YFP 302: Navigating the Mortgage Market: Insights from a Loan Officer

On this episode, sponsored by First Horizon, Tony Umholtz talks about navigating the mortgage market, important factors home buyers should understand when evaluating lending options, the anatomy of a home loan, and when to engage with a lender in the home-buying process. 

About Today’s Guest

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

Episode Summary

In this episode of the Your Financial Pharmacist podcast, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, is joined by Tony Umholtz, a mortgage manager at First Horizon. In this episode, Tim taps into Tony’s 20+ years of experience in the industry to discuss important factors home buyers should understand when evaluating different lending options, the anatomy of a home loan, and when to engage with a lender in the home-buying process. Tony opens the conversation with an update on the state of the lending market, with more interest in buying homes, but the market remains competitive with low inventory. An overview of the different loan types is covered, along with their nuances and situations where each is applicable. First-time home buyers will learn how much of a down payment may be needed based on the current options available, the term options for loans, and when 30, 20, or 15-year mortgages make the most sense. Tony shares his thoughts on lending options outside fixed-rate products and when they can be advantageous. He also explains what points are, how they work, and the importance of understanding how they are baked into introductory rate offers. As the show wraps, listeners will hear a frank exchange, where Tim and Tony discuss the impact of current events and bank uncertainty on financing a home purchase.

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
• 5 Steps to Getting a Home Loan
• Apply for the Pharmacist Home Loan
• Your Financial Pharmacist Disclaimer and Disclosures

Episode Transcript

INTRODUCTION

[00:00:00] TIM 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 welcome back onto the show Tony Umholtz, a Mortgage Loan Officer with First Horizon. During the show, I tap into Tony’s 20-plus years of experience in the industry to discuss the important factors that homebuyers should know when evaluating the different loan options that are available. We discussed the differences in down payment, how credit scores can influence the options available, fixed versus adjustable rate mortgages, and when purchasing points does and does not make sense. 

Make sure to stay with us to the very end of the show where I asked Tony about the impact of current events on financing a home purchase, including the inevitable end of the student loan pause, whenever that may be, and the impact of the bank uncertainty, given the current news with Silicon Valley Bank, Signature Bank, First Republic, and most recently with the UBS purchase of Credit Suisse. 

Now, before we jump into our discussion, 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 280 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 working one-on-one with a fee-only certified financial planner can 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 jump into my interview with Mortgage Loan Officer from First Horizon, Tony Umholtz. 

[INTERVIEW]

[00:01:46] TIM ULBRICH: 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 a hunt for a solution for pharmacists that are ready to purchase a home loan with a lower down payment and are happy to have found that option with First Horizon. 

First Horizon offers a professional home loan option, a.k.a. doctor or pharmacist home loan, that requires a three percent down payment for a single-family home or townhome for first-time homebuyers, has no PMI, and offers a 30-year fixed-rate mortgage on home loans up to $726,200. 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/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan. 

Tony, welcome back to the show.

[00:03:01] TONY UMHOLTZ: Tim, good to be here. Thanks for having me.

[00:03:03] TIM ULBRICH: Well, it’s officially the start of spring. So at the time of recording this, yesterday was the first day of spring. Typically, that means it’s prime time for home-buying. Current state of the market, we’d love to hear your thoughts. You shared something with me prior to hitting record about existing home sales being up more than was projected, which to be frank, surprised me a little bit, just given what we’ve been hearing of a lack of inventory that’s out there. So what are you seeing in terms of the current market?

[00:03:33] TONY UMHOLTZ: Well, I think we were in a very slow environment the last few months. When retail or the existing home sales were higher, it was from the month of January. So January was a low month, and I think it was at kind of a bottom level. But economists had predicted like almost 400,000 less units then actually sold. So I think the market is showing some underlying strength that the economists had predicted. 

Frankly speaking, with spring here, we’re busy. I mean, there’s a lot of people reaching out for pre-approvals right now. I mean, rates are certainly higher than they were last year at this time. But we’re seeing a lot of people interested in buying a home. But still, inventory is fairly tight, like we discussed earlier.

