KGCI: Real Estate on Air - An Agent's Guide to Conventional, FHA, and VA Loans

Episode Date: October 9, 2025

Summary:This episode serves as an essential primer on the three most common types of residential financing: Conventional, FHA, and VA loans. Listeners will get a clear, concise breakdown of the key differences in down payment requirements, credit score standards, mortgage insurance, and property eligibility for each. This is a foundational guide that equips agents with the knowledge to better advise their buyer clients, strategically evaluate offers on their listings, and navigate the complexities of financing from contract to close with confidence.

And welcome to another edition of the nerdy agent podcast. I'm your host, Luke Pedersen, with my brothers and fellow nerds, Josh and AJ. Just like when we, I'm trying to think of the timing on this. I mean, the wolves obviously won the series. That already happened. But we predicted that was going to happen. Well, it came out after it happened. Yeah.

I don't really know. It's going to depend what we're going to say right now on if the Warriors actually win on Thursday. We're not going to even. We won't have a game. We won't play the Warriors until after this comes out, I don't think. Yeah, it'll be a while. If we do, we will be up 1-0. And by the time this comes out, I think the wild,

they're going to pull off game 6 and 17. Hey, you know what? Tough overtime losses. Huge shout out to our 40 loyal listeners. I think we had 40 or 50 listens last week. Yeah. Pretty darn good. That's a lot of people.

That's about how much we're going to beat the Warriors by in the first four games of the series. It's going to be pretty fun. It's the question of like how many more mentions of sports do we need to do before our listener count drops, right? Are people tuning in for this? It went up. It went up.

It went up. Okay, there we go. This week we're going to pivot a little bit, and we're going to do more of a training session. If you're not a real estate agent, maybe not as applicable, but maybe you'd want to know so you can be more knowledgeable about real estate in general. But if you are a real estate agent, this is stuff that you 100% need to know. And I actually tell all my clients when we meet initially, I just say, hey, do you have any questions about most clients come to real estate agents before they talk to a lender,

or before they learned about financing. And I always ask them, do you have any questions about financing? Because I found it to be really helpful for me to, I say, be dangerous with my knowledge on financing because I'm usually the first one they talk to. And they usually don't know how to calculate debt to income, what they're going to qualify for, what their credit score means with what they're going to qualify for from a loan perspective. So just wanted to lay out the kind of the bare bones of the different types of programs.

Wanted to start with conventional. But we should prep preface this with like, if you're a real estate agent, it's important for you to know this you know maybe not at the level of detail that we're getting into but we I mean I see that's important to have that information if you want to be a high producing real estate agent you 100% need to know it at this level of yeah fair but at the same time it's like you also need to it's more of a it's more of a PSA for saying make sure you also find good lending partners that are going to be able to explain very in a very helpful manner how to look at these things as well so correct and you also should feel like you could close a conventional loan tomorrow as a lender because

I feel like I could close a conventional loan right now. Yeah. You should feel like you can do that because your knowledge should be that good. And if you really want to get into the weeds, I mean, we learned this just by talking with lenders and asking them questions. And they are more than happy to share it. Yeah. So starting with conventional, I want you guys to just go off and explain that the box, I think, is the best way to explain that. The way I explain this to buyers most of the time is, and I explain it a few different times.

Sometimes it happens at the buyer meeting. Sometimes it happens when we're going through the peer approval process. sometimes it happens when we're under contract and waiting to close. And the box is an important concept for them to understand because it helps them know that they are not unique. There is nothing about each borrower in a conventional financing situation that they're getting the standard questions being asked by the lender that everybody else gets asked. They're always asking the same questions. It is a little bit of a pain to obtain a pre-approval and to get financing nowadays because of that. And so ensuring that they understand that the most important things that fit them into the box that Fannie and Freddie would say qualifies them for conventional financing are debt to income ratio.

Who's Fannie and Freddie? Fannie and Freddie are a government conservatorship company corporations that basically back all of the conventional loans on the market. So they're the ones that are saying we will take these on down the line. I don't need to get way too in the weeds. So when Mr. Lender Broker or Mrs. Lender Broker gives your buyer, helps them get a loan, and then at closing, the title company goes, you're going to pay Rocket Mortgage, which is a different company than the company that was giving them the loan, your broker, your lender.

