Choose the Right Loan

There are kind of four primary types of loans that I want you to talk about FHA, conventional, VA and USDA.

Hey, thank you for joining me for this episode of the podcast. Today we're going to be talking about different types of loans that are available. There's four major types of loans. We're going to be talking about those today. And I have as my guest George Sago, and he is vice president of the Mortgage for Bank Plus here in our local market in the MidSouth, Tennessee, Mississippi. And so we're going to just jump right in and George, tell us a little bit about you kind of where you are, where you can.

Sir, yes, sir. I appreciate you having me. As you said, I am vice president, mortgage originator for Mortgage. I've been in banking for probably a little over 18 years in different roles. And mortgages over the last three to four years has been kind of where I lay my flag, and man, I've loved every minute of it. Currently, I operate in the Tennessee. Tennessee? Memphis, Tennessee. The Midsouth area where we serve. I do loans really all over Mississippi. I've done mortgages in Texas. That's one thing about being with a bank.

We have some special privileges as far as where we can go in and do mortgage loans. So a lot of lenders you may go to can only do loans in certain states. When you come into a bank, we have access to any state we really want to. So that's the good thing about if you were to do business with me, that no matter where you are, I could help you get that mortgage done. Okay. And again, we are in the Mid South and Memphis metro area, and I'm a licensed agent in Tennessee and Mississippi. George is here in our market as well. If we're not physically in your market where you are because you may not be in our market, we can help you find somebody in your market or we might still be able like George said, he can probably help you in that market wherever you are.

But there are from know what I know. I know that there may be all kinds of different loans out there we call jumbo loans that have to do with an amount of money, how much the mortgage and stuff is. But for our purposes today, there are kind of four primary types of loans that I want you to talk about FHA, conventional, VA, and USDA. So tell us what we hear about the FHA loan and how the federal government is letting us borrow money from them. Exactly. Yeah. So you mentioned the four types of loans conventional, FHA, VA, USDA. The latter three are government, I guess, government backed loans.

So you talk about not technically borrowing the money from the government. Right. They are guaranteeing the loan for the customer if they were to default.

3:52 - FHA Loans

So the FHA, for instance, they charge what they call a funding fee, and that funding fee is the client's fee basically to use their guarantee for their loan. So what they do, they guarantee that loan for the bank and they also allow the client to be able to borrow money from the bank with, I guess you want to say, a lower criteria for qualifications as far as credit score, debt to income ratio, those things. Debt to income ratio could be higher with the FHA loan versus a conventional. Credit score can be lower for an FHA loan versus a conventional. Generally you will see a credit score around as low as a 580 for an FHA loan and a debt to income as high as 55% to qualify for an FHA loan.

Okay, so that's kind of the quick overview for FHA loan. The other one, because typically, unless we're working with a vet or unless we're working in a particular area out, we're going to be dealing with FHA and conventional loans.

5:16 - Conventional Loans

So how is a conventional loan different from the yeah, so the FHA that's guaranteed by the Federal Housing Administration, they're going to guarantee that loan to the bank for that client if they default. So conventional is not backed by a government agency. So a conventional loan is typically a bank loan that goes under private corporation guidelines. Fannie Mae, Freddie Mac, those are the guidelines used for conventional lending. But that is a loan that's going to have a higher credit score requirement and a lower debt to income requirement because they are looking for a certain quality of a client to qualify for those loans because they don't have that protection on those conventional loans. Now, the benefit to a borrower, if they want to go conventional, FHA, some things about FHA that's different is a conventional loan.

You can get rid of your mortgage insurance because there's mortgage insurance when you're applying, when you're getting these loans, you have mortgage insurance on a conventional and mortgage insurance on an FHA. But with an FHA, that mortgage insurance does not go away unless you refinance it into a conventional and you're under 80% loan to value. What that just means if you want to have 20% of equity in your home to get rid of your mortgage insurance and then that way that saves you some money on your payment each month for that. So the conventional allows you to get rid of that mortgage insurance once you are under that 80% loan to value for that property. So I guess the benefit for the client is I can save money there. And I know I fit within that criteria for the conventional. I guess use some of the I don't have to kind of go through some of the stringent criteria as far as what a home has to look like or different things that you have to go through and pass on inspections with the FHA versus the conventional. So it's an easier final approval process for a conventional versus FHA.

