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Ep. 11: 4 Major Loan Types Explained with Joe Savala

Wednesday October 7, 2020

Ep. 11: 4 Major Loan Types Explained with Joe Savala

Perhaps you've made that big decision to build or buy a home. But unless you're one of the rare folks who can pay 100% cash, you'll likely need to secure a home loan. In this episode of the Welcome Home podcast, we bring in Joe Savala of Trinity Oaks Mortgage to help explain the four primary financing options that most homeowners choose. The best option is based on your qualifications, background, income and other important factors. Which one is best for you? Listen and find out!

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Intro: [00:00:03] Welcome home, a podcast brought to you by John Houston Custom Homes. Join host Chelsi Frazier and Whitney Pryor, as they walk you through the exciting adventure of your home buying and building journey.

Whitney: [00:00:18] Hey everybody! Thanks for joining us on another episode of the Welcome Home podcast. I'm Whitney Pryor and I am here with Chelsi Frazier. How are you doing today, Chelsi?

Chelsi: [00:00:29] I'm good Whitney, thank you. I'm excited about our episode today.

Whitney: [00:00:32] Who do we have joining us today?

Chelsi: [00:00:34] We have another great person from Trinity Oaks Mortgage, Joe Savala. He's a mortgage loan officer. He's going to educate us on the four big loan types and the differences. What they are and how you know which one to choose. I'm really excited because this is a mystery to me and I think to a lot of people. It's going to be a good one!

Whitney: [00:00:55] I get that question all the time about what types of loan programs does Trinity Oaks Mortgage offer. It will be great to go into detail about what you guys offer. I'm excited to have you Joe!

Joe: [00:01:09] Thank you, thank you for having me.

Chelsi: [00:01:11] Welcome to the show. How long have you been in the mortgage industry?

Joe: [00:01:14] I started my career back in 2005, so 15 years.

Chelsi: [00:01:19] You've seen a lot, done a lot and have worked with different situations, I'm sure.

Joe: [00:01:24] Absolutely, yes. It's constantly changing. The market, different loan programs,etc.

Whitney: [00:01:31] Joe, why don't you talk us through the four types of loan programs that are offered?

Joe: [00:01:38] The four main loan types that you are going to hear about are: Conventional Mortgages, FHA, VA and USDA.

Chelsi: [00:01:46] Let's start with a Conventional Loan. Tell us what type of loan that is and and why you would choose that.

Joe: [00:01:52] Conventional Loans are a great loan product that's out there. These loans are not guaranteed or insured by the Federal Government. They're for Fannie Mae and Freddie Mac. It really depends on your down payment and what you're looking to put down. They can go as low as 3%, if your a first time homebuyer. You have to meet a certain criteria, but overall, it's a great loan program. Credit score requirements on those are going to be 620 for your borrower, just depending on their credit scores, then we can price it out for them accordingly.

Whitney: [00:02:24] That's good to know because I didn't know that you could go as low as 3% on a Conventional Loan. That's good to good to know, especially for a younger crowd that hasn't quite gotten there, as far as buying a home. It's good to know that they don't have to have 20% down, that there are ways to to get a lower down payment. They don't have to have $100,000.00.

Joe: [00:02:49] I think that's the biggest misconception in the industry, that you have to put 20% down. There are so many people when I'm out in public or friends, family and partners of mine, that will send somebody to me and think that they have to put 20 % down. There's so many different things you can do. You can go in as little as 3%. Most conventional mortgages will be 5% down, but you can go as low as 3% if your a first time homebuyer. A first time homebuyer is classified as a person that has never purchased a home or if it's been 3 years since they've owned a home. People are kind of shocked when I tell them that I can actually get them into a loan at 5% down or 3%. They thought they had to have $10,000.00 or $20,000.00, however, that's not the case.

Chelsi: [00:03:38] After Conventional, what is the the next more common loan type?

Joe: [00:03:43] I would have to say the FHA Mortgage because that is available to everyone. A VA Loan is only for veterans, active duty or a widow of a service member that has passed.  An FHA Loan is really great as well. The down payment is 3.5%, the credit score is a 620 and the guidelines are a little bit less strict, compared to a conventional loan. They have a higher debt to income ratio that you can go up to. For a conventional mortgage, the maximum debt to income ratio you could have with your housing payment and your other debts, are going to be 50% of your gross income. Whereas, I've recently had an FHA Loan at 56%, so it gives you a little bit more room and a little bit more buying power.

Whitney: [00:04:36] What is considered a debt in this scenario, when they're looking at debt to income ratio?