[00:04:19] TIM ULBRICH: Tony, for today’s show, I want to focus on prospective homebuyers and what they need to know in order to navigate the mortgage market and to make a decision on ultimately how they’re going to finance that home purchase. The question of why is this important, right? For starters, this is one of the, if not the, biggest financial purchase that they’re going to make. Obviously, they’re going to want to feel comfortable in understanding what their options are or want to feel good about the decision that they’re making from a financing standpoint. 

Second, I often hear from prospective pharmacist homebuyers, especially first-time homebuyers that are confused and overwhelmed about all the options that are out there; conventional VA, FHA, doctor-type loans, points, no points, 15 years, 30 years, fixed rates, ARMs. We want to clear up as much of that as we can, again, with a goal that folks will feel educated and informed as they’re going forward with that home purchase. 

Let’s jump in by dissecting some of the lending options and the features that are associated with those options. So, Tony, at a high level, I mentioned a few of them that are out there. What are the types of loans that are available when people are considering the financing of a home?

[00:05:34] TONY UMHOLTZ: There’s really several loans that are very common that you’ll see in the marketplace. Number one is FHA loans, Federal Housing Administration loans. Also, the Veterans Administration for those that have served in the military, VA loans. So you hear a lot about those. Then, of course, conventional loans, which are basically backed by Fannie Mae and Freddie Mac. So when you hear those two large government-sponsored entities, that’s what conventional loans are. 

There’s also nichey loans, niche loans that are offered. Typically, they’re not mainstream. They’re typically offered through banks, some financial institutions that will offer them for, for example, like the product for pharmacists that’s available for pharmacists, doctors, attorneys. There’s some nichey programs available based on your occupation. A lot of those loans are held on the bank’s balance sheet. So they’re not a program that would be openly sold on the open market. 

You’ll hear a lot about those programs, and each one has its own benefits. It’s important to know where you stand. So when you go through a pre-approval process, it’s a great way to get educated on where you stand. Even before that, you can find some information online. You can learn more about these different programs. 

But, typically, for example, FHA loans are going to have a limit for the market that you’re buying in. Let’s say you’re purchasing Hillsborough County, Florida, for example. They’re going to have a max loan limit of, let’s say, roughly 400,000. You can’t go above that number for FHA on a single-unit property. 

Now multiple units, you can do higher loan amounts. So a four-unit property can be higher. FHA is great for certain things. The one downside of FHA is that it’s permanent PMI, lifetime PMI. You can never get rid of it, although they did reduce it recently. But it’s still a lifetime PMI. You can never get –

[00:07:29] TIM ULBRICH: I learned that one the hard way, unfortunately. 

[00:07:33] TONY UMHOLTZ: Yes. So there is some downsides there. I do like the FHA when credit scores are a little weak because I can get better pricing than I can on a conventional loan. Then conventional, of course, does not have permanent PMI, has a little bit higher loan amounts for the county. Most counties in the US are 726, 200, so a little higher loan amounts. In some counties in the higher cost areas are actually a little bit more than that. 

Conventional has got PMI that only has to be on for two years. Sometimes, you can get it off, pulled off less, if you put more money down during the loan process. It doesn’t have upfront PMI like FHA. So there’s a lot of benefits to conventional. The niche programs, of course, you have to be a pharmacist, doctor, attorney. Those type of programs are going to be more unique to one group. But those are, obviously, going to typically be better and stronger than any of the products you can – the FHA and conventional. When you compare the two, they’re typically going to be stronger. 

But we always look at every option. That’s one thing that we’d love to do is say, okay, let’s compare it and stack rank what the best products are today for this client. We’ll come up with the best solution, and most lenders work that way.

[00:08:47] TIM ULBRICH: I’m glad you brought up the FHA to kick that off because what I see and what I hear from a lot of pharmacists is depending on where they live, and obviously you mentioned the max loan amount, but I think they’re often thinking first-time pharmacist homebuyers, “How do I get into a home and minimize my down payment? Because I’ve got $200,000 student loans. I’m starting a family. I’ve got all these other competing priorities.”

