One Airport Place,
There are many loans available for homeowners who want to renovate their homes. Today, Richard Oring of New Century Financial Group is joined by Bobby Dmuchowski, VP of Mortgage Lending at Guaranteed Rate.Bobby explains the advantages of going to a mortgage broker, as opposed to going to your bank. He also talks about the differences between HELOC (Home Equity Line of Credit) and renovation loans.We cover Fannie Mae and HFA loans, fixed vs. variable rates, closing costs, underwriting, and how funds are dispersed.Rich also cautions our listeners to look at IRS publication 936, which deals with home mortgage interest deduction. You can view that here: https://www.irs.gov/forms-pubs/about-publication-936.United States Veterans have a number of options available to them through the VA - with much more flexibility than civilians have access to. Bobby, Rich, and Jag explain that.There are many types of loans out there, including VA, FHA, Convention, Nonconforming, and more. And there are also many ways, with the advent of technology, to get your loan. Depending on your preference, you can coordinate over the phone, text, or online
Welcome back in to Financial Matters with Richard Oring. I am John Jag. Hey, Rich. Always good to be with you.
Always good to be with you, Jag. So much has changed around the world since we spoke last.
Oh, that is an entire other podcast, my friend. We are going to focus today on a different topic, and that is kind of an alternate way to finance renovating your home. I know you've got a guest there with you that's an expert on the topic. Why don't you go ahead and introduce him?
Jag, I think first off, before I even introduce him, I think this is a great topic. I get phone calls all the time from my clients saying, "Hey, Rich, I want to improve my home which account should I take it out of? Should I refinance my mortgage? Give me some options. What should I do?" So, I think this is a very good, timely podcast topic because I've been getting a lot more of those phone calls recently.
At this time, I want to introduce our guest. His name is Bobby Dmuchowski, he's the VP of mortgage lending at Guaranteed Rate. And instead of going over his credentials and how long he's been in the business, it's better for him just to do it. He'll do a better job than I will. So Bobby, go ahead, introduce yourself a little bit more.
Absolutely. Bobby Dmuchowski, VP of mortgage lending at Guaranteed Rate. I've been in the lending business for 15 plus years now so starting to get the hang of it. Located in New Jersey here. But a good thing about us here at Guaranteed Rate is we've got a full lending platform. So, today, I know we're going to focus on renovation loans, so love to offer some advice and solutions for some clients, and people just looking around today.
Bobby, I've heard the name of your company. It's on a stadium, I can't remember which one.
We're out in Chicago.
That's right. Where the White Sox play, right?
You got it.
Bobby, what you don't know about Jag is he's a very big sports fan. Unfortunately, he's a big Patriots fan.
Yeah, I know. But Jag, here's something else interesting. Bobby, I am surprised is here today because it's his wife's first day back at work after having the baby.
Why, thank you. Appreciate it. We had to do some double coverage today, actually. So, we had the babysitter lined up, kids got sick there. Cousin Jess filled in and here we are.
You are a man who's very dedicated to your work, so I'm looking forward to today's discussion.
Bobby, you mentioned that the company you work for and there's a lot of confusion. A lot of people want to get mortgages and things like that or loans, they go directly to their bank. And I always encourage clients sometimes to work with a broker. Can you explain the difference between direct lenders and brokers?
Absolutely. So, a direct lender, they essentially have one playbook. So their investors, their stockholders essentially create that playbook, their rules, they're overlays to what their comfortable lending with. So if you don't fit that mold, it's a hard no. So to have 40 different plus investors out there, if you come into a stop, if that investor has a hard stop at a certain credit score, there's other options out there. There's different investors that have an appetite for that business to make that deal a reality. So to have 40 plus investors at your fingertips is often the difference in a deal or not.
So the difference is basically, walking into your local bank, getting a loan from them?
And if you don't meet their criteria, sorry, good luck. They pulled your credit.
Now you got to go get your credit pulled somewhere else again? And we talked about that in a previous podcast about pulling your credit too many times. Whereas they come to you're basically walking to a branch with 40 different lending opportunities.