Joe: [00:04:46] It's mainly going to be anything that's reporting on your credit report. However, some of our customers might not have a lot of credit, so they have self reported bills, utilities. Those we don't count.

Whitney: [00:04:58] Ok, so mainly your mortgage and your auto loan.

Joe: [00:05:01] Auto loan installments, student debt, revolving credit cards, things like that. What we're looking at when we're going through the underwriting process is just the minimum payment. If you have a credit card with a $500 balance, but your payments are only $25, that's all we're counting. Some of my clients pay $100, which is great, however, for the underwriting process, it's just the minimum.

Chelsi: [00:05:26] I think that there's a lot of people coming into the home owning industry right now that have student loans. We've got a lot of people graduating or they've been graduated a few years. Millennial's are a big market for us right now. What kind of questions do you ask people when they come in to determine what type of loan they should apply for?

Joe: [00:05:51] I'm looking at the amount they're looking to purchase, where they're at and pulling credit. Based off their credit score, I let them know what loan I would recommend. I think an FHA Loan's pricing is outstanding, it's very favorable. Even if your credit score is a little bit lower, lets say a 620, versus a conventional mortgage, sometimes it makes a little bit more sense. It also depends on your goals with the property, If your goals are short term or long term, I would look at that and take that into consideration to find the best route to take based off the information provided.

Whitney: [00:06:26] If they know that they're not going to live in their home for more than 5 to 10 years, that might be a different loan program based off of interest rate or other factors, than someone that's like, nope, this is my forever home. I'm going to be here until I am old and wrinkly. 

Joe: [00:06:44] What I do is I'll talk to clients and let them know that this is your base rate today. However, if your goals are long term, you might want to consider buying down the rate by paying what are called discount points- that's just a percentage of your loan amount. If you're a loan amounts going to be $200,000.00, it would be $2,000.00, but you can essentially buy a below market rate. Over the long term, depending on how much you're saving on a monthly basis, it might make sense, especially if your intentions are to be there for 30 years. Let's say it takes you 3 years to pay back. The remaining 27 years, you're saving quite a bit of money in interest and on a monthly basis.

Chelsi: [00:07:26] It's that investment up front. Over the life of your loan, you're saving and you're spending less money if you buy that down, correct?

Joe: [00:07:32] Correct.

Whitney: [00:07:35] After the FHA Loan, what is the next most popular loan program you see?

Joe: [00:07:42] The VA Loan. Of course, that's for your veterans, active military, and then also if a widow of a service member.  

Whitney: [00:07:48] It's a special program for them. Can you let us know what are the details of that? Why is it special?

Joe: [00:07:58] There is no money down, zero down payment. The other great feature about the VA loan is there is no private mortgage insurance. If you're not putting at least 20% down on any program, you're required to have this additional payment called "private mortgage insurance" or "PMI". It's basically insurance for the lender, however, a VA Loan doesn't require that. VA loans are actually guaranteed up to a certain dollar amount, a portion. You're going have a lower payment in that scenario versus the other loan products are out there.

Whitney: [00:08:31] Right, because the PMI payment can add , we don't know a specific amount, but it can add a several hundred dollars potentially to your monthly payment. The VA Loan not having that, can save a ton of money.

Joe: [00:08:47] It's huge and it's a great way to give back, to be quite honest.

Whitney: [00:08:51] My husband and I did a VA loan. If we weren't offered that option, I don't know that we would be in a home today. To be able to offer that to the service members and the veterans, I just think is an amazing way to make them feel like they can grow their roots after serving their country, so that's awesome.

Chelsi: [00:09:15] If you don't want to share, that's okay, but didn't you say the amount you had to bring to closing was a small amount?

Whitney: [00:09:22] It was so little, yes. You still have to pay closing costs, some closing costs, not all of them I believe. It was laughable compared to what others have to bring to the table.

Joe: [00:09:36] There are definitely certain fees that are not charged, which is a great thing, but in most cases, with our our service members, it can be pretty minimal.

Whitney: [00:09:46] Yes, especially when you combine that with other programs, too. I know for us as a home builder, we offer our Hometown Heroes discount where we can help with an additional amount ,as well, to help them with that. I know that there's other programs out there that people might be able to look at and combine with their VA loan program.

Joe: [00:10:06] They used to have a loan limit, now there is none.

Whitney: [00:10:10] There's no loan your own limit?

Joe: [00:10:12] Zero loan limit.

Chelsi: [00:10:12] What does that mean? 