The only way that my understanding is they can give that to Rocket Mortgage is because they fit the guidelines that Fannie or Freddie have put into place in order to transfer that. Exactly. And if you think about it like this, because our whole economy, me runs off of debt. So if you think about it like this, the money starts with Fannie and Freddie, let's just say, or the back end investors in the bond market that exists that they participate in. It flows up to the borrower and then all that money flows back to them. So the debt just kind of flows up and back and ebbs and flows. The Federal Reserve participates in the mortgage back security

market as well. And it's a very complicated marketplace. But the box is this. So the most important items that go into the box are how much money do you make, how much debt do you have? And that determines on a monthly basis what your debt to income ratio is. So if you have a car payment for $250 and Fannie and Freddie in their box would say you make this much so you qualify for $5,000. What kind of income, A.J. specifically. Gross income. Pre-tax. Pre-tax. So if you W-2 full-time, if you're 1099 employee, it's a whole different thing. I wouldn't try and get exactly. And let's just say that at the end of the day, they say that you qualify for $5,000 in debt service. And if you had $250 on a car payment and $250 in

student loan payments, then you would qualify for a $4,500 mortgage payment. So I think the biggest misconception is buyers go to lenders and the lender says, oh yeah, you qualify for $400,000. And then I call the lender and I say, what if the taxes on one $400,000 property are $8,000 and the other one are $2,000? Does it still apply the same way? And they're like, well, I mean, because they try to make it simple on the borrower, which I don't think is always helpful. You don't qualify for a purchase price. You qualify for a monthly payment. That's point blank. And that's how debt to income ratios work. The other things that fit into the box would be credit score is a very important one. Typically, over 740 on conventional or 760 sometimes gets you the best

terms on the market. Best terms. But if you're a buyer that has a, you know, under 40% DTI, even 43% probably and they have a credit score over 700, they're probably getting a conventional loan. Yes, exactly. And then your down payment obviously fits into that box as well. So there's 3% products, 5% products, 10% products, 20% products, more than 20% products. That will determine kind of the terms and the rate that you get. But first, the box is going to determine if you even fit inside of it or not. Like let's say you're self-employed and you've been running your own business for one year. You don't really fit in the box in the same way that. someone who just started working at Target is a great example.

So W-2 income always trumps self-employed. And there's a reason behind every rule that they have, and most of them are to give them, their actuaries, people who are assessing risk, are determining what are the best things to include in that box, that profile, to ensure that we have the best chance of getting paid back. And so that's how the whole process works,

because the worst thing that can happen in a debt economy is someone doesn't pay the debt. So if the debt doesn't get paid, it screws the whole system up like we saw in 2007, eight and nine. So on a conventional loan, outside of understanding that they need to fit into that box and have an idea, so they make a decent amount of money, they have a decent credit score and they don't have crazy amount of debts. They fit into that box. Then as a newer agent, I would say the newer agents are more likely to maybe not understand financing options. You're probably more likely to be working with, say, first-time homebuyers. The only product that you should 100% know about is the home ready or home possible product because as a first time

home buyer, if you make under, I think it's 80% of the median area income, you can qualify for that product where you can get 3% down payment conventional loan, which is good to know because historically people have thought that 5% down conventional is the only one that's an option for owner occupants, you know, 3% down. And their interest rate is actually significantly better. I've seen it like half points sometimes. Yeah, quarter to a half. quarter to a half point better. And that's a really good program to help people understand and at least talk about. And again, like I, we talk a lot about one, being knowledgeable and adding value, but also like looking good. I feel like, hey, have you heard of the home ready home possible program? Well,

if you make under 80% of the median area income and you qualify for a conventional loan, you put three percent down and your interest rate's going to be better. And one thing on that note that could help you with that. And one thing on that note, too, to think about is sometimes, this is why it's important to have a good lender that you're talking to because they might look at and say, well, it's a couple and combined, you make this much, but individually you make this much and you can qualify for this program. So there's nuance too to it where like, you know, maybe one of the two makes enough to be under that limit but still qualify for the house. And so financially it's actually more advantageous to look at it that way.

