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Products & Coffee with Josh Ep 4: The Core 4 · The Can-Do Lender Podcast Series: Products & Coffee

• 0:00
  SPEAKER_00: This is not 2008.
• 0:02
  SPEAKER_00: It's still an affordability crisis.
• 0:03
  SPEAKER_00: The income you have today is the lever you can still move.
• 0:06
  SPEAKER_00: Last episode we talked about how to use the 2-1 buy-down when the house is right, but you need time to get used to the payment and have a life after payment.
• 0:14
  SPEAKER_00: This week is the other half, the four products that let most buyers use that income.
• 0:18
  SPEAKER_00: I like to call them the core four.
• 0:19
  SPEAKER_00: Welcome back to Product and Coffee with Josh, episode four.
• 0:22
  SPEAKER_00: I've got my old school Chelsea title mug from my 2008 era and tribute to Andy Brown for those who knew him.
• 0:28
  SPEAKER_00: I'm actually closing a loan right now with their office in help of Mary Newbauer and Myra Dieter, who are doing a fantastic job, so hats off to them.
• 0:35
  SPEAKER_00: A while back I put out a short named what I like to call the Core 4: Conventional, FHA, VA, and USDA.
• 0:42
  SPEAKER_00: Each one is a different door.
• 0:44
  SPEAKER_00: The job is to pick the door that fits the buyer and the house, not the one that sounds easiest.
• 0:49
  SPEAKER_00: Let's talk about the first one, conventional.
• 0:52
  SPEAKER_00: Conventional is the most common path.
• 0:53
  SPEAKER_00: It's backed by the agencies Fannie Mae and Freddie Mack.
• 0:56
  SPEAKER_00: They are referred to as the GSEs and are responsible for writing the underwriting guidelines and ensuring loan files adhere to the secondary market investors' standards when packaged and sold as bonds on the secondary markets.
• 1:07
  SPEAKER_00: They work best when the credit and income are solid.
• 1:10
  SPEAKER_00: The higher the credit score, the better the rate.
• 1:12
  SPEAKER_00: And loan amounts play a big factor with that as well.
• 1:15
  SPEAKER_00: The house needs to be in livable condition as well, but cosmetic issues can be more easily overlooked than with some of the other more strict government loan programs.
• 1:23
  SPEAKER_00: Safe and sound is a common term.
• 1:25
  SPEAKER_00: Down payments can be as low as 3% on some programs.
• 1:29
  SPEAKER_00: 10% or 15% can often get you better terms like lower PMI or monthly mortgage insurance.
• 1:34
  SPEAKER_00: And 20% down makes the PMI go away.
• 1:36
  SPEAKER_00: However, PMI companies remain extremely competitive.
• 1:40
  SPEAKER_00: So even at 3% or 5% down, it's much lower than it used to be.
• 1:44
  SPEAKER_00: There are other PMIs like lender paid mortgage insurance or split premium, but right now with the way we're in an inverted yield curve and the way rates are pricing, it doesn't make sense to go that way.
• 1:54
  SPEAKER_00: It's best when the file is clean or a paper.
• 1:56
  SPEAKER_00: Conventional will go down to a 620 credit score, but having a 700 credit score or higher makes the underwriting process much easier.
• 2:03
  SPEAKER_00: You can also buy as a primary residence, second home, or investment property with different down payment requirements, and self-employed and W-2 borrowers can be approved depending on the income calculations.
• 2:13
  SPEAKER_00: Generally, conventional is not the place to force a thinner credit or tougher property file.
• 2:18
  SPEAKER_00: However, if you partner with the right MLO that is well versed in the guidelines, they'll be able to walk you through it up front and help you avoid some of the pitfalls that can happen while in underwriting.
• 2:28
  SPEAKER_00: So now FHA.
• 2:30
  SPEAKER_00: FHA is much more forgiving on credit and DTI or debt-to-income ratio than conventional.
• 2:34
  SPEAKER_00: FHA will go down to a credit score as low as 500, although I found you need a 580 or higher to obtain the automated underwriting pre-approval that most lenders use to pre-approve buyers up front.
• 2:43
  SPEAKER_00: Also, FHA will allow up to 56% DTI, where conventional is a hard 50% cap.
• 2:48
  SPEAKER_00: 3.5% is the normal down payment for most buyers, but you can put more down if you like and will help reduce reduce the monthly mortgage insurance and eventually allow it to go away at year 15 if making a large enough down payment.