Joe: [00:10:13] As long as long as you can qualify, it doesn't matter. It could be a million dollar house.

Whitney: [00:10:18] Wow. It used to be $475K to $480K, I think is what they would let you borrow up to. A veteran was limited to a home that was at that price or lower. To release that cap is amazing. 

Joe: [00:10:35] You also have areas that are very high priced such as California and Hawaii. Their houses, compared to here in Texas, is going to be a different ball game. That just changed at the first of the year, which is outstanding because a conventional loan limit is $510,400.00.

Whitney: [00:10:57] FHA also has a loan limit as well, right? 

Joe: [00:10:59] Correct.

Whitney: [00:10:59] I think it's about the same as what the VA loans used to be, so you've got those limits to keep in mind whenever your considering your your different loan programs. If you want to go above that amount, then some loan programs might just not work and you might have to go conventional in that case.

Chelsi: [00:11:24] I had no idea. I didn't know that there were caps.

Whitney: [00:11:27] Yes. There's also income caps, too, as well, right?

Joe: [00:11:32] Correct. 

Whitney: [00:11:32] Would that be on the FHA?

Joe: [00:11:37] FHA doesn't have caps on theirs, but I know there are certain restrictions on some loan products that have them.

Whitney: [00:11:43] Yes, where you can only make a certain amount of money or up to a certain amount of money to qualify for that loan.

Joe: [00:11:49] Or for example, when you're looking at some of the different programs like The Texas State Affordable Housing Corporation or Tshack, is one of the programs we use a lot around here. It helps you with down payment assistance or purchasing. Closing costs have income restrictions.

Whitney: [00:12:06] Is that a program that you use on top of whichever loan program you choose?

Joe: [00:12:12] Yes, that's correct.

Whitney: [00:12:13] OK, so tell us about what is Tshack?

Joe: [00:12:16] They have it available as a grant or a bond. It helps homeowners here in Texas purchase a home. You can go up to 5% of your loan amount and they will basically just send that money to title on your behalf. There's a small course you have to take for the program, but there are income caps on that one. There's also loan limits for that particular product. It just depends on the county you're in Texas. If you qualify, you just take the class. Let's say you were getting an FHA loan. It's 3.5% down, but you got a 5% grant or a bond. It's going to cover your down payment requirement, plus give you a little bit of money to help you with closing costs.

Whitney: [00:13:07] That's amazing. If people wanted to learn more about that program, they would just research it online and find out how you qualify for it?

Joe: [00:13:17] Correct, or they could always give us a call. We'd love to help them navigate them through that.

Whitney: [00:13:21] Great! I had no idea about that, so that's awesome. Is that just for people that have not purchased a home before or for those that are already in a home and looking to purchase another home?

Joe: [00:13:34] Yes, anybody can use it. A lot of people think that it's only for first time homebuyers, but I've done quite a bit of those where people are looking to purchase another home and are currently selling their current home. 

Whitney: [00:13:53] I want to take a second from talking with Joe and remind you that this episode is sponsored by Trinity Oaks Mortgage. Trinity Oaks Mortgage is a part of the Family of Companies and offers many different loan programs to suit your needs. For more information, you can visit their website at trinityoaksmortgage.com, NMLS number 1443326 and they are an equal housing lender. Now back to our conversation with Joe. 

Whitney: [00:14:21] We've talked about 3 of the 4 loan programs that we offer. What is that last loan program we offer?

Joe: [00:14:28] The last one is going to be the USDA Loan.

Chelsi: [00:14:31] What does USDA mean?

Joe: [00:14:33] USDA is the United States Department of Agriculture. it's basically a rural loan.

Whitney: [00:14:38] I think of milk whenever I think of USDA, so it's interesting that we have a mortgage loan program that's named USDA.

Joe: [00:14:46] There are certain areas ,like here in Red Oak, were classified as a USDA area. Midlothian is as well. Basically, what we do is loan officers, we'll look it up based off the property address that you're looking to purchase.

Whitney: [00:14:59] There's a map or an area and it's only rural areas where there is not a lot of people that live there? It's kind of based off of that? Okay, that's interesting.

Joe: [00:15:11] It's really a great program as well ,that actually has zero down.

Whitney: [00:15:15] Wow.

Joe: [00:15:15] Yes, zero down. You can get clients in for buying a house with not as much down, compared to the other loans.

Whitney: [00:15:25] If you're not a veteran, then a USDA Loan would be the only other way that you could get into a home with zero down payment?