There's different ways to kind of be considering these things. But you should as an agent understand that premise. So I think it's because if you have two people on the loan together, the amount of money that they have to make combined is lower, right? So like if it has to be, one person has to make under 90, but two have to make under like 130, let's just say random number, right? So it's, if two make 90, they're for sure over, but if only one of them makes 85, then they're another reason why when you're talking to your clients, you can bring that up an example to say, like, this is why it's important to make sure that whatever lender you're working with is not just,

you submit a bunch of docs on the internet and they just give you a pre-approval because there's nuance to it that will affect your ability to get access to the best product that fits your box. And it's why I have partnered my partner with lenders that think creatively and actually work on behalf of my clients versus just trying to turn out a bunch of loans and make a bunch of money because we're actually adding value. And you already sat down. You've been talking these people for five minutes and they're sitting there going, oh, I didn't even, I thought real estate agents opened doors. You're telling me how we can get a better interest rate in a lower down payment and do all of these things. And I think the key there is I think a lot of agents would say, well, you're not a

licensed lender, you can't talk about financing. And that's where I say, like, we have these conversations all the time about what's allowable, what's not allowable, what's gray, what's black and white. And I think there's so much in the gray that exists. And sure, I can't go to my buyer and be like, I'm going to get you a 6.5% interest rate and make it like a definitive, I'm doing the loan thing, because I am not a license lender. But I can have conversations around what I know. I can say what rates are on a website that is tracking rates across the country. I can talk to a lender and get the rate that I think that that borrower is probably going to get. I can advise them on, hey, you know, did you talk to the lender about this? Or did the lender think about maybe paying that payment down

to 10 months so that it doesn't count on your debt to income ratios? There are things you can know that you can suggest. You just can't definitively talk about anything that you are going to do to make the loan actually happened. So that's where the gray exists, I think. And to your guys' point, a lot of agents either don't care to learn about this stuff or they think that this is all black and white and they say, I can't talk about financing. And I'm like, I'm going to call the lender and if the borrower's okay with it and the buyer's okay with it, I'm going to just straight up ask like, how much money do you have? I said that to an agent in our office the other day. I'm like, well, how much do you have for a down payment? They're like, you ask the buyer that question. I'm like,

well, of course I ask it at almost every buyer meeting. I always just say, why, and I just Have you set aside some money for a down payment? Just in case, I say, you know, if you don't want to share with me, like, all my buyers give me their incomes because I run that, I run like a rough, I'm like, this is roughly how this is how they do it. Yep. Say, this is how the calculation works. And they just, and I'm like, if you're willing to give it to me, if you don't want to, that's fine. Well, and it helps to inform and I think.

They want the info. For sure. And on the search, um, as, as you're starting to search for homes and you're setting aside a price point, let's just say, on your MLS auto search, or they're out on Zillus. truly a home spot or wherever looking at houses, the worst thing that could happen is you don't run that rough calculation for them. And now they're looking at houses that are either way too cheap or way too expensive for their situation. And now they have terrible expectations because you're not going to get them pre-approved within five minutes of sitting down for a buyer meeting.

I think there's a better to do that. There's a third, there's a third agent persona there, though. The one was don't care to know. The other one was the black and white. The third is nobody's told them they should know these things. Or this is too hard because it's math. Sure. That's fair. But you can learn that if you want. For sure. Even if it's math. But like no way's told them to know these things. If no way's told them to know these things,

it's time to reach out to the advisory realty group at 9 9th Avenue North in Hopkins. We're hiring. We're hiring agents. You should have people telling you these things. Our agents know these things because we teach them them and we tell them it's important. So past conventional loans, though. So let's say I don't fit into that box. Do you want to go higher than talk about the conforming loan limits?

Do you want to do jumbo loans? 806. Correct. the max conforming loan limit currently. You know what's really why? I had it, but I did. So we, I mean, all of my buyers are pretty much on that.