So one's for the pristine credit rating. Yep. Maybe some for self-employed people, their special situations and so forth. So again, I always encourage people not only look at your local bank, but sometimes speak to a mortgage broker because they might have a better product at a lower cost to meet your needs.
So, I know the main topic we're going to get into today is renovation loans. And Bobby, I know I've heard of these HELOC loans. Can you tell me first what HELOC stands for? And then they're mostly used for home renovations, right?
Exactly. So in regards to renovation products, there's essentially two lanes. So one of them is the HELOC it's a home equity line of credit. So it's essentially a giant credit card on your house that'll give you access to the equity on your home and you control it completely. So, if you want to do a kitchen, you might take a line out for $50,000. As the contractor comes through, you'll actually have a checkbook. You could cut checks right from it. And you'll control that account a 100%. Kind of the drawbacks to a home equity loan is it's capped at your current market value. So the bank is going to look at what the house is worth today. So if that equity position is not strong enough to support that $50,000 line, it's not going to obviously meet the need of the client. So the alternative is renovation financing and the perk of that, the positive is that they're going to lend off of the future, your value.
That improved value of the home. So with that, they look at if you're going to do an addition to a home, you're going to get a quote, an estimate from a builder. You're going to attach that to your request for an appraisal to the appraiser, and he's going to give us a future value. And we're going to lend on that number. And these renovation products would let you lend over with the house is worth essentially today so that's really a strong product and what we're seeing people be able to do to leverage the access in their home.
I got to imagine you do a lot of those loans down at the Jersey Shore where people are buying these old properties tearing half of it down and rebuilding.
Yep. So those small capes, as you see the whole street growing four times in size. A lot of those homeowners are leveraging renovation loans for this.
I just want to make sure I understand this Bobby. So if the house is worth $500,000 right now and you're going to do it in addition on it. And after the addition, based on what the builder's going to do, the house is appraised at 600,000, you can take a loan against the 600,000 as opposed to the 500.
Instead of the five.
Is that right?
Okay. So what loans are these? Are these variable? What's the maximum loan, the value, like tell us more about these.
There's a few different products out there. So FHA has a... The common one you'll hear about is a 203(k) loan. Those, the more of the conventional style loans are just capped by the county limits. But a lot of those, like the base county limit, well, at least specifically here in New Jersey, you got to check your county in each state, but they'll go over 600,000 on just a regular single family. In high balance areas they're going up to 900. So there's really a lot of opportunity like you said, especially at the Shore. These houses are going for big money over there. So there's plenty of opportunity for those ones, but they're typically all 30 year fixed mortgages, which is nice. So they're a one closed loan. So you'll on that loan and essentially what the lender will do is put those repair dollars into an escrow fund.
So say you're going to do an addition. It's $250,000. Normally they'll give you a draw for material to get rolling. And then as work is completed, they'll put a draw schedule together. And then as work is done, they're going to dish out that escrow money, it'll be a dual check signed to the builder and the homeowner, which is great, because it protects the client. So one of the scary things I know we were talking about home equity loans. If you cut a check, it's up literally between you and the contractor. So, if the job's not to your standards, you're fighting them in court. Here, you have the bank on your side. Everybody wants to protect this collateral, this investment here. So as the work's completed, we send out that appraiser to make sure that the job's being completed properly to spec and to everybody's standards. And then once that's done, they'll cut the check and everybody's got to sign it to make sure that they're happy to keep the project moving.
So, Bobby I got to ask you this question, cause I always warn clients when they're doing home improvements is always expect a 20% overage on what they're budgeting. How does that work with this? And when would you start making the payments? You don't know what the final cost is going to be?
Right. So on these typically so we're going to actually set aside depending on the scope of work the deeper you get the larger reserve we're going to hold, but typically on a renovation project, we're going to hold 10% aside. Again, because we're counting on the unknown as people start doing work and you dive into it, added costs, pop up every time. So you're going to put in at least 10% into kind that reserve fund and everything gets completed. You don't use it, put it right back to your principle, which is nice.
Is the payment based on that extra 10% though, or the final amount you actually use?
So it'll be on the final you use. On these conventional products it'll be once you close on that loan, that's the money outstanding and owed as soon as your first payments still.