Joe: [00:15:36] Yes. One of the great things about their products, which I love, is their private mortgage insurance. If you're not putting any money down, you're going to have to have private mortgage insurance or PMI. It's pretty low compared to the other products, a Conventional or an FHA Mortgage.

Whitney: [00:15:51] In the homebuilding industry, people do a lot of research before they ever walk in the door to purchase a home. They're able to really get an idea of what they want and what the best home and poor plan is for them. It sounds like what the mortgage industry, that's a little different and that you really need to speak with someone based off of your situation. You can research online the different programs, but you're not really going to know until credit is pulled, a profiles looked at and kind of get an idea of, you know, how many years you want to live in the home. There's just so many factors. You really need to sit down with someone in person to find out what's best for you.

Joe: [00:16:27] Yes, that's one of the biggest things. I think a lot of people, when I'm talking to them and we're going over different options and brainstorming, what's the best loan product for them or to help them accomplish their goals of being a first time homeowners, they're kind of blown away with that.

Chelsi: [00:16:40] For me, when we purchased our first home in 2009, I think having our loan officer working closely with us and our realtor was so helpful. I didn't know there was so much I didn't know. Once you figure out what you can get approved for, you find your house and get into the paperwork/financial documents, I think there's just so much that goes with being comfortable with your loan officer. It's important having somebody that's there for you and leading you and guiding you along the way.

Joe: [00:17:14] I agree. I know the first time I purchased a home, it was in 2004. I wasn't even in this industry at that time. I remember feeling overwhelmed. Documents were coming in. They said, sign here, sign there. You're just really hoping that this is being correctly done. Is it a fixed rate? What type of mortgage is this? What are you payments? Are they going to go up? It can be very overwhelming. I do a lot of a builder business as well, so I try to relay and help the clients understand, this is your payment right now. Things will change a little bit because maybe the house is unimproved. There's a house now and they're going to come out there the following year and say there's a nice big $250K or $300K home. Your taxes are going to go up. That happened to me. The first house we purchased ,my payment was $1,100.00 and I thought everything was good. The following year, it went up to $1,350.00. I was like whoa! For your average person, if you're going up $250 with your budget, it can be tough.

Whitney: [00:18:27] Setting the right expectation of not only what program fits you right now, but also once you get in your home, this is what's going to happen with that and your payments.

Chelsi: [00:18:36] One of the things that makes Trinity Oaks Mortgage Company different, is that it's not just this deal right in front of us. It's the short term getting it closed. It's the long term explaining and being there for for your clients.

Joe: [00:18:51] Absolutely. That's one of the things that I convey. This isn't just a one time transaction. I want to be there for you. If you have questions or concerns, even after the process, give me a call. I have clients that have called me from 5 years ago. They tell me what's going on in their life and what things have changed. Families grow or they get smaller -empty nesters, and they need something else. What's going on in the market? They're looking to add some additions. That's why it's good to have somebody that's there. All of my clients have my personal cell phone.

Chelsi: [00:19:27] For refies or even new loans, what is the typical amount of time to apply, get paperwork in and close?

Joe: [00:19:37] Our goals are going to be 30 days or less, as far as the refinance. In most cases, especially if we've already had the transaction, we pretty much already have a lot of stuff. We can turn around and take care of it pretty quickly. I had a client the other day that had purchased the house 3 years ago. When I submitted it through our automated desktop underwriting, it's an underwriting engine, they didn't ask for an appraisal. They came back and said, "we accept the value ", which is one last that takes time throughout the loan process, that we don't have to do.

Whitney: [00:20:16] If someone comes in and wants to build a home, we know that process takes about 7 months. If their credit score is not quite 620 or 640 for whichever program they offer. do you guys let them know here is how you might approach or who you can go see to to work on that score, so that they can get approved to build a home?

Joe: [00:20:43] Yes, we actually have some different programs in place that we have access to. They can give us ideas on things we can do. Depending on your credit profile, there might be some very simple things we've learned over time that can help you.

Whitney: [00:20:59] I've heard a million times, don't go buy a car if you're buying a home.

Joe: [00:21:03] While you're going through the process, you don't want to do anything that will affect your underwriting.

Whitney: [00:21:21] My mother is wanting to refinance her home in the future. Do you guys ever just sit down with people that maybe aren't quite there yet? Maybe they're a year or so from wanting or being able to do any sort of loan program and advise them on what their next steps are? Maybe they're they're wanting to buy a home next year, they're waiting for retirement or waiting for kids to move out, and they want to get an idea of what they need to work on to have the best profile to purchase a home and get the best interest rate.