They may end up down an FHA pathway, which maybe is the best option but maybe not, and they may not be aware of an option like a pharmacist home loan that could get them into a home at a reasonable down payment. Obviously, credit score is a factor that we’ll have to consider, and we’ll talk about that again here in a few moments. But allows for that lower down payment, a little bit higher on the purchase price potential, which obviously in today’s market is an important factor but doesn’t carry the PMI, especially the permanent PMI you mentioned with the FHA. 

Take home point that I really hear there, Tony, is when you’re working with an individual such as yourself, working with someone that is looking at what is the best option for you and your personal situation, looking at potential purchase price, looking at down payment that you’re bringing, looking at credit score and really being able to customize the offering for that individual and their own situation. 

I want to break down down payment a little bit further because that is probably the biggest pain point I hear from first-time pharmacist homebuyers, which is maybe they’re familiar with the traditional, “Hey, I’ve got to have 20% down.” Not aware of other options that may be out there. That can be a big overwhelming number when it comes to purchasing a home at 400,000; 500,000; 600,000 dollars. 

So the question of do I need 20% down, you’ve talked about that a little bit already. But talk to us more about why that may not always have to be the case with other options that are available.

[00:10:43] TONY UMHOLTZ: When you’re looking at purchasing a property, 20% down and a great metric because you get out of PMI for a conventional loan. But it’s also a lot of capital, putting a lot of investment into your home. Then that can dilute the returns you get on your own long-term because leverage enhances returns, but it also takes away from savings and everything else. 

So there are programs available. For example, the FHA, I’m going back to FHA, you can put as little as three and a half percent down. Now, you do have heavy PMI. You do have lifetime MI, upfront MI that’s added to the loan amount. There are those other things. But you can get into the home with just three and a half percent. 

The pharmacist product and some conventional products, now some of these conventional products do have PMI. But sometimes, they’re priced pretty well. But you can do three, five percent down. These programs, you’re coming into it with very little, little, little down. PMI in the conventional sense, you will have a PMI premium every month. But the pharmacist product, no PMI at all. 

So you put three percent down, five percent down. That’s impactful because you’re – and you’re allowed to have the seller pay your closing costs and prepaids, if you’re in a bit of a cash-strapped situation, I mean putting three or five percent down and having your closing costs and prepaids taken care of, pretty attractive. So those are available to pharmacists and physicians as well and then even normal everyday folks on the conventional side. Three, five percent down, an ordinary buyer can take advantage of that. 

There are some programs for certain counties if you meet – and most of your audience will be above the median income for the county. But there’s even some programs offered if you’re below the median income, where there’s some additional benefits as well. This is a down payment assistance actually.

[00:12:37] TIM ULBRICH: So for folks who are saying they want to learn more about that pharmacists home loan product, as we mentioned in the introduction, you go to yourfinancialpharmacist.com/home-loan. We’ve got more information about that product with First Horizon, what are the different criteria. There’s an option on there to connect with us, and we can provide you with more information. 

Tony, down payment, as I mentioned, gets the attention because I think that’s often what we’re thinking about or how much cash are we going to have to forego at the time of purchase. But what may not get as much attention or other parts of the loan if we dissect that a little bit further, so things like the term of the loan. I’m thinking about, obviously, fixed rate versus a variable rate, whether or not there’s points. We already talked about the PMI. 

Let’s start with term. 30-year fixed rate I would assume is the most likely option that individuals are pursuing. But there are other options, 15-year term. I know I’ve seen 20-year terms. Are those the three that are typically used, and is the 30 the most common?

[00:13:39] TONY UMHOLTZ: Yes. Those are the three that are most common by far. 30-year is the most common. It gives you the most flexibility too from a payment perspective because you can always add additional principal. These loans, most loans don’t have any prepayment penalties. So you can always put more towards the loan. That typically is a good strategy. That gives you flexibility. 

But the 15-year, the-20 year are – some people do choose them. It also depends on when you choose to retire, right? Or when you – if you think you’re going to hold the home long term. Everybody’s goals are different. Everyone’s circumstances are unique. So we look at their timing. 

I had one client that said, “Hey, I’m going to be retiring in 15 years.” I think he’s like in his mid-40s, and that’s what we ended up doing for him because he wanted that 15-year to hold himself accountable. But I said by far the majority of people are opting for the 30-year. I think that that’s the better strategy because for the rate break you get, the flexibility is great. I just think having that flexibility is the most important thing. Cash flow – 

[00:14:43] TIM ULBRICH: Cash flow. 

