AmeriServ Presents: Bank Chats, with Drew Thomas.
So, with me today, is David O'Leary, he is a mortgage professional with AmeriServ Financial Services. And yeah, so tell me a little bit, hi, Dave. Hi, Drew. Hi, how are you doing?
I'm well, how are you?
I'm doing, I'm doing good. So, tell me a little bit about yourself and your background and,
about my, my lending background, background? Yeah. So, I've,
I've, unless you were a circus performer at some point in the past,
I did have a career before, a brief career before, I was in banking and lending, but I used to go out repo cars, and Baltimore and things like that. And, yeah, and that's sort of taught me how it looks, how a deal when it's not done correctly, looks, okay. Postmortem of it. Eventually, I moved into consumer lending. I'm from like I said, I'm from Baltimore. I,
we won't hold that against you. That's
proud Baltimore. I came up here, and I worked commercial lending for a little bit. And then I, two years ago, I moved down to the mortgage department, Residential Lending, and I run the operation down there.
So what's, so what would you say is the biggest difference between doing residential mortgage versus the commercial mortgage you did before?
Well, it's a good question, because they're very different. Just to start off with residential lending, mortgages, and I'm air quoting, is really probably the most heavily regulated form of lending there is. Residential Lending is very much by the numbers. If you talk to a lender and you answer a certain number of questions correctly, well, that's considered an application at that time. The presence of an application triggers a bunch of disclosures, those disclosures have to be done correctly, or there's financial consequences for the bank on top of any regulatory consequences as well. Commercial lending is, every commercial deal is different. You, there's not a common thread that runs through them, for the most part. It's not very regulated, commercial lending has a certain amount of creativity to it as far as, you're able to structure things, customized to that particular borrower in that particular situation.
Okay. So obviously, we're talking today a lot more about mortgage from a residential standpoint, right? But I think sometimes people don't realize that there are business mortgages, there are commercial mortgages that are out there. Because when you think of a mortgage, you think of buying a house. Right. So, one of the things that I found interesting is I was sort of, you know, researching some stuff and preparing, you know, for the, for the conversation we were gonna have today is that the percentage of homebuyers who are first time buyers, was at the lowest percentage ever in 2022, just 26%. So do you have any idea like, have you seen that like the, the average, you know,
my gut on that is, in 2022, there was some financial ambiguity for people. And I think, plus, at the same time, home prices were skyrocketing between, from 2020 2021. And I think it just drove a lot of people out of the home buying market for a while.
Yeah, I mean, it's, it's been crazy. I mean, from 2020, with the peak of the pandemic, and interest rates going through the floor, to now whenever they're among the highest they've been in, what about a decade? Yeah, probably at least about a decade. So, what does that do to a price of a home when someone's buying a home, and the interest rate goes from, say, 3% to 5%? It doesn't sound like a lot, but I would expect that it probably is.
Well, what it's going to do to pricing is if I had a house, that's, I, that is worth $200,000 I'm trying to sell for $200,000, when the mortgage rates were in the twos, I had a huge pool of available buyers that would qualify for that house. As the mortgages really have doubled, obviously, that pool of buyers that could afford that house has shrunk dramatically. So, I think what we're gonna start to see and it hasn't really, I read that it's happening, but I haven't seen it necessarily yet, is there's going to be some downward pressure on housing prices, the actual cost of a house. And I think it's gonna just basically eat away at some of that dramatic increase in prices that we saw in the last couple of years.
Okay. So, when you say downward, what you mean, like the price of the house itself will go down, even though the interest rate may not necessarily go down? Yeah,
a year ago, I could have sold this house for $200,000. Today, I may have to sell it for $160-$170,000, something like that.
Which means if you paid $180,000 for it, five years ago, you're losing money, now. Where maybe two years ago, if you would have sold it, you made some money, time as everything. So that's, so from a seller's point of view, that's not, that's not so great. From a buyer's point of view, the housing price coming down helps but the interest rate being higher? Yeah, it's hard.