So wait, so wait, if you, if you're, if you're taking out a loan, uh, and your loan is above, uh, set threshold by Fannie and Freddie, who sets that threshold? And it depends on the area. If it's above that threshold, you would no longer be conventional, conventional, conventional, your conventional, conventional,

conventional jumbo. And that for those, changes the terms of the loan. For sure. This is important if you're working, with buyers and higher price points. If you're not working with buyers and higher price points, it's probably still a good number to know

because if you suddenly found a buyer in a higher price point or someone came to do and it's like, hey, tell me about jumbo loans. And you don't know the conforming loan limits. You're gonna probably look uninformed in a way that they might work with a different agent. And that's a client you could lose. You could also just bring it up and go,

hey, do you know what a jumbo loan is? You're probably getting one here. And the swing, the swing point for these loans is right now roughly a million $25,000 with 20% down would mean that you're going to be slightly over 20% down because you want to get that 806 500 number is the loan amount. It's not the purchase price of the house. One thing that I think, just a caveat that's just insane, when we bought our house in Minnetonka in 2017, they had gutted the home and we were taking out a construction loan to finish that project. And I had the numbers that it was going to cost for us to finish the project.

and I set it up in a way that we did 20% down at the max loan limit in 2017. What was the max loan limit? Do you know what it was? No, no, let me guess. Let me guess. In 2017, let me guess. Guess what it was in 1990, too? 585, 417, Josh, is that correct?

In 1990? Wait, wait, wait, let me guess. Let me guess. 1990. 150. No, 116. 200,000. Oh, wow.

Crazy. So the thing about what has happened and, like, in the, the last five years what home prices have done and now it's 806 500 it's really funny to think that i based my purchase price from this guy off of i don't want to get a jumbo loan so i need to be at like but you know what happened right it all started with 2008 when fanny and freddie went under conservatorship that's where they set the number and so when that happened they fixed that number for a period of time so the graph is completely flat from 2008 until about 2018 18 and then they adjust and then it's then it's gone through the roof and i'll give you a few comments on

on jumbo loans just so everybody understands them. Yeah, this one's less likely and less frequent, obviously. The thing about jumbo's is that they don't exist in the Fannie and Freddie space. So you don't fit in the box if you're over an 800,500 loan. You're outside the box. And so you have to go to a bank who is very likely never going to sell your loan. They're going to collect your money every month. Maybe they have another servicer that's going to service it for them.

But they are the ones actually taking out the debt from whoever they're taking out the debt from, giving you the debt, and then you're paying them. This is how commercial products work. It's essentially called a portfolio loan. So if you ever hear portfolio loan, that's what that means. And it does have additional requirements. You can't just have a good income and a little bit of down payment money. Typically you're going to have to have somewhere between six and 12 months reserves.

Can be in the form of a 401K typically from how I understand it. But all of these banks are going to have different overlays and different rules. And so it is good to shop around if you are going to be a jumbo loan because the rules aren't just super standard. whereas the Fannie and Freddie typically have a little bit more of a standardized look and feel to them. The thought process there is Fannie and Freddie only wants so much exposure to risk, right? So if they're taking on a $2 million loan and they're backstopping that, that's a high level exposure with one person. So they're essentially setting their max limits that they will take exposure on from a loan product as a government backstop. These are still 30-year amortized, no balloons?

Correct. Usually, I mean, there's products. There's five, seven, ten options within all of these. Sure. You can adjust anything. And then is the interest rate? How does that track compared to like a 30-year convention? Really, really depends.

It's super fascinating. I mean, back in prior to 2020, there was several Wells Fargo, notably. I sent a lot of loans to them. I mean, my buyers, I connected them with people at Wells Fargo because they were trying to get more assets at the bank at the time. And so they were running programs where like you could give if you had 20% down and then you brought 50 grand in cash and another 50 grand assets over to the bank. Then they'd give you little kickers on that rate. And so the rate was running like half a point lower than a lot of other people.

So it actually made sense to almost do less down and get into a jumbo product at that point. And I know lenders that have done that on conventional products too where you do 19.9% down and all of a sudden it kicks you into this new interest rate because you're in a new program. So there are ways, to Luke's point and Josh's point, it's like if you're with a really good lender and they know math really well, they may be able to find ways to save your buyer like 200 bucks a month by just adjusting their down payment from 20 to 19.9 or from 25 down to 20 and becoming a jumbo product because the rate is going to be so much better. So there's a lot of ways to run that. But typically, jumbos tend to run slightly higher than the 30-year fixed conventional financing on a normalized basis. They ebb and flow, but I think that's what I tell people is. They tend to be just slightly higher, largely due to the fact that they're not the Fannie and Freddie backstop, largely do the fact that they're at higher price points.