[00:14:43] TONY UMHOLTZ: Is important. 

[00:14:44] TIM ULBRICH: Yes. 

[00:14:45] TONY UMHOLTZ: Yes. Because the one thing that clients have to understand and buyers have to understand is the shorter that term, there’s even a 10-year fixed, actually, 10 as well. But it’s a heavy payment because it’s amortizing so quickly. Amortizing, essentially, is just your principal pay down, right? It’s how rapidly you’re paying down the mortgage. So a 10-year fixed loan, you only have 120 payments, and that loan is totally paid for. So it’s a heavy monthly payment. 

I think cash flow is really critical for everyone. I think that’s the best way to – because you can always add principal and pay the loan down quicker, right? But you can’t always – you can’t go back and say, “Darn, I wish I didn’t do that 15-year and have to pay that extra 2,000 a month.” You can be putting it into your IRA or somewhere else, paying down other debts. 

[00:15:34] TIM ULBRICH: Yes. I think the options of cash flow. It’s something we hear from a lot of pharmacists, first-time homebuyers. I know it’s something my wife and I have talked about extensively, right, especially when you’re in that transitionary phase, where home prices now are more expensive than they’ve ever been. Rent rates are obviously higher. So those monthly payments, even at a 30-year, are going to be higher than they were just a few years ago, let alone at a 15 or a 10. 

Student loans are coming back online. At some point here in the near future, we’ll talk about that in a little bit. Then just a lot of the expenses that come with that transitionary phase, a lot of folks that may be getting married. They’re having kids, right? They’re moving. So a lot of demands on cash flow. To your point, we can make bigger payments, and you can even automate those over time if you feel like, “Hey, I confidently can make this. I want to pay this down for whatever reason.” Maybe it’s, “Hey, I’m going to save a little bit of interest. I’m averse to the debt or I want to retire early.” 

Whatever the rationale may be, you have that option. But you’re also giving yourself other options in the event that you need to have some of that cash flow, so well said. I think for those reasons, we see many folks go in with a 30 and perhaps some people that are making extra payments along the way. 

What about the rate, Tony? I feel like when I was going through the refinance process pre-pandemic, refinancing a 30-year fixed rate, three percent. Maybe even a little bit lower for some folks at that point in time. Obviously, rates have gone up substantially. But in that moment, it felt like, and for the longest time, fixed rate, fixed rate, fixed rate. Lock it in for as long as you can. I’m curious to hear your thoughts now, given the interest rate environment we’re in. Options on adjustable rate mortgage versus a fixed rate. What are some things that folks should be considering here? As I do know, there are some other products out there that may be marketed towards pharmacist or physicians or other health care providers that aren’t a fixed-rate option. 

[00:17:29] TONY UMHOLTZ: That’s right. Yes. I mean, there are ARM products out there. It’s interesting that they’re not super mainstream. They’re going to be more nichey because Fannie Mae and Freddie Mac, the pricing on ARMs is actually worse than a 30-year right now. There’s just no market for it, a secondary market. 

But banks will retain it. We have some programs where we’ll write ARMs, and we’re appropriate. It’s a good product. It does carry a slightly lower rate than the fixed rates. I think this would be one of those times where I don’t think you would get hurt, potentially. But I think you got to know your risks, though. I mean, that the risks are what do rates do because, typically, the ARMs are structured 5, 7, or 10 years. 

Now, when I first started in the industry, we used to have just outright one-month ARMs. I mean, 20 years ago, you would use ARMs we could write that were adjustable day one. They had some amazing rates made, but they really run with a cycle around BC. I these things move up and down. But I would call them more like a hybrid ARM. They’re fixed for 5, 7, or 10 years. So they do have a fixed-rate component. There’s still a 30-year loan. Some banks offer a balloon, which means you have to like redo the loan at that time. But those are fairly attractive, especially if you think you’re not going to be in the house for 5, 7, or 10 years. I think that’s something to look at. 

