YFP 285: Cracking the Code on Home Buying Loan Options

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

About Today’s Guest

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

Episode Summary

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

Links Mentioned in Today’s Episode

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

Episode Transcript

[INTRODUCTION]

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

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

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

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

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

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

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

[INTERVIEW]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[00:43:33] T. ULBRICH: Thank you. 

[END OF INTERVIEW]

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

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

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

[END]

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