Yeah. And those are two, the prices going down are going to help a little bit, but the fact that the rates are so high is going to be an issue. And you know, the funny thing is, when you talk to people that work in this field, is we have we saw almost no refies last year, refinances, refinances. Yeah. Where that, where somebody has an existing house, and they refinance the, the mortgage loan they took out on it, because the rates, and for the last, say, four or five years prior to 2022, were so low. So, I kept saying like, sooner or later we're going to run out of people to refinance. Yeah,
yeah. Yeah. I mean, if you bought a house at 3%, and you may never refinance your house. Yeah,
it would be a strange circumstance to want to refinance your 3% loan at 6%. Yeah.
So, so let me circle back to what you had said, you had said something about paperwork. And, you know, when you do a certain number of paperwork and consent, it's considered to be an application and so forth. And you said, you know, things go so, so much by the books. And two of the terms that are, that are thrown out there a lot that I think are, are a source of confusion for some people, are the terms pre-qualified, and pre-approved, right. Okay, so what are the, what's the difference between someone who is pre-qualified versus someone who is pre-approved?
So, a pre-qualified loan is basically a lender, or, a pre-qualification is basically a lender saying, if certain criteria were met, and nothing else weird happened with the deal, we would most likely approve you for a loan. And so a lot of times when you're, somebody's looking for a pre-qualification letter, especially in the last year or two, where you basically had to have evidence that you were pre-qualified for a loan just to put a contract in, because there was so much competition for, for housing, that pre-qualification is not anything binding or anything else. And like, for example, AmeriServ, will do a pre-qualification, will issue a pre-qualification letter, after sort of getting an idea roughly of what the credit background is, the income looks like, their assets, their capital situation. And it'll be sort of a range, like we would do this pre-approval, which AmeriServ doesn't do is more actionable. It's basically saying like, yeah, you're approved. Yeah, we'll do this. Right, right. So that's why, that's why a lot of banks won't actually do a pre-approval. That term gets used interchangeably, sometimes pre-qualification and pre-approval, right. But most, most banks are going to actually be talking pre-qualification. And just to circle back to it, sometimes pre-qualification can be done without anybody, with a house in mind or anything else. They can just be saying, like, we're gonna go house shopping, and we think we would potentially look for a house between $200-$300,000. And so that, that's sort of based on that range.
Yeah, there was, I was reading there were, there were actually certain situations during, during the peak of the pandemic, during COVID, where, if you didn't have a pre-qualification, they wouldn't even show you a house. The realtor wouldn't show you a house, like, it was like because they didn't want people just going out on Saturday and going to open houses and walking through the house or something like that. They literally shut all that stuff down and said if you're not a serious looker, we don't, we don't even want you in the house.
I think some of that was partly because of COVID, they just didn't want people in the houses. But also, especially once we sort of worked our way out of that initial COVID locked down period, the realtors were so busy, I think they just didn't want to waste their time with somebody that at least hadn't talked to a mortgage company and yeah, at least had something enhancing. Yeah, that these people are credit worthy to some extent.
Gotcha. Okay. So, so as a, so as a first-time homebuyer, first time homebuyers, the age of those have gone up too, I mean, the, the average age of the first, the person buying their first house is now like 36, where it used to be, used to be much, much younger. Yeah, but if I'm a first-time homebuyer, what, what are some of the things that you said things are very by the book and very, very rules oriented. What are the some of the things that you have seen from first time homebuyers that, that maybe they were surprised by, like the biggest thing that kind of shocked them? Yeah, process.
This, the process of getting to an approval for a mortgage loan is very document driven. And I mean, it's, it's very specific, and because, just to sort of circle back a little bit to why that exists, why, and I hear that from people too. They're like, I can't believe how much work it was to get approval, and I went to the car dealership and filled out a form and I drove away in the car an hour later. Sure. Yeah. So, mortgage lending, residential lending, on the consumer side is document heavy. One, because of all of the regulations, two, because frankly, a lot of the loans that are originated, wind up being sold on the secondary market to other investors like Pennymac, or Truist, or Wells Fargo, until recently, was in that, that game to that, that secondary market thing. As, because of that, the fact that these are bundled up and sold to, sometimes multiple investors, and then eventually sometimes can wind up, and you may have heard this term thrown around a lot in 2008, mortgage-backed securities, everyone involved in that process needs a certain level of comfort that the loans were processed and documented and handled in the same way. Because these all sort of wind up not all, but a number of them wind up as various forms of collateral down the road. And the investors all have to have a belief that the loans are credit worthy, there's gonna be repayment without too much issue, things like that.