And of all four loans, that's going to be the easiest one for the buyer client. It's going to be the easier loan for the borrower to be able to get into. Like you said, as far as condition of the house, inspections, that type thing, they're going to be a little bit lower there. So FHA and conventional.

8:26 - VA Loans

Now, who's eligible for a VA loan and what's the benefit of getting that? Yes, the Office of the Department of Veteran Affairs. So the VA loan, I think it's a great product. It's a great loan if you qualify for it. And so in order to qualify for that particular loan type, you have to be a veteran, a military veteran.

The greatest thing about it, there's 100% financing. There is no down payment requirement for a VA loan. So another thing that I just mentioned, mortgage insurance with the commission FHA, there's no mortgage insurance on a VA loan. So the vet can get into the home, no down payment, no mortgage insurance. And they tend to be able to. And the qualifications for this, too, are, I guess, a little bit less stringent as well as far as credit score, debt to income ratio, I've seen debt to incomes go up pretty high, but it's ticky per individual. You have to see, hey, what's going on with this particular borrower? But I've seen them close to 60% debt to income be approved for a VA. So, like I said, it's a great loan.

If you fit that mold, you're a veteran, you avoid having to come up with down payment. You avoid that mortgage insurance, and you're able to get into the home that you want to get in pretty good. And then that interest rate I'm sorry, that interest rate for those go back to FHA, too. The interest rate for the FHA, for the VA, for the USDA are going to be lower as well as commissioner because they have that government backing on their loan. So the risk is less. So that's why you have lower interest rates on those particular mortgages. Yeah. And you mentioned the interest rates being a little bit less.

They're based kind of on the market as well and on your credit score, which has to do with the risk that the lender may not get their money back. The worse off somebody's credit score is, the more risk the lender has in getting their money back. So they're going to charge more for it in case you bail, they've made some money off of it, and we talk about that 80%. You don't have to have 20% down to buy a house. What's the lowest percentage down for an FHA? 3.5%. So 3.5% is the minimum down payment for the FHA. Minimum down payment for conventional is 5%. So that's kind of some things you have to kind of consider when you're making a decision on which loan I want to go with.

Got you did. Conventional used to be three, and it changed because I was thinking there was a 3% when you hear 3% around, these are like specialty products that a lender has, but the standard minimum for a conventional loan is 5%. Okay. Yeah. So if you're doing a conventional loan, you're putting 5% down. You mentioned the mortgage insurance that you're going to be paying extra, and that's added to the principal and interest payment. That's to insure the bank against that 15%. Between 80% down and you've put 5% down, there's a 15% gap, and they want that money.

So you're paying more for it to basically ensure the bank, the lender, that you're going to be paying that money back. And if you were to default on it, they know they could probably easily sell the house for 80% of its market value. And then that insurance kind of pays them back for the difference, lets them recoup something out of it. Exactly. You hit it on the head. That's it. I was just about to say that. You hit it dead on the head.

So that insurance is exactly what it is. It's the bank paying a third party insurer to ensure that 15% or that 20% that you have to get to before it drops off again. They know they can get at least 80% of the value right. It's kind of like you may see these golf tournaments that they have a car sitting on a green that if you hit a hole in one at this particular hole, then you could win a car. Well, whoever's doing the sponsorship is paying an insurance premium, and it may be 200, $300, $1,000, whatever, that somebody's not going to win the car. But if they did, the insurance is going to pay out and pay the car dealership for the automobile that they were giving away. And it's kind of like that for the mortgage insurance. It's an insurance you're paying, and insurance doesn't protect you.