But sometimes, you know, the buyers might be more qualified buyers because they're buying a more expensive house. It'll ebb and flow. Historically, if you... Close, but a little bit higher. Historically, you typically want to avoid a jumbo loan if you can. If you have the option to choose one of them, right? Right now, jumbos are at 695, 30 years are at 6.81. So it's, yeah, but they're close.

Yeah, close. So then next outside of... the box, FHA. Yeah, so this is typically the biggest reason that someone would go FHA or one of my buyers would, because if the second reason that I'll bring up happens, I would advise them differently. The biggest reason is because their credit score is not great. That's the typical buy box for FHA is they'll take a 610 credit score. 590 sometimes.

590 credit score. Someone's got a lot of credit card debt or they defaulted on a car loan or something happened in their past where they have to do. that. The other reason sometimes people do FHA is they do have a little bit higher debt to income ratios that are allowable. They'll go over 50% in some cases. I definitely would have a talking with your buyer if they're like, oh, we can do 300 on conventional. We can do 350 on FHA. Maybe we just go FHA. You know, ask me if they've got a financial planner. That's like the main thing. I would do be like, hey, you know, I'm not licensed to be a financial

planner for you, but it does seem like we are really pushing the max limits on what you're qualifying for. So I want to make sure that you don't get yourself into a spot where you're super house poor. But yeah, it's really credit score that does it. And the big things to note on FHA, well, A, FHA was like the original loan product that exists. I was going to tell you the, tell the story, the fun fact about FHA. Okay, Luke will tell the fun fact. The federal housing administration was created during the Great Depression because the loans back then before the FHA were created were all balloon a couple year like interest only in balloons. And they were only giving them to people that had basically a ton of money and were super serious.

It was like 50% down. It's how a large portion of the world actually works. Yeah, it is. And so the United States, though, created the federal housing administration to offer what was then the conventional 30-year amortized loan for the, I don't want to say middle class, but like average buyer who doesn't have a time, working class,

so they could actually buy a house and get a loan product. Over time, that then, you know, I don't know how it changed, but over time, then they came out with the conventional being different, and then the FHA became FHA as well. I think banks probably started to learn that they could make money on their own conventional products. That's probably what is. To make money on them.

And then, you know, then larger corporations came involved and said, we can help you do even more loans. We will back you with all this money. And then another layer came in and said, we have all this money. This what always happens is. Yeah, I mean, financing people will tend to look at things and try to find a way to get creative and I mean, I was talking to a guy yesterday and he was talking about new products. I was like, oh, man, I'm getting nervous.

We're going back to 2008 again where we're just creating all these weird products that there. But if you can create a product and someone will buy it and use it, then that's what they do. What's what they do? What are the downsides to the FHA? FHA has a little bit more red tape when it comes to qualification. The biggest downside I would say is the appraisal is not just like a valuation of the property. It's also kind of a little mini inspection. Things like peeling paint, missing smoke detectors and CO detectors, loose handrails. I'll just say that the exact same thing. Yeah, that was great. Like cracked windows. The property condition is important to

understand on that case. The other thing about FHA is they're at lower rates, but there's a lot going into that. So there's the upfront MIP, not the PMI, that you're paying on the front end is going to create a higher closing cost environment because it's about 1.75% of the loan price. And then you have the monthly mortgage insurance that is on that for the life of the loan. So I tell people if you're going to be in an FHA box, it's thoughtful to understand the value of your home over time because if you can get to the point where you can pay that loan down, you can't get rid of the mortgage insurance in that FHA loan, but if you refi out of it, you can get into a conventional loan product down the road that could get rid of that for you.