So, what kind of so, so as so, so kind of getting back to the what the documents are like, what, what do I need to provide you as a first-time homebuyer to start the process? Like if I just wanted to,
to start the process, typically early in the process, and let me just say, I'm not a Mortgage Loan Officer, I'm not on the front end. Fair enough. But typically, the conversation is going to be roughly, what do you look, how much are you looking to borrow? How much do you have to put down? And then a discussion about credit quality, your, you know, your FICO score,
which is probably not, I wouldn't touch on that too, which is probably not the number you're getting from your credit card company, or some of those free sort of yeah,
the those, those free FICO scores have a lot of strings attached, and a lot of fine print. When it gets to the point where we're actually pulling credit on somebody, we actually access all three major credit bureaus. It comes out in a single report, you know, it's Experian, Equifax, and TransUnion, maybe TransUnion, yeah. So those three bureaus have their own FICO formulas roughly, and they all report things a little differently too, so you'll see a swing of FICO scores between the three of them, and sometimes it can be a pretty dramatic swing, because one may be showing a collection or something else that the other two don't have. So, as a result, we take the middle score, and use that as, okay, and that's, that's your, that's what we use is your effective FICO score.
And that helps to determine what your interest rate offer is and things like that. Right.
So, because at some point, once your bureaus, your bureau has been pulled, we have a rough idea of what your debt to income is going to be, which is a ratio of your monthly debt service divided by your gross income. That's not your disgusting
income that's the, that's the, the income before you take out your tax, before taxes and Social Security, yeah.
Your health premiums and everything else so, right. And so, the industry standard is you typically want to be 43% or below, okay. With the other 57% of your gross income going to things like your taxes, your utility bills, your groceries, things
like that, because buying a house isn't just paying your mortgage, right? Buying a house is also having to pay for your electric and your sewage and your water and on and on and on. So, and I think a lot of people forget that, you know, they do one of these mortgage calculators online somewhere that doesn't take into account the taxes on the property. It doesn't take into account, the utility bills, the home insurance that you're going to likely need and depending on, and I'd like to touch on this too, in a minute, depending on the type of mortgage, you may have, different insurances that you have to have. Correct, right? So okay, so I'm applying for a mortgage I've given you, I'm assuming you have to give bank statements or something to prove your income?
Yeah, down the road, we're still sort of in the initial part of it here, where we're, a lot of this is going over the phone or in face to face with a loan officer, okay. And, at some point, the loan officer will say, will basically be able to say, well, you say you have, you make $5,000 a month, you have $20,000, in the bank, you know, we've pulled your credit report, you know, we, we should be able to move forward with this. Okay. At that point, and typically, you know, once we have an actionable credit report, they'll start chasing items, like, we need your last two months of bank statements, we need your last two full pay stubs, and it should be at least one full month’s backwards. So, if you get paid weekly, will be four, you know, there's usually an estimate of like what your homeowner’s insurance is going to be and what the taxes, the property taxes are going to be, trying to think of other documents that they'll, they'll be asking for upfront.
But this goes to show just kind of, to your point earlier, why you can't just walk in and sign a paper like you can with a car, exactly, and, and walk out with a loan the same day, like there's a lot of prep and a lot of research that goes into this to prove that you have the funds available, right, to do what you're going to do,
right. And then once that documents that we've discussed have been sort of accumulated, an underwriter, a credit officer is going to roll their sleeves up and dig in and then validate to the penny, every penny of income, every penny you have in deposits, try to get their hands around taxes and insurance, things like that, make sure it at least makes sense. If it's a refi, we actually usually have that information there too, because you will be your insurance isn't going to change shouldn't change too much. And your taxes obviously aren't going to change.