So is the loan closed before the renovations or after the renovations?
Closes before. So you're set that you're locked in that 30 year fixed interest rate and your payments based upon that one once you close.
So let's say that you have an extra 30,000, you haven't used. Can you pay that principle down and ask them to recast the payment? And what recasting means is keep the same terms but lower the monthly payment.
Right? Yep. So some products you can like the FHA, they won't. It just reduces your principle.
So I guess you got to be really of careful making sure you have...
You want to make sure your estimate is tight as you can make it. Yes. Whereas, and then construction loans that's a whole separate animal. Those are the ones where you will just literally you'll pay just interest on your outstanding amount. So if you paid off a current loan and you took out another $50,000 on your first draw, you're only going to pay interest on that money.
So what's the underwriting and what's the cost to get these renovation loans?
So they're very similar to refinance or purchase. So it's their conventional financing. So at least here in New Jersey, you want to figure two to 3% of the loan size, your closing costs, including all your title fees, bank fees, escrow fees, which sets up your taxes and insurance. So, that'll typically get you pretty close in New Jersey here.
We keep talking about New Jersey, but I know that we spoke in the past because I have clients throughout the whole country. What other states are you licensed? Or it might be even easier to say, what states are you not licensed to do business in?
Yeah, sure. So I'm licensed myself. I'm New Jersey, New York and Pennsylvania, but through Guaranteed Rate our company here, we're all 50. So we've got the solution for every one of them.
Perfect. Now let's say I have a primary property and I have a second house it may be a rental property. Sure. Is this available for all three of those type of properties or just my primary?
So they actually do investment property. So you can do renovation financing on an investment property, which is awesome. So the playbook like anything, it's a being an investment property, it's riskier loan. So the amount of equity that you could leverage is less, but you're still had the ability to use that same product and do renovation financing with a conventional loan.
Now I'm going to assume on a investment property. It's the same thing where they ask you on the application that you plan on keeping this property for at least a year. So this would not be for buy a place, fix it up and flip it?
Ah, some of them are. I think on the note, once you go to sign it, I got to double check. I want to say it's expected to own the property for 180 days.
Okay. So Bobby, I didn't tell you this, but when I first got in the business, I actually wrote mortgages. So I worked with Gateway Funding, which was a brokerage company. Sure. And I remember that question on the application has probably changed since then. Do you plan on living or owning this property for at least a year?
Same question. It's still there. It's still on that 1003 form. It hasn't changed. They put it in a different spot, but the same one's there.
The one thing I want to mention is a lot of people forget the rule with the IRS has about mortgage interest to be deductible. First off the IRS, pretty much cracked down on this rule a couple years ago. It says that if you take a HELOC loan or a renovation loan, it has to be used to improve the betterment of your current housing or repairs. It has to go into a property, which is secured by that mortgage. So you can't take a HELOC loan and put the money toward your houseboat. That has to be to the property it's secured with, with that mortgage. Okay. So I encourage people especially if they have higher mortgages, larger dollar amounts, check out the IRS publication, 936, it goes over all the rules, the maximum amount you can deduct, what qualifies, what doesn't qualify for the eligibility for deduction.
That's an important point. I know, Rich, especially with your background, but it's always important to mention and I know, we've mentioned this in previous podcasts, there are limitations for the amount of debt and definitely speak to your accountant about this stuff. We want to make sure that you're going to the appropriate people that have the right expertise in these fields before do any of this kind of stuff.
Absolutely. Always double check.
All right, Bobby, let's turn back to you. I know that there are other types of mortgages that Guaranteed Rate offers. Can you speak to those a little bit?
Sure. And then while we're on a little bit of the renovation financing, I'll transition to these other products, but they kind of both are one and the same here. So the VA offers renovation financing to our vets as well. Now this one they'll allow you to rent the same thing, renovations on their home. Also, the VA allows you to cash out up to a 100% of the homes value which is awesome. So for the vets, especially, we see the market moving up. So the VA loan, it's an amazing product for our servicemen and women. So typically you don't have to put any money down on a VA loan. So when, if these folks bought these homes four or five years ago, they're starting to gain that equity position now with the market taken off. So at this point everybody's trying to access the equity in their home. The VA product will let them cash out up to a 100% of the home's value today so if they're looking to do any work.