And the biggest thing to ask the lender when they say this person has to be FHA is, have you thought about a credit rapid rescore? Rapid rescore. So if you're at a 640 credit score and they're saying we can't get good terms on conventional, you ask them, okay, what's their credit profile that has caused them to be this low? Do you have a program that would tell us if they did one or two or three things, it would get to this? number and have you thought about going through that process because that can very, very much improve the terms of the loan and it could get them into a credit score that would qualify them

more conventionally. Historically, if you can get a conventional loan, it doesn't make sense to go FHA because of those reasons. Unless you need down payment assistance and the product doesn't exist in the conventional realm. Correct. Yeah. If there's extra ones. Yeah. Let's keep moving so we don't run out of time. Veteran VA. VA is very similar to FHA in the in the property condition for the appraisal aspect. It is zero percent down, no mortgage insurance. The biggest thing I ask people when they're coming to me and they're a veteran and they want to use their VA benefit is do you know your disability rating? That's another question that people would be like, wow, why do you ask that? That's crazy. It's because it really impacts the loan.

If you have a certain percentage disability rating, I don't know the numbers off the top of my head right now, you don't pay the funding fee. There's a funding fee that can be up to, I believe, 3.15% of a low amount. If you have zero percent disability, you may be responsible for paying that. If you've bought and sold multiple times, it can also change the funding fee. If you've used that benefit over and over, that benefit is, I mean, it's a massive deal. And I think the biggest misconception in our industry is your VA, you're zero down. You're not a qualified buyer.

I always call listing agents when I have VA buyers and I have lots of veterans that I've worked with. And I just say, here's the deal. This person served our country. They're using their VA benefit. This is not an unqualified buyer. are super qualified, they can do conventional. But the fact that they could do zero percent down and not pay mortgage insurance and get a

good rate, it doesn't make any sense for them not to do that. So they have money. They just don't need to use it on this and it makes more sense for them to do it this way. AJ, why are you zero percent down with an appraisal gap? Yeah, exactly, right? Because they have 50 grand line around. They just don't want to put it down. Why would you use it if you don't have to?

This is the one spot, especially VA and FHA, anything that's outside the box. obviously you want to go directly to the lender, but this is the one spot that I do defer pretty quickly to the lender. The one thing to know about the VA approvals is they can take significantly longer. So like a conventional buyer could get pre-approved in five hours. If your lender's quick and they get them all the documents, the VA is going to need the certificate of eligibility and that's going to take, can take 10 days. Like it's not super fast. And so if you do have a buyer and they're like, hey, we're thinking about the VA loan. It's like, okay, we have to do the application today. We have to have him reach out to the VA to

I can get this certificate of eligibility right now because it's going to take some time. It's not super fast because that buyer legitimately, if they go and look at a house, they probably won't be able to buy it because they're not going to get the approval fast enough. The other thing about the VA loans that people, there's a misconception. You'll have to deal with it still. That stigma that the VA appraisal is going to be a pain, the same way the FHA appraisal is going to be a pain. So do know that if you have VA buyers, what I tell them is if you qualify for conventional, it's important for us to understand that we have both options.

I want you to use your benefits because you've earned the right to use those benefits. But if we're in six offers, it becomes a little tricky because the stigma of the other side is going to be that they're going to have to go through a difficult appraisal and deal with stuff that they don't want to have to deal with. I think we are going to get down payment assistance another time. Because we're at time. That was exciting. That was exciting. It was so exciting. They were worried. Tell us what you think.

They were worried this was going to be boring. I thought it would be exciting. I thought it's great knowledge. And the next time we see you, the Timberwolves will be. up two or three games on the Golden State Warriors. Or the Houston Rockets. Maybe we'll be advancing. We all wear your jerseys next time?

The next time we win a series? I don't have a jersey. I got a T-shirt for when I went to that game that one time. I got a wolf's back towel. Did you guys know where, did you see the stat that the Timberwolves have never been to back-to-back second rounds? Jeez, Louise. First time in franchise history.

Did you see that the top four scoring performances in the history of the wolves in the playoffs were Edwards. That's amazing. All four of them. He's the best at least the top two, but probably the best Timorl we've ever had. It's not even close. We all love KG. Anthony Edwards. Anthony Edwards is different. Timberl's going to win the whole thing. The wild

they're going to win two in a row. And that's all we have this week on the Nerdy Agent podcast. And as always remember, be better. Bye now.