It's designed to help you with funds. If there's a catastrophe, if you have a car wreck, if you have tornado that rips off a roof, well, the insurance helps you. So you're not out all that money up front. You've been paying all that to protect you, and the bank does the same thing for that. So we've dealt with FHA, we've dealt with oh, I had a question about the VA you mentioned for veterans. What about active service people? Yes. Does the VA work for active service? It will work for active service as well, yeah. Okay, so you don't have to be out of the military. It's either prior military service or current military service. They qualify for that Veteran Affairs line.

You will get a Certificate of eligibility from your branch, from the VA, and it will tell you that you're qualified for your service a lot of times. A DD 214 is the form where the military or the vet knows that, hey, I am qualified for this VA loan. So they will grab that form or grab that Certificate of Eligibility, and it'll show them, hey, this is what we can get you as far as the VA loan goes for you. Okay. Now, are they limited to only being able to buy a house one time using their VA benefits? No, you can use your VA benefits multiple times. So if you buy a home under VA and let's say you sold it, you can use it again, or if you didn't sold it, if you still had some eligibility there, you can use that loan again as well. So you can have multiple VA loans sitting out there? If it fits within the guidelines, yeah. And that's where your lender can help you work with the VA to figure out what your actual eligibility is for all that. All right, so we've dealt with FHA VA conventional.

16:24 - USDA Loans

Now let's talk about USDA loans, and that's not available everywhere in the country, but those who have access to it, tell us about that loan. Right, so USDA loans are rural development loans. When people hear rule, they have this image in their head, but it's much broader than just being out in the country. You really just have to know what areas that are being focused on by the USDA as far as trying to get individuals into housing in these areas. So USDA has a website where you can go in and put in an address to see if that home qualifies for that particular loan. Again, it's a 100% financed loan, no down payment requirement for the USDA, which helps people get into homes. They recently just increased their income limitations.

Because there are income limitations on the USDA, they recently increased it for a one to four family, one to four person family. It's $110,000 household income requirement there. So five and higher, I believe it went to 146 is what it went to 146 for. If you have five or more people in the household, that's income. That's not house price. That's income. Exactly that's income. Now, the requirements as far as qualifying for this loan as a borrower, you want to be around a 640 credit score 640 or higher will help you qualify for that USDA loan. Usually the debt to income ratio is a little bit more reserved, and you're looking at around 43% to 43%, 45% maybe, but they're a little bit more relaxed. Not relaxed, but a little bit more reserved on what they want your debt to income to be for that particular loan as well. So a great product. Again, you got to find the home, and you have to make sure that your household income fits within those guidelines. If that's the case, that's a product where you can get into a home with no down payment. Once again, okay. Yeah.

en we bought this property in: 2015

The link will be in the show notes to be able to check out the USDA website. Well, I'll get to that in a minute. At the end, as we wrap up, I'll have another link to something specific to George that we'll have in there that I'm going to ask him about at the end as we kind of get this thing wrapped. So let's put out a scenario. I actually have a property listed that's in a USDA area, and I wasn't prepared to talk to you about this, but I'm going to ask you about this because it may be something you can or can't do, but you may know a little bit about. I had somebody mention to me about this particular property because it's in USDA, being able to add a particular product to it that allows the buyer to get it at 100% financing, plus maybe take advantage of some Mississippi Homecore money that could help them with down payment. Some people talk about that as, I guess, stacking the benefits on there that help. So this particular house you could need a buyer could need $20,000 in cash for down payment and closing costs.

is not asking the seller for: 6000

You can actually put that money with the USDA, with the VA loan, even though they don't have a down payment requirement. You can take that money and you can use it for closing costs. And I deal with closing costs and other episodes about what goes in that prepaying insurance, prepaying taxes, the lawyers involved, title insurance, title search, all those different things. And that takes money. We typically say anywhere from 3% to 5% of the value of the home could be your closing cost and prepayments. Right. So that goes along, that $7,000 for a first time home buyer. If they're buying a $300,000 house and they're not having to put 5% down because it's 100% financing.

able to move into a house for: 2000

No, there may be some options out there. So talk to a lender like George to help you figure that stuff out and navigate. That absolutely right. That's absolutely right. You have to have a good lender that knows how to find you money when possible and, and couple that with your particular situation. So as we're going to be wrapping up and I'm going to go ahead and ask you. Now, you've written a book, right? Yeah. You've got a book.