So Bobby, a few years ago, as he actually was working with a client who was a VA and he was going through the VA process for the mortgages. And I was amazed, because when I did mortgages I don't think I've ever wrote one to be honest with you. But I was surprised that after two years of a bankruptcy you can get written for a mortgage. The loan to value. If you have debt and you're paying it off, you could still get the mortgage, not as much needed down payment. It was amazing for those VAs out there for those who served our country.
It's an awesome program. It's the best one out there, in my opinion, absolutely. One of the ones they definitely did right. So like I said, zero down and there's no mortgage insurance either. So these vet's their whereas typically you got to put 20% down to avoid PMI, that private mortgage insurance that monthly payment zero from day one on the VA product with $0 down. Awesome.
I'm really glad we're covering this today guys, because I would assume that this is not something that all vets know about. That there are avenues and tools and resources available to them after the sacrifices they've made for our country that they can take advantage of. And it is so important to get the information to them because I don't think it's not exactly on a billboard in Times Square right?
No, you're spot on.
I've been on military basis giving advice to some members of our military and it's interesting the way they get their information, they have to ask. It's not always just promoted and sometimes it doesn't make sense. And the worst part is if you're in the military, there's always abbreviations for everything. So if you're coming in as a non-military person, you got to learn how to translate those stuff.
Acronym soup, right?
Yeah. So Bobby, you mentioned PMI and I think this is a perfect time just to talk about this just for one second. I know we're diverting a little bit from the different type of mortgages. Home prices have gone up. If I'm going back from memory, I don't think this works with FHA, but if you have a conventional mortgage you took two years ago, maybe you only put 10% down, you're paying PMI, your property value has gone up $450 in an appraisal. What does that do for you?
It could drop that PMI payment itself so a house that range, you might be paying 275, 300 bucks a month in PMI. So for the last two years, just living there with the appreciation in this market, going up, it could be the opportunity to drop that monthly payment and savings.
And how do they go about doing that? How do they tell the mortgage company, "Hey, my home value has gone up."
Sure. So they want to just reach directly to their servicer. So just depend whoever's sending them the monthly statement each month. It's typically the 1-800 number on there. Tell them they just want a reassessment regarding the value and to try to drop the PMI on the property.
No, I think FHA it's mandatory for what seven years?
It's 11 years. If you put less than I think 10% down, sometimes there's a couple funky rules with FHA, but typically on the lower down payment, if they put 3.5% down, it's on for at least 11 years.
Right. So a little bit different than the conventional type of word. You have to have it for so many years.
Yeah. It's in stone regardless even if you put 50% down, they're still going to make it put the PMI on it.
You guys do FHA?
We do. Yep. So with FHA, it's another great program out there which just gives you more options out there. You'll typically see it used by first time, home buyers, 3.5% down and a lot more flexibility in underwriting. So FHA and their guarantee on these loans, they want to promote home ownership. So you'll see a little bit more clearance on your debt to income ratios. So whereas if it might not fit that conventional mold, they'll give you a little bit more room there and the same with credit scores too. So they're a lot more flexible on credit scores and they deliver awesome rates too. So you'll get a great product.
What's the maximum where you can get on FHA now?
County limits again. Yep. So you got to just check within your state, each county, how far it'll go up, but, and they just increase those recently as well, not too long ago. So most, especially in New Jersey, most of them all bumped up a 100,000 plus.
Wow. And then we always have our conventional type of mortgages.
Yep and then conventional in play too. So, and a lot of people don't realize it, but conventional has a great first time home buyer program too, where you could just put 3% down on conventional action. So first time home buyers can take advantage of that for any other typical transaction on single family homes. You're looking at 5% down, so and then and then I think that's the advantage working with a broker and having those different investors out there, you want to figure out which lane to go down.
You mentioned the 5% down, let's talk about gifting?
