit property with 3.5% down. Now FHA does have higher PMI, but the rates are very attractive. So that can still be a good solution for owner-occupied, you know, multi-family that you’re renting the other units out.

Tim Ulbrich: Awesome.

Tony Umholtz: So that is a good tool. There’s other tools outside of our professional product too.

Tim Ulbrich: Another question we have from the community, Krista asks, “What advice for those that are considering a refi that are hesitant because of a second mortgage such as a HELOC? Can borrowers with two mortgages consolidate and still get a competitive rate?”

Tony Umholtz: That’s a really good question. Very, very good. So a HELOC is if — so there’s two ways lenders look at this. So if you purchased a home originally with a first mortgage and a second so it was part of your acquisition of the home and we refinance and combine the two together, which I think is a great decision because you get rid of a floating rate second, right? If you combine into a fixed. But that’s considered what’s called a rate and term refinance, which is going to get you the best rates. If you were to buy the home and then take out a second mortgage let’s say a month later, if we pay that off, it’s considered a cash-out mortgage. And that comes with different guidelines and can be a little bit more expensive, depending on the loan-to-value. So it is possible, but that’s often — it just changes the type of loan if it’s a subsequent, if you subsequent purchase took out the line of credit.

Tim Ulbrich: OK.

Tony Umholtz: And that comes up a lot because if you’ve done it later after you purchased, it’s a cash-out and that can change the terms of the loan.

Tim Ulbrich: Great stuff. And the last question we have, which brings us full circle to some of our conversation about what’s going on with COVID-19, from Jessica, “Does national shortage of housing units create an environment where home prices will remain high despite the economic recession?”

Tony Umholtz: You know, every market — and we touched on this a little bit in the beginning of the call, is different. Every market has different demand and supply factors. So we don’t want to completely generalize. But on average, most of the country is in a supply issue. Right? There’s not enough supply of homes on the market. And I think commercial is a whole different story. This call isn’t about commercial, but obviously commercial market can be impacted much more deeply than residential. But being that we had such a low supply of homes and interest rates being low and the housing market is pretty strong, we’re very, very busy. I’m very surprised myself. But just in the things I read and the people I talk to, now I’m kind of on the ground level with this with realtors and buyers, there’s a ton of activity. So I would have to say that the residential market is very, very well supported, very well.

Tim Ulbrich: Great stuff, Tony. And thank you to those from the YFP community who submitted questions. We’ll have Tony back on the show in the future if you have a question that we didn’t get to today. And I want to thank Tony for his time, again, for his partnership and collaboration with us for serving you, the YFP community. And to learn more steps — about the steps in consideration to getting a home loan, make sure to check out the post on the YFP site titled, “Five Steps to Getting a Home Loan.” You can do that by visiting YourFinancialPharmacist.com/home-loan. Again, YourFinancialPharmacist.com/home-loan. And right from that page, you can get the contact information to reach out to Tony. 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 or review in Apple podcasts or wherever you listen to your podcasts each and every week. That helps others find our show. So thank you for joining, and have a great rest of your week.

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