So, this also to me, speaks to why you always hear that thing, don't go open up a credit card, whenever you're buying a house. You know, if you're if you're planning to buy a house, and people do that, they'll, they'll go out and they'll say, well, I'm buying a new house, I need to buy furniture, right? Or I need to buy stuff to fill the house with and they go out and they get a credit card halfway through this process. And it's not just the bank or the or the financial institution just being jerks, it's about the fact that we've done all this research, and we validated all this information, and now you've gone out and changed the status quo on us midstream. And that just throws things into a
loop. We've had deals that went off the rails, because six or seven days before closing customer went out and bought a truck and suddenly added $450 of debt service to their debt-to-income ratio. And the debt-to-income ratio was already a little skinny. Wasn't a lot of room there. So yeah, I mean, you know, it is a wise thing to not get a credit card, not get a car loan, you know, obviously, you may have, like you mentioned, you're gonna have some expenses that you may want to finance down the road, but wait till you're 30 days out, you've closed in 30 days is gone. Because in a case like where you're, and this is the reason, in that case, we caught it, we'll actually do a, what's called a soft poll on your credit report a few days before closing, just to make sure that your credit situation hasn't changed. And also, an investor may do the exact same thing too. So, if you, if you've obtained credit, and it hasn't been disclosed at the time of purchase, or the time the application was taken, everything's off the table, you basically run the risk of having to start all over again. So, it's, it's wise advice. Stay. Don't, don't buy anything, don't finance anything, until you have the keys to the house in your hands. Yeah.
So, advantages and disadvantages to, to different mortgage types, right? So, you have, you've got you've got fixed rate mortgages, you've got adjustable-rate mortgages, FHA mortgages, I mean, there's, there's different letters behind all these mortgages that people go out and research. So, can you talk just maybe a little bit about what the differences are between those?
So, kind of starting at the, as an overview, there's a couple of different kinds of lending. There's conventional mortgage lending, which is what 90% of what we do, which is basically deals, a deal or it's not, it's closes, money changes hands it's sometimes sold to an investor, or we'll hang on to it for our portfolio, and it just moves on. There are government backed loans like FHA, VA, USDA, there's probably another couple of different sets of initials that are I'm forgetting, but those are loans that are mostly, there's some sort of guarantee by a government entity, FHA Federal Housing Authority, USDA, US Department of Agriculture. Yeah. And then the VA, which is for veterans of our armed services. So, there's, those have different, their own specific requirements and things like that. They have different paperwork, requirements, sometimes they require inspections of the house that don't come up and conventional loans.
Sometimes the home has to be in the literal certain location to yeah,
yes. Typically for USDA loans. They tend to need to be in more rural areas.
But the agri-, being agriculture, that makes sense. Yeah, exactly.
But, you know, in our footprint in our immediate area, like the greater Johnstown area, there are areas that qualify for USDA loans through their rural program, there are ones in the next zip code over that don't. So, sure, in some of those cases, it does require specific, being in a specific zip code. So, the other thing you brought up was like, a fixed-rate loan versus an ARM, which is an adjustable-rate mortgage. Okay, that is more or less based determines the pricing and the repayment of it. And how, over on the
volume No, no, no, no, that was No, no, no, that was me. I wouldn't I wanted to take a sip of coffee I had I had to do that.
Yeah, I was, yeah. Some of it, I can't help but look at the board, I sort of want to control it. I have control issues leave me alone, I have control issues. So, a fixed rate loan is basically say a 30 year term loan and your rates 5%, and it's going to be that throughout the entire length of the loan. Your interest rate it's not going to move. An adjustable-rate mortgage typically has an initial rate, which is usually, in theory, should be less than what the fixed rate loans offering at that moment, for a specified period of time. So, a lot of times, it'll look like a ratio, like a, like a fraction almost. So, you'll see like a seven slash one or a five slash six or, and what that saying is, the first number before the slash is the number of years where that initial rate is going to stay the same throughout the entire, throughout, throughout the course of that five-year period. So okay, using the five slash one example. So that's 60 payments. On the 61st payment, your rate is going to adjust, and that's typically using an index of some sort. AmeriServ uses the SOFR rate, which is I think, standard overnight finance rate? SOFR, we'll go with that. Yeah, we'll go with that. We'll go with that SOFR, and plus a certain number of percentage over the top of that. So, after the initial rate is over, your rate adjusts. And then it adjusts to say it's whatever the SOFR