• 3:00
  SPEAKER_00: FHA charges both upfront mortgage insurance and monthly mortgage insurance premiums included in the payment.
• 3:05
  SPEAKER_00: The upfront mortgage insurance gets financed into the loan, but the monthly is relatively low compared to conventional mortgage insurance or PMI at the same down payment levels.
• 3:14
  SPEAKER_00: Because of the low down payment, more lenient credit, and DTI requirements, FHA is often the practical door for first-time home buyers.
• 3:22
  SPEAKER_00: We even have the FHA 100 program now where the 3.5% down payment is given as a grant or a small second mortgage, so the buyer only has to come to the table with their closing costs.
• 3:33
  SPEAKER_00: Speaking of closing costs, the seller can pay up to 6% of the buyer's closing costs, which in most cases will cover all of the buyer's closing costs.
• 3:40
  SPEAKER_00: I've had lots of loans where the buyers got their escrow deposits back at the closing table when doing the FHA 100 and having the seller cover the closing costs.
• 3:48
  SPEAKER_00: So it can be a real benefit to get people on the door who don't have a lot of savings.
• 3:52
  SPEAKER_00: Also, the lower credit scores allowed in the thinner credit standards make it easier to obtain an automated underwriting approval up front.
• 3:59
  SPEAKER_00: FHA's loans can also be manually underwritten as well, but those guidelines are more strict and it's harder to qualify without the automated underwriting approvals.
• 4:08
  SPEAKER_00: FHA rates are also not as credit score sensitive and can be better priced for manufactured homes and condo files.
• 4:14
  SPEAKER_00: I've closed a lot of manufactured homes under FHA as it tends to be a better fit with the buyers and the property type.
• 4:19
  SPEAKER_00: But conventional loans will finance manufactured homes as well.
• 4:22
  SPEAKER_00: One thing to watch out for on FHA is the property condition.
• 4:26
  SPEAKER_00: The appraisers are required to examine the property a little more closely and have to ensure it is safe, sound, and habitable.
• 4:32
  SPEAKER_00: Hot and cold running water is a must, as well as kitchen cabinets and built-in appliances, and heat and AC where applicable.
• 4:38
  SPEAKER_00: Also, no holes in the wall or broken windows and things like that.
• 4:42
  SPEAKER_00: If the home is in really bad shape, we can do what's called an FHA203K renovation loan, but it requires a buyer with a little bit of familiarity with renovation and is willing to put in the time to go through all the different inspections and paperwork, which sometimes they're not.
• 4:56
  SPEAKER_00: Conventional also has a version of this renovation loan, so both of these loan products can help when a property is in distress or needing updating, and the value supports it.
• 5:06
  SPEAKER_00: So now VA.
• 5:07
  SPEAKER_00: VA is for eligible veterans, active duty service members, and some surviving spouses when they've gone through the process of inheriting the deceased veteran spouse's benefits.
• 5:15
  SPEAKER_00: It's really one of the best loans out there, terms-wise, as it's 100% financing, but you can still make a down payment.
• 5:21
  SPEAKER_00: There's no monthly mortgage insurance, but it does have an upfront funding fee that gets financed in the loan, unless the veteran's disabled and exempt.
• 5:28
  SPEAKER_00: And just like FHA, VA rates are less credit score sensitive and will allow down to a 500 credit score, although I found you need a 580 or higher to obtain the automated underwriting pre-approval up front.
• 5:39
  SPEAKER_00: And VA rates, like FHA, are typically lower than conventional loan rates by a quarter percent or more in some cases.
• 5:46
  SPEAKER_00: VA also technically does not have a DTI requirement, and I've seen loans as high as a 75% DTI obtain automated approval when the residual income guidelines that VA has separately are met.
• 5:56
  SPEAKER_00: VA loans are meant to help the veteran or service member, so they tend to be a little more lenient on income and credit, as well as the down payment.
• 6:04
  SPEAKER_00: They will also allow the seller to pay up to 4% of the veteran's closing cost, which will generally cover most, or if not all, of the veteran's closing costs.
• 6:12
  SPEAKER_00: VA appraisers, like FHA appraisers, are required to examine the property a little more closely for safe, sound, and habitable issues.
• 6:19
  SPEAKER_00: The VA underwriters will issue what's called an NOV or notice of value after reviewing the VA appraisers report.
• 6:25
  SPEAKER_00: And they often put conditions on there.
• 6:26
  SPEAKER_00: So these conditions can sometimes catch buyers off guard later on in the process.