The downside of those loans is if you are in the property, and it does start adjusting. The rate market is not favorable, but you’re going to be in a higher market, and rates are going up. It’s going to be harder to refinance. So there is some risks and tail risk there down the line that if you’re there in the home that it can move. So I’ve seen a move down. I’ve seen a move up. 

Where we are in the economic cycle is tough right now. I think the Fed is pretty far into this tightening phase. We can address more of this later, Tim. But I think we could see some volatility in rates for a while, but there is potential for rates to go down, again, at some point. So I think anyone that does an ARM, I think inside of five years, there could be chances to refinance and do a 30-year again. So it’s not necessarily a bad loan if you’re willing to take a little bit of risk.

[00:19:40] TIM ULBRICH: I think understanding that risk, Tony, is really important, as well as being honest with yourself about your risk tolerance and what is that worth, as well as what margin may there or may there not be in the budget. We talked about this with student loans and days gone by when you might refinance from the Federal on the private side, especially if you’re looking at a variable rate over a fixed rate on the student loans. Understanding if that rate does go up or when that goes up. What margin do you have in your budget, and how do you feel about that being a fluid part of your monthly spending plan? 

I think for some pharmacists, maybe many pharmacists, they look at it and say, “I want the known, so I can plan around it.” But I think in the spirit of talking about all the options that are out there and evaluating which one is best for you, it’s worth covering in more detail. 

Tony, points. I’m seeing a lot of confusion out there right now around points. Correct me if I’m wrong, but I think what’s happening is people are going out, and they’re Googling mortgage rates. They’re getting into a sales page, and what they’re seeing are rates that have points embedded. Unless you’re reading the fine print, you’re really not comparing apples to apples as you’re trying to find what might be the best rate out there for the product that you’re looking at. 

So that’s just, I think, an unfortunate part of the practice if you’re not doing your homework. But what are points quickly, and how do they work, and why is it important that folks are understanding how these are baked into these introductory rate offers that they see?

[00:21:10] TONY UMHOLTZ: Yes. That is a great point, Tim. Basically, points are what the – most lenders do when they charge points is essentially just buying the rates down. So they’re offering you a certain rate at a certain – we call it par price, right? So they will say, “So for you to get this rate –” Let’s say it’s six percent today. You would need to pay a half point or one point, right? That can vary by lenders based upon their pricing. So that can vary. 

But the one thing that that’s out there, and I think a lot of people miss this, is like the national headlines like week’s rate by Freddie Mac, right, which is old news anyway, except the last week’s rate. Rates change daily. They almost always include some sort of points in that quote almost every time. 

[00:21:56] TIM ULBRICH: All the news headlines you’re seeing. 

[00:21:58] TONY UMHOLTZ: Yes. 

[00:21:58] TIM ULBRICH: Yes. 

[00:21:59] TONY UMHOLTZ: Yes. If you read the fine print, it might say, “Hey, I had three-quarters of a point, which is point .75 percent of the loan amount.” So fairly expensive, right? Or one percent or one and a quarter. So typically, they quote the rates with some points. My stance on points and the way I typically try to charge them if people really want them is where it’s like upfront interest, so they can write it off on their taxes. 

But in this environment, especially, I’m not a big advocate of points because there’s a good likelihood that rates are better over the next 24 months. I think why pay a premium now? Come in and pay your points when rates are a lot lower. Then you’d really can grab a nice low rate for the long-term. But you’re seeing a lot of quotes out there with points from lenders right now to make themselves look more attractive. A lot of home builder finance companies will do it as well. 

The other thing in these what’s called 2-1 buydowns, which are really, in a lot of ways, a smoke and mirrors because what they’re doing is they’re giving you have a lower rate for the first year or two because you’re paying it all upfront in interest. So you’re paying a couple of points upfront to get that buydown. It’s a worse rate long-term. So that’s another thing. You’re loading up on interest. You’re paying it yourself. You might as well take the higher rates. You’re going to save money. 

So there’s things like that that are out there. It’s just promotional ways, promotional products. But the points, again, it’s not a bad thing to do them because you typically will get a better rate than you would have if you didn’t pay points. But given the environment we’re in, I’m not a huge advocate. I’m just giving that you could save the money, and I think you’ll get it back later.