is that day plus 3%, and that's your new rate. And that would be for another five years? Well, that's, now we're going to talk about the, the second number in there behind the slash, okay, so that second number basically identifies how often that, that rate is going to readjust, in this case, that one signifies one year. So, on the anniversary of that readjustment every year, it's going to adjust again to whatever the SOFR rate is that day plus, using this example 3%. So, the ARMs are good for, like I, when I was with Chrysler Financial early in my career, there was a period where I was living in a different house in a different town every year. I moved a lot for a little while there. And after a while, I realized like, I'm not going to be in this house for more than a couple of years, so why get a fixed rate? When I can get a lower rate the ARM, and most likely I'm going to move out. So, if you're in that sort of circumstance where you know, you work for the government, you find yourself moving every couple of years, an ARM rate is actually a better deal than, than a fixed rate. Yeah, that makes sense. And to tell you the truth, when I moved to Jacksonville, Florida, I thought I was going to be moving again in a year or two and I wound up saying seven years because I got a, I wound up changing employers, I was tired of moving. And actually, I was sweating the first adjustment five years later, because I never had to deal with this before, and my rate actually went down. At the time they didn't have floors and things like that on the on the ARMs. So, it actually went down two years in a row, and I think the third year floated back up almost to the original rate it was the initial rate was so, ARMs can, they will fluctuate, but they're not necessarily going to be the worst thing in the world either. There are people who just are so concerned about that adjustment period that they would rather pay a higher rate for the, for peace of mind knowing that that rates are never going to move for 30 years. Right. My mortgage is going to be $847 through the next 30 years. Yeah.
Now, now, so let's talk about the monthly payments, since you kind of brought that up, like, you know, having that fixed payment idea. And let's, let's talk a little bit about what goes into an escrow. I think a lot of people again, you do these calculators online, and you say, oh, wow, you know, I can afford a $200,000 house, because this calculator online that I'm looking at tells me that my mortgage payments only going to be $600. Right? But you're not, that calculator, in that case, is most likely not taking into account the other stuff that you're gonna have to pay and, and that may, either may be in an escrow account with the with the lender, right, or you might pay it separately.
Yeah, majority of the time, at least with the loans, we see, taxes and insurance are escrowed. taxes, property taxes, insurance is just your homeowner’s insurance. Both those things are in the bank's interest to make sure are kept up and not, you know, falling behind or not being paid in the case of insurance. So, it's mutually beneficial to both because it helps the borrower sort of budget, and then the bank is sure that the taxes are getting paid, there's no notices that the house is going to take, you know, a sheriff sale or something else like that. Right, right. Or there's a big loss in a house and you find out that the insurance lapsed three years ago for non-payment. So, from the bank's perspective, escrows are attractive, they're a little bit of a headache, because there is some work involved with them. But
so so is it up to the lender to decide to do that, or is it up to the borrower? Or is there a conversation that says like, well, I want to do this, or I want to do that? Yeah,
so, there are certain circumstances where escrow can be waived, and I think, I believe it has an impact on your rate as well, because there's a little bit more risk involved. Stronger deal can get an escrow waiver, a deal that's closer to the bone as far as debt to income, or maybe credits, not 100% where you'd want it to be, are less likely to get an escrow waived.
And it is up to the homeowner, obviously, to find insurance for the home. Like that's not something you do through the, through the lender, right? That's
because, yeah, that because that's a different animal. If in a circumstance and, and it runs, they run into it in HELOCs, the borrower signed a document saying that they're going to maintain the insurance on this house throughout the life of the loan. And if the borrower doesn't meet that obligation, the insurance lapse or something like that, the bank actually has the right to, it's called force-placed insurance, and contact an insurance company and get at least the replacement value or, you know, the the amount of the loan covered so that in the event that there was a loss, the bank's covered. The premiums on force-placed insurance are very high, very high. So, you know, and that's passed on to the to the borrower as well. So yeah, it's, it's in the borrower's interest to, to shop for insurance that meets the minimum amount of coverage requirements, and is also the most affordable for them as well.
Now, so now sometimes, though, when it comes to certain insurances, you there are insurances you have to have over and above your homeowner’s insurance, right? So, like, for example, like on an FHA loan, don't you also have to have like mortgage insurance?