Joe: [00:21:57] Yes. We speak to quite a bit of people. They're say, "I've got your information. I'm looking at maybe 2 years down the road or a longer period, but we just want to kind of make sure that all our ducks in a row. We have a good game plan on what we need to get done. That is actually a pretty common question we come across. The biggest thing is having a conversation, that's where it first starts. What are your goals? What are you looking to accomplish? With the property, get an idea what rates are doing and then just basically setting up a roadmap, so that our borrowers in the future, accomplish their goals. whether it be purchasing, refinancing or whatever life throws at them.

Whitney: [00:22:40] Yes, I get a lot of people that ask me for advice on buying a home. I tell them to call a loan officer, that's the first thing you want to do. Don't go and look at that home, just call a loan officer. They're going to set the right expectations for what your profile is before you go out and purchase that home. You will know what you're dealing with and financially what you're going to be looking at for that home buying process.

Joe: [00:23:06] I do think that's important. I'll have some clients that will go out and look at particular properties. They really like a property. lets get an application going, so we can submit an offer. You talk to them and tell them what their payment will be and it's a little bit higher than what they were anticipating. We look at what they feel comfortable paying, because that's obviously very important for the budget. 

Chelsi: [00:23:32] I think it's good to know that it's not a hard sell. If you just need to to ask some questions for the future and your out their looking, just call that loan officer. I think that you guys are all more than willing to just give some basic information or go more in depth and not really push it. 

Joe: [00:23:47] Correct. We're always available for that, it's part of our services we offer. It is always good just having a conversation.

Whitney: [00:23:55] Yeah, it's definitely more like loan counseling versus sales. People are always scared to call that person or ask questions. Even though they're not ready, they don't want to inconvenience someone. It's not an inconvenience. We understand when people are making decisions like this, it's definitely future, it's several years sometimes in the making. It's good to know that you can call Joe he's going to walk you through the process.

Joe: [00:24:26] The majority of the borrowers out there, when you're purchasing home, this is going to be their biggest purchase in their life. Financially, your payments are to be different than paying a car, so being able to talk to somebody about options and payments is huge. You also have different tax rates and different areas, Ellis County versus Dallas versus Johnson, and some of the counties we work in. It's good to what are the taxes because they can vary between city and county.

Whitney: [00:24:59] They never forget to file Homestead, right?

Joe: [00:25:02] Absolutely, so you can get a reduction in your taxes.

Whitney: [00:25:08] Tell us a little bit about what Homestead is or what you know it to be.

Joe: [00:25:12] How the Homestead Program works, is once you've lived in your property for a certain amount of time, you can file for a homestead exemption with your county. They're going to reduce your taxes compared to what the value is.

Whitney: [00:25:24] If you're someone that has your taxes going into escrow, which means that you are taking your tax payment out monthly or you're paying for it monthly with your mortgage payment, then that would lower that monthly payment, right? Or, if you pay a lump sum property taxes once a year, that still lowers the payment.

Joe: [00:25:46] Yes, It's always a good idea to check the county appraisal district to see if they have applied your Homestead Exemption. If you have an over 65 exemption, a veteran with disability, etc.,  you can't get lower taxes. Some of the things I do for my clients, once I close them. This year for example, when the county appraisal district shows online that they're estimating your house has X amount of dollars and this is what your taxes are, it will usually show in there whether you have an exemption or you're not zero exemption at all.

Chelsi: [00:26:22] Joe, thank you so much for joining us. You have been a wealth of knowledge. I think there's so many things that we were able to address, but even more that we will probably talk about in further episodes. We've got Trinity Oaks Mortgage coming in several times a year. If you have any questions, just reach out to us through our contact information. We wanted to thank you so much for coming on and sharing your insights with us today.

Joe: [00:26:45] It's been a pleasure. Thanks for having me.

Whitney: [00:26:47] Thank you so much listeners, for joining us on this episode of the Welcome Home podcast. Be sure to click the description for episode notes and a link to our guest sponsors website, Trinity Oaks Mortgage. For more information about John Houston Custom Homes, check out our website at johnhoustoncustomhomes.com. Follow us on Facebook, Instagram or Twitter. And for any other questions or comments, you can call us at 866.646.6008 Or email us at info@jhoustonhomes.com. Trinity Oaks Mortgage and NMLS number is 1443326 and they are an equal housing lender.

Chelsi and Whitney: [00:27:30] Welcome Home.

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