[00:23:43] TIM ULBRICH: Tony, something you said there has me thinking I want to preface my comments with this a little bit of conjecture, right? We don’t know what rates will or will not do. I agree with your thoughts that likely we’re going to see those come down in the next two years. Certainly, that’s not guaranteed. But my mind is spinning. If that happens, my mind was going down the path of, wow, like a flurry of refinances and people that have bought in this high-interest rate market that are trying to get a better rate. 

But then also like what does that mean for what we started the show talking about that there’s not enough supply? Unless that rate comes down significantly, I don’t think it solves the issue of people that have a home locked in at 2.8, 2.9, 3 percent. If they come down even a point, point and a half, like it feels like that spread is still too significant.

So I don’t know. Maybe I’m being overdramatic, but it feels like we have some challenges ahead of us as it relates to the supply and demand, even though the rates might get better as a homebuyer. I hear that and think, “Great. I’m going to save a little bit on rates.” But that probably means that home prices are going up because demand is going up.

[00:24:49] TONY UMHOLTZ: That’s exactly right. I think we’re going to see that. I think most – not every market is the same. Some markets have more inventory than others. Some are more challenged. But I know just from my experience, and we learned across the country. I had a conversation this morning with a client, and they had to purchase the home without an inspection. It was that competitive. There was just no inventory where they were buying, and it was that competitive. So I think we’re going to go right back into that again. 

I do think lower rates will help move some people because families can grow, right? They outgrow their home. There’s move-up buyers. People have to relocate, and builders will start building more inventory. But the challenge is just there isn’t enough people moving right now and putting their homes up for sale. So you’re exactly right. I think we’re going to start seeing it tighten up again. Prices are going to rise. Maybe not to the extent they were during the COVID boom, but I think you’re going to see prices rise. 

I think the last six months have been a good time to buy. I think still even now is still a pretty good time because there’s still – it’s not everybody’s out there buying –

[00:25:58] TIM ULBRICH: It’s crazy. 

[00:25:59] TONY UMHOLTZ: You could still get sellers. Sellers will listen to you right now. They’re a little spooked, right? If you’re selling, you’re going to be a little more spooked and a little more nervous. But I think there’s going to be a lot more buyers coming in as these rates drop. You’re right. I don’t think we’d see rates go down. I mean, we don’t know for sure. But I don’t see rates going to the high twos again. But they definitely – even coming down into the fours, even five is going to be a significant lift to the market, significant.

[00:26:28] TIM ULBRICH: I hear what you’re saying, right? There are some things that life happens. We’re in a two or three-bedroom home, and we’ve had a few kids. You’re going to push through that despite rates because those factors are that significant or relocation because of family or whatever. 

But a piece we haven’t talked about, which also just hit my mind, is the impact of the remote work transition. I don’t have any stats to back this up, but I would think that that just inherently reduces the number of people that are moving as a result of a job transition or who could stay put and aren’t having to have to relocate, which might put some further pressure on the supply piece as well. 

[00:27:09] TONY UMHOLTZ: Absolutely. 

[00:27:09] TIM ULBRICH: Yes. There’s just a lot of factors, and we’re going to look back at this period one day and say, “Remember when all these things happened at the same time.” So I want to wrap up by picking your brain. I always appreciate, Tony, not only your 20-plus years of experience in this industry and your experience working with many pharmacists that are looking to purchase but also your mind around the economics of this and, of course, what’s going on in the markets right now. We’ve got some unique challenges. 

Two that I want to focus on that I know are top of mind for our listeners right now. One is, hey, these student loans are coming back at some point. What does this mean, and how are lenders going to be looking at that? Then the second, I want to talk about some of the bank uncertainty that we’re living in real-time right now. 

So let’s start with the student loans. We don’t know when yet. The Supreme Court heard the case on the Biden debt cancellation. We’re expecting an announcement. I think all signs are pointing to that’s going to restart payments here at some point. Right now, it’d be no later than the end of August, unless something changes as a result of that decision. 

From a lender standpoint, we now have coming up for graduating classes, Tony, that have yet to have to pay on federal student loans. That also tends to be a group. They are usually first-time homebuyers. So debt-to-income ratios, how student loans are factored in, knowing that that pause is going to be ending, how are lenders thinking about this, especially for folks like our listeners, pharmacists that carry a pretty substantial debt load?