• 6:31
  SPEAKER_00: And one of the main things to watch out for is the WDO pest inspection, which is always required on VA loans, but not on other loan products unless the appraiser calls for it.
• 6:40
  SPEAKER_00: So even if you have a conditional approval from the underwriters on VA, it's best to wait until the NOV is issued to know for sure if there are any more loan approval conditions you'll need to overcome before closing.
• 6:49
  SPEAKER_00: And just like with conventional FHA, VA has a renovation loan that can help with those properties that are in worse condition and do not meet the minimum standards required by the VA loan guidelines.
• 6:59
  SPEAKER_00: At the end of the day, you want to work with a seasoned MLO like myself, who's also a veteran and knows the ins and outs of the VA loan process and can help fellow veterans and service members walk through it.
• 7:09
  SPEAKER_00: VA really is one of the better loan products out there for those who qualify.
• 7:14
  SPEAKER_00: So now product four of a core four, USDA.
• 7:17
  SPEAKER_00: USDA is a rural housing loan through the Rural Housing Agency.
• 7:20
  SPEAKER_00: And yes, USDA stands for United States Department of Agriculture.
• 7:23
  SPEAKER_00: It's 100% financing and it's based on an eligibility map and income guidelines.
• 7:27
  SPEAKER_00: Both can be looked up through the USDA website.
• 7:30
  SPEAKER_00: However, not all properties have to be rural.
• 7:32
  SPEAKER_00: It's based on density maps, so plugging an address into search map can return a lot of properties that are eligible for this loan product that you might not think otherwise.
• 7:40
  SPEAKER_00: Also, the income guidelines have increased and are very generous depending on family size and can be looked up.
• 7:46
  SPEAKER_00: As mentioned, one of the benefits is 100% financing.
• 7:49
  SPEAKER_00: But just like FHA and VA, USDA rates are not as credit score sensitive and also tend to be lower than conventional.
• 7:56
  SPEAKER_00: However, USDA is typically more strict with DTI as they use a separate automated underwriting system than the other loan products, which generally keeps the DTI below 50% and even looks at the front-end ratio, which is the payment versus a borrower's qualifying income.
• 8:10
  SPEAKER_00: And that ratio is even lower.
• 8:11
  SPEAKER_00: Not everyone's going to fit in the USDA box, but for those that do, it's a very nice 100% financing vehicle.
• 8:17
  SPEAKER_00: And like FHA, it'll allow the seller to pay up to 6% of closing costs.
• 8:21
  SPEAKER_00: So we can often structure it where the buyers get their escrow deposit back at closing.
• 8:25
  SPEAKER_00: It also allows manufactured homes and condos to be financed, but typically you need a 640 or higher credit score to obtain the automated underwriting approval.
• 8:33
  SPEAKER_00: And if less than that, it can be very difficult through the manual underwriting process.
• 8:36
  SPEAKER_00: Although some lenders do specialize in that, I like to stick with the automated underwriting.
• 8:40
  SPEAKER_00: The appraisers generally follow the conventional loan guidelines.
• 8:43
  SPEAKER_00: However, one nice thing about USDA is that you can actually finance the repairs and renovations as long as the value will support them.
• 8:51
  SPEAKER_00: You don't necessarily have to have a separate renovation loan, which a lot of people don't know.
• 8:55
  SPEAKER_00: And the process is easier than conventional or FHA203K renovation loans.
• 8:59
  SPEAKER_00: So USDA can really open the doors to a lot of first-time home buyers or even move up buyers as long as they are selling or don't own another property.
• 9:06
  SPEAKER_00: The main thing is that you first check the address and that you're within the income limits.
• 9:11
  SPEAKER_00: Then make sure you're working with an MLO who is well versed in the USDA automated underwriting and approval process like myself.
• 9:18
  SPEAKER_00: So these Core 4 loan products are how most buyers use the income they have today to open the door to the house they want.
• 9:24
  SPEAKER_00: Manufactured and starter homes are allowed, and two-one buy downs can sit on top when the payment needs help in years one and two.
• 9:30
  SPEAKER_00: Talking with the right MLO and looking at the different core four products you qualify for can really help find a payment you can live with and still have a life after payment.
• 9:39
  SPEAKER_00: If you're a buyer or homeowner or partner trying to match a house to a paycheck, start with which of the core four actually fits and let's run some numbers.
• 9:46
  SPEAKER_00: I'm here to help.
• 9:47
  SPEAKER_00: Can do.
• 9:48
  SPEAKER_00: DM me or email me, Josh at mmphomeloans.com, or visit www.candolender.com.