There's going to be a link in the show notes that people can go to a site and give you their name and their email address and get access to the book. That helps explain a lot of this and more. Exactly. So it's a book that breaks down the home buying process, talks about the loan types, talks about what you as a potential home buyer should expect, what you should be getting ready to get to that point if you're not ready yet. So it breaks all that in detail. And I wanted to put that out really to help people be in a better situation than coming and saying, I don't know what to do. Look, here's a guide to help you. And it just makes for a much easier transition and process.

If someone wants to go through that buying process, like you said, click the link, check it out, get the information. It's free information. It's a free ebook, free information. It's really just about getting that information out there to help as many people as possible. And if you are thinking about selling a house, imagine the shock from a buyer or a buyer's agent. If you or your listing agent made that resource available to a buyer, that's helping them out. It's like, oh, you're trying to help me get better at all this stuff. So you can still use that. You don't have to just be a buyer to use that. You might be able to use that as a seller.

26:25 - Why this Matters

So we've talked about the four different types of loans, and Cannon gave us a good thumbnail about each one of those, good description about each one of those for the buyers to the benefit to an FHA loan for a buyer. Let's just summarize that real quickly. All right. So benefits for conventional for a buyer, you're looking at the opportunity. If you have 20% down or more, you lose that mortgage insurance.

You don't have to pay that out of pocket or anything. You avoid additional closing costs like funding fees that you have to pay with the FHA, with the VA, with the USDA, they have funding fees that you have to pay up front. There's a part of your closing costs, in most cases, debt to income. Yeah, well, debt to income with that. To me, I guess the benefit really is the mortgage insurance. If you get to get rid of that, because you mentioned with the FHA, it's maybe a little bit lower interest rate, but by the time you add the mortgage insurance to the payment, the payment could be more, it could be less interest. So you have more of your principal interest going to the equity to pay off the principal. So your equity builds a little bit faster, but you're out of pocket a little bit more because you're paying that insurance because you didn't put 20% down.

Yeah. Even though a buyer might think, well, I get a lower interest rate, how come my payment is higher? Well, it's higher because you've got that mortgage insurance premium on there that's going to stay on there, where I think in my case, I didn't refinance, but if I had refinanced, then I could have gotten it to fall off after about five years instead of seven years, or going through and asking about all that. And it would have dropped my payment like 110 or $120 would have knocked my payment down. And you can get rid of it if you're on the conventional you can get rid of it without refinancing because you could just ask the servicing company, hey, I want to see if I can get rid of my mortgage insurance. And they'll reanalyze the value and everything of the home. And then they say if you fall under that 79% loan to value, they'll get rid of that mortgage insurance for you. So they'll order an appraisal to go through all that. I just kept waiting around and didn't do it, but I could have saved me a little bit of money if I'd done it, and I wish I had.

,: 7000

This is the price of doing business with the exactly. Exactly right. Hey, George, thank you so much for being my guest today. We're glad to have you on here to talk about the four major types of loans that will help the folks out there that are either looking to sell or looking to buy understand a little bit better as they make decisions for what's best for them. Thank you. Got any last words? Hey, if anybody out there got questions, you don't have to be a client of mine to ask a question. I'm trying to, really and truly. I'm setting up a program that's going to be called Ready to Buy and it's going to be to help people get to the point where they are ready to purchase, to come from wherever background they have.

Wherever they come from, you get the information because it's about information. So my favorite book says, my people perish for lack of knowledge and so I want to give knowledge to as many people as I can about the industry that I've been in for over 18 years. And I like that book a whole lot too. I think it's the most published book in the right. Yeah. Hey George, thank you so much for today and I appreciate it and be talking to you soon. Yes, sir, thank you.