There is a, there is a premium on FHA loans, because they tend to be high LTV deals, loans. And, and that sort of ties into a discussion that people have heard PMI, private mortgage insurance. If a loan-to-value is typically over 80%, it's required to have PMI on it. And that's basically in place until the borrower can prove the loan is now at roughly 80% or less LTV, okay, that can go away. FHA, it can't go away, it's baked into the deal, it's gonna be there forever. So, but that is another kind of insurance that's on there. It's not on every deal. It obviously depends on the loan to value. And then there are certain loan programs that can waive PMI as well, but that's kind of getting into the weeds is yes, but the other kind of insurance that you may have to carry is flood insurance. If you're
which we know a lot about in this area. Yeah.
For good reason. Yeah. So yeah, so flood insurance, basically, that's, that's more or less identified at application roughly. We do a search, and I think every lender does the exact same thing, does a search on the address early in the process. And there's, there's a couple different databases that different vendors use, but basically, it goes into, FEMA maintains these flood maps. And if the house is in what's considered, I think it's 100-year floodplain, it has to have flood insurance on it. Because typically, homeowners’ insurance policies won't cover water damage, regular water damage. You know, if a pipe breaks in your house, that's one thing, but if you, the creek in the back of your house rises and floods your house out, your standard policy isn't going to cover that. So that's where the flood insurance comes in. Okay. So on, those maps do get rewritten. And typically, though, those floodplains are expanding, so one of the things you're required to do is even if you're not in the floodplain at that at the time of closing, if the FEMA rewrites those maps, and your house is suddenly in a flood zone, you have to at that point get flood insurance on it. Okay. So, the maps, like I said, those maps usually expand, they rarely contract. But if it, if it did happen, so say two years into your loan, you went and had a flood search done on it, and now suddenly, you're out of the flood zone, we can't require you to carry it if you're no longer in the in the floodplain.
Gotcha. Okay, so, so, okay, so, so we've kind of gone from, you know, this whole pre-approval pre-qualification, you can, you know, we, we might, we might consider giving you a loan at some point, here's, here's a piece of paper that says, you can go look at houses, yeah, to the point of, of acquiring all of these documented documents and bank account statements, and, and so on. So assuming that I put an offer in on, on a home, you know, how long does it normally take from the day that I say, yes, I'd like to buy this house, and of course, I'm just going to qualify this as saying like this assumes that there are no hiccups in terms of the seller deciding at the last minute, they don't want to sell you the house, or that there's
decided they don't like the cut of your jib. Yeah.
Or that, you know, a meteor does not come down and crashed through the roof of the house and in the process. But assuming that everything goes as smoothly as is typical, how long does it take from the day that you say, yes, I want to buy this house, to the day I get the keys and can walk in and start painting?
I typically tell people 45 days, but it can go either direction. A big chunk of that time is sitting around waiting for an appraisal report to be prepared. And the appraisal basically gives us a dollar value, an estimate of the market value of the house at that moment, you know, the appraisals are ordered, typically, once we have an idea that this is going to at least be conditionally approved, and then it's typically a 30-day window. Sometimes they float in really quick and sometimes, depending on the complexity of the property, the circumstances around it, the location of it, it can go 45 days, sometimes even two months.
AmeriServ Presents: Bank Chats. This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts to help take some of the mystery out of financial topics. We live our lives using bank products and credit products, mortgages, auto loans, credit cards, but many of us don't always understand what we're getting ourselves into. Please keep in mind that the information in this podcast and in the resources available for download from our website or other sources relating to bank chats, is not intended and should not be understood or interpreted as financial advice. We expressly recommend that you seek advice from a trusted financial professional before making financial decisions. Drew Thomas is not an attorney, accountant or financial advisor, and the program is simply intended as one source of information. We are not a substitute for a financial professional who is aware of the facts and circumstances of your individual situation.
We just finished discussing how waiting is a major component of the residential mortgage process and waiting is exactly what you'll need to do to hear the second half of our conversation with David O'Leary from AmeriServ Financial. Luckily, you won't need to wait long. We've already posted episode two of AmeriServ Presents: Bank Chats. It's waiting for you so that you can hear the conclusion of this conversation. And we have a number of fantastic guests waiting in the wings to discuss banking related topics such as cybersecurity and budgeting, additional lending topics, trust and financial services, topics, retirement and more. So please be sure to subscribe and we cannot wait to take this journey with you. For now, my name is Drew Thomas, so long.