[00:28:46] TONY UMHOLTZ: That’s a great question. I think it’s just one of those things we look back at this time, right? It’s so unique. There’s a couple of ways that lenders look at these student loans. Number one, we look at that minimum payment, right? That minimum income-based repayment that is required. So that’s one way. The other way is we take a factor of that student loan amount, and the factors vary. 

For example, we talked about FHA and conventional earlier. Their factors are pretty high. So it makes it much harder to qualify with those programs. Even though you’re not making a payment, your payment is zero, there’s still an actual factor that’s attached to that loan size. So it’s $200,000. It can be 2,000 a month that the lender is counting against you. So the factor we use for pharmacists on our product is much lower than that, but it’s still used. So that’s basically an internal factor is how banks will look at that typically. 

It’s a tricky time. We don’t know what that outcome is going to be. So I would say right now, we’d be utilizing that factor or that income-based repayment, like what’s that amount going to be if you started paying in September or whatever it might be. But I would probably say for most people in that situation, we’ll be utilizing that factor, Tim, to qualify them.

[00:30:04] TIM ULBRICH: I want to poke a little bit more on that in terms of the factor or an income-driven repayment. Is that a general formula that a bank is using like, “Hey, $200,000 of student loan debt based on our calculation, income-driven repayment plan, would be X.” Or is it looking at the specifics bar to bar, right? Because we do have some of our listeners that might be employing a loan forgiveness strategy, where they’re working hard to lower their AGI to increase the amount that’s forgiven tax-free because it’s dropping down their income-driven repayment now. So they might be below like a generic calculation. How is that determined?

[00:30:42] TONY UMHOLTZ: It hasn’t gotten that far yet. That’s a great question because it’s still looked at like we’ll get a payment letter saying, “Okay, your monthly payment is going to be 400 a month.” That’s what we would use on the income-based from the servicer, from the student loan servicer. They would essentially provide the borrower with that number, what that amount is. 

Now, the factors is used on the lump sum of student loans. You brought up a good point. Will it get there? I mean, FHA and conventional have a certain way of looking at things and Fannie Mae. I don’t know if that’s going to change. That could change. I think it should change based on that Supreme Court outcome. So that could affect those type of programs. 

The more nichey bank programs, I think those would follow suit. They are more lenient, though, than Fannie and Freddie are and FHA as far as how much they would count. So like, for example, FHA, one percent, right? So $200,000, right, 2,000 a month. That’s a big hurdle to qualify in. 

[00:31:40] TIM ULBRICH: Makes sense. 

[00:31:40] TONY UMHOLTZ: That’s a big monthly payment. If your total debt ratio is 43%, that’s income to qualify. It makes it hard to afford a home. So that’s why these nichey programs are important for clients with big student loans.

[00:31:54] TIM ULBRICH: Yes, median debt load of a pharmacist today about 160. I think we’re going to see that drop maybe a little bit, just because of the pause on interest to credit while people are in school. But we have many clients, many folks we talk with on the regular that, sure, making a great income. But they’ve got 200,000; 250,000; 300,000 dollars of debt or maybe a household debt of 400,000 if you have two pharmacists together. 

The second thing I wanted to pick your brain on and we don’t have to go into the weeds on the background of how we got to this point with the bank uncertainty. But if anyone’s been following the news at a high level, it’s been a tumultuous time, right? We saw what happened with Silicon Valley Bank in California a couple of weeks ago, followed by Signature Bank in New York. First Republic, at the time, what we know at this recording, was propped up with a $30 billion cash infusion from some other banks, still struggling after that infusion. UBS buying one of the major banks in Switzerland. 

I hear all this, Tony. As a pharmacist, you might be buying a home and wondering, “What is the impact for me and this purchase that I’m trying to make? Is there a hesitancy to lend because of all that’s going on with the uncertainty, and what should I be aware of as a buyer?”

[00:33:09] TONY UMHOLTZ: Well, great questions. There is a lot going on, guys. There really is. I’ll try to unpack it as simply as I can. But to answer that question, I do think there are going to be challenges with lending. Some banks may be more cautious to lend, especially on portfolio products, these nichey products, if they’re in a challenging deposit situation. So you could see some challenges. 

