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Does the Loan Type Matter?
Episode 2126th October 2023 • Get Me Ready To Sell • Jeff Jones
00:00:00 00:35:26

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In this episode of the Get Me Ready to Sell podcast, we will discuss the different types of loans available with guest George Sago, vice president of mortgage at Bank Plus. We focus on how these loan types can impact sellers when considering offers. FHA loans, for example, may require more stringent appraisals and inspections, whereas conventional loans are more lenient. It's important for sellers to be aware of the potential differences and understand the specific requirements of each loan type before making a decision. Communicating with your listing agent and asking questions can help ensure a smooth selling process.

  • 3:52 - FHA Loans
  • 5:16 - Conventional Loans
  • 8:26 - VA Loans
  • 16:24 - USDA Loans
  • 26:25 - Why this Matters


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:

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:

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:

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

As we're wrapping things up, I want to talk about specifically about a seller, why the different loan types are important to a seller. What and I guess let's talk more about the downfalls than any potentials. If a seller is getting an offer and the buyer has indicated the purchase is going to be dependent on a loan and they've indicated a loan type, what about each of these loan types would cause that seller to pause? If they had two identical offers and one was FHA and one was conventional, why might they I'm not telling you to reject the FHA and you don't do it for this at all. But what might they need to know is the difference between for them and potential headaches between that FHA and conventional that a seller might need to absolutely. So I love this question because I get this question a lot, believe it or not. And for a seller, there's this stigma.

I say there's a stigma because I don't think it's as bad as it's perceived for a seller. When you have two offers in front of you and one's an FHA, one's a conventional, yeah, they're going to be some there. There are going to be some things you may have to do versus one versus the other, potentially. So I'll tell you, with an FHA loan, as a seller, you should expect in some cases not every case. A more, I'm trying to find the word, I guess a more stringent. I don't want to say stringent, but a more I'm going to say it anyway, more stringent. Appraisal and inspection because you're dealing with a government agency, they're looking at safety and soundness and livability, and they want to make sure if you got rotten wood, hey, let's replace that rotten wood. If you got fence down, you got bores off a fence, let's get it fixed before we give you this money.

They're going to look at those type of things and make sure that the buyer has those, that the seller I'm sorry, the seller gets those things done before they give a final approval on that particular loan. So it looks at things a little bit different than the conventional. Conventional is a little bit more lax in that sense. You can go get a conventional appraisal done with that same rotten wood and it's not an issue. So I had some people with bars on the window recently and FHA said, hey, you got to get the bars off the window, do something, put a latch on it or something that's not safe. That's a hazard. Those are things as a seller, you have to kind of deal with, say, if you know, there's some work that you didn't want to put into the house, that you didn't want to get fixed, that you was like, I'm ready to go. I'm not doing anything, then the conventional might be the way to lean because the FHA is going to require in some cases, especially like if you're selling an older house, they're going to probably find something where you're going to have to make happen for that deal to go through.

And the VA and the USD are a little more strict. So if you're looking at the strictness, I guess the least strict is going to be conventional. And then FHA is going to be a little more strict, right? USDA is going to be, I think, a little more strict. And I might have these in a reverse order. I think the VA is going to be the most strict because they want to take care of the veterans. The government is giving them up to backing up to 100% of it. And they want to make sure that veteran is not going to have to come in and fix half of a fence or replace, like you said, rotted wood and stuff. And you'd mentioned inspection, you talked about that's, the appraiser's inspection.

The appraiser is determining the value. They're also doing kind of an inspection because they're noting the condition of the house. That is not the same thing as a home inspection, right? If a buyer has a home and hires a licensed home inspector to come in, that's the same inspection across the board. It doesn't matter if it's a cash offer or they're borrowing money, it's the same. But the appraisers have different guidelines that they have to follow and what they note in their report based on the type of loan. Is that correct? That's correct. Okay, so a seller, if you're thinking about selling, you need to be aware of what type of loan that that buyer is intending to get and you need to be aware of it. You may decide that you want a vet in there.

You might have somebody offering you a conventional you can choose whoever you want to sell your house to. You just need to know if you've got different ones out there. You might expect to come back and have to fix some things that you were hoping you could just leave and walk away from. You might not be able to do that based on that loan. And you just need to know that. And hopefully your listing agent has explained all that to you so you're not caught off guard. Right. And I hadn't seen it.

I'll say this too. I hadn't seen anything that was just major where the seller had to do something just ridiculous to get the loan done. It's generally smaller things that I've seen. And I've got some friends who are appraisers and they don't want to be the reason the deal got killed. They have their job to do just like you have your job to do. I have my job to do. They have guidelines that they have to follow because people come behind them and audit their appraisals to make sure that they're doing things accurately so they can't screw it up and continue to be a licensed appraiser. They have to follow the guidelines and they want to make the deal work, but they can't make magic happen and they have to be honest with that.

And I say this too. I've seen in multiple offer situations where the VA can come in a little bit stronger than the other offers because they got 100% financing. So if they got some money, they can come in a little bit stronger than the other offers. I've seen that as well. So there's a lot of things to consider as a seller when you talk about which deal you want to go with. Yeah. And don't just look at a type of loan. Don't just look at this stuff.

Look at the whole package and make the decision that's best for you in working that out to get your home sold. And don't be afraid to ask questions. Be comfortable. I talk about is my role is to help buyers and sellers be confident in this process. So at the end of the day, there's no regrets and they haven't had to sweat a whole lot. They got lots of little micro decisions to make. But when you navigate and make those, at the end of the day, you're confident in the decision you've made to sell your home.



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