I did have one client. It was a physician that mentioned that the bank they were working with had stopped doing physician loans. So there are, I think, some banks that will pull back a little bit on lending. But for the most part, FHA, Fannie Mae, I mean, these loans are all backed by the government. There’s no liquidity issues there at all. The vast majority of banks are not going to have a challenge lending. 

In these cases, and again we’re in a time very – there’s a lot of question marks with a lot of uncertainty because the Federal Reserve is aggressively raising rates. So these several banks you mentioned, Silicon Valley Bank, for example, was a risk management issue to some extent. I mean, they essentially were – not to get too far in the weeds, but they were a large regional bank. They serviced tech companies in Silicon Valley in California. So they were very nichey in the venture capital world. 

It was basically a classic run on the bank in a more modern time, where they took their assets, their capital, and they invested it in treasury bonds, which are the safest bonds out there, right? The regulators allow that because they’re safe. You’re going to get paid back. But what they didn’t account for is the duration risk and the interest rate risk of holding long-term bonds. So basically, what happened is roughly $100 billion portfolio treasury bond is suddenly worth 70 billion or possibly a little less because of that hit to it with rates going up. When they had the demand for their deposits back, they couldn’t pay the depositors.

The other issue with that too is what’s called uninsured deposits. They had a vast amount of uninsured deposits where FDIC, which ensures a $250,000 deposit, they had a lot of tech institutions, venture capital funds that had a lot more money on balance that was not insured. It was basically that classic run. So that was Silicon Valley. Fairly similar with Signature Bank, just more in the New York real estate market, these are very nichey banks. 

But I think there’s a lot of banks that are going to be affected. I just don’t think – we don’t know the extent of it yet. We don’t know what the Fed is going to do. But a lot of this is just risk management per institution and the fact that the Fed has just raised rates so quickly. I mean, it’s that simple, right? It’s reducing the liquidity in the system. 

For your listeners and your viewers, it’s not going to impact you. There could be some nichey banks that pull back on their products, so you do have to watch that. But for the most part, it’s going to be business as usual for the vast majority of people out there.

[00:36:18] TIM ULBRICH: I think what’s worth watching is the ripple effect or the potential ripple effect, right? You mentioned not only of these banks but also what’s the Fed going to do going forward. How are they going to continue to fight inflation, while dealing with some of this uncertainty? We’re going to find out a little bit this week. 

[00:36:32] TONY UMHOLTZ: Yes, we will. 

[00:36:34] TIM ULBRICH: I think while these are niche banks, they’re not small institutions by any means. I think our listeners may be most familiar with First Republic of the group that’s listed. So while me and Ohio may not be actively putting money in a Silicon Valley Bank, and that seems like a niche far-off bank, there’s definitely a ripple effect that can happen. That is causing a lot of the anxiety and concern right now.

But also, these aren’t small institutions. So we’ll see kind of where things go forward, and stay tuned, and we’ll do our best job to bring this information to the community to make sure that they feel confident understanding what’s going on. But most importantly, how this impacts the decisions they’re making, like purchasing a home as we’re talking about here today. 

Tony, as always, I appreciate your expertise, the value that you bring to the YFP community. We’ll mention and include in the show notes information where folks can connect with you. They can go to yourfinancialpharmacist.com/home-loan. Get more information on the pharmacist home loan product offered by First Horizon and looking forward to more conversations throughout the year as well. So thanks for your time and for your expertise.

[00:37:47] TONY UMHOLTZ: Tim, always good to be with you. I always have fun. So thanks for having me.

[00:37:51] TIM ULBRICH: Before we wrap up today’s show, I want to, again, thank this week’s sponsor of the Your Financial Pharmacist Podcast, First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home. A lot of pharmacists in the YFP community have taken advantage of First Horizon’s pharmacist home loan, which requires a three percent down payment for a single-family home or townhome for first-time homebuyers and has no PMI on a 30-year fixed-rate mortgage. 

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

[END OF INTERVIEW]

[00:38:35] TONY UMHOLTZ: 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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