Sure. So, and that's another thing so FHA will give you a little bit more room there so where you could get seller concessions as well. So through these both programs, conventional and FHA, you can get gifts from family towards down payment, closing costs. FHA a little bit more liberal in their guidelines. So you can get larger seller concessions as well. So sometimes the seller can even give you that concession to pay for your closing costs as well.
So what he's talking about is sellers assist. As some of us might have heard of it, the problem you have right now we're recording this podcast March 23rd, 2022. It is a seller's market out there.
It's unlike, I have not seen a concession on a contract in quite a while.
I have a friend right now looking by an expensive property. And he called me and he said, what's your opinion about waving home inspection? And I said to him, I personally would not waive a home inspection, even though everyone is who's selling is looking for that. I just might make it a high number, like 20, $30,000 because I still need to protect my family. I can't go into a house and find out there's a foundation problem and cost me $125,000 and plus to move out.
I like that solution, Rich, because in talking to some real estate folks in my world is that, well, you want that home inspection you want that security, like you said for your family, but at the same time, if you're competing against other buyers who are, "Oh no, I don't need the home inspection." What do you do? So I like that solution. You're the best of both worlds there.
It's interesting in Pennsylvania, where I live, if you get a home inspection and you give that list to the home buyer for contractually to repair and they don't. Technically the banks should not close that mortgage. Hmm. So you would think that the banks want this home inspection.
But it is certainly a seller's market. He said that actually leads into a question that I had for Bobby, which is in this crazy market as you said, recording this March 23rd of 22, if somebody is a little bit gun shy about buying a new home, I'm not asking you to make any predictions about the market or anything like that, Bobby. But if somebody's a little nervous about maybe looking to get into a new home, because it is such a seller's market right now, what advice would you have for them? Just generally speaking?
I think you have to be comfortable. You really got to look at your budget that's where it comes down to. You don't want to get in over your head. Typically, the bank is going to they're protecting their investment on the collateral itself so they don't give you a ton of room out there to overextend yourself. But nonetheless, we see the prices, everything out there right now, continuing to go up. So you still to want to be able to live. I've always said you don't want to be able to buy the house, but you also want to put furniture in it the day that you moved in.
You don't want to be house poor. Right?
You got it. Yep.
I always tell clients when we're talking about paying off the mortgage, you're not paying off the mortgage or debt in retirement. I always say you can go from eating a steak to mac and cheese, but you don't want to go from living from your house to a tent. So you got to make sure that you can budget your retirement or your expenses. Especially young people not only should they get their dream homes, but they need to start saving monthly for their 401ks or IRAs, their shorter term goals. They can't just go house poor.
Right. Yeah. So if they're spending that extra 15 to 20% for a house, that's probably the money typically they would've been putting in the bank and saving.
So Bobby, I know we don't have time to go through every single one. I'm just want to rattle off. Do you do nonconforming?
We do. So we've got portfolio products as well. So if they don't fit that Fannie Mae, Fred Mac, Jenny Mae mold, we've got solutions for that as well.
Reverse mortgages nationwide there and you're starting to see some, some hybrid products come back into the mix now. So other investors are getting back out there you're starting to see bank statement programs. The last 10 years has been difficult for self-employed borrowers to get financing on these loans here. So, they're looking at bank statements now, which is awesome. So, if they could see that the business is doing well has a good positive cash flow, sufficient down payment, credit scores, and the deal makes sense. These programs are opening up as well.
That's great. It's interesting, a few of the deals I saw over the last two years with my clients, I have clients who are very asset rich but they don't have income and they wanted to refinance. I'm thinking of this particular couple and the mortgage company required me to start taking monthly distributions from their assets...
To count it.
Just to show as revenue which is crazy and they wanted schedules to show that it can last for at least two years. Is that still going on?
And so those Fannie Mae, Freddie Mac those programs with the tighter playbooks still want to see that income. They want to see it, that it's getting taxed. So, but there's other, these nonconforming products are out there. There's asset driven programs out there now. So, it's starting to open up for those specific clients, which is awesome.
So Bobby, I'm going to steal Jags line. I think I did this last time. If somebody wants to get a hold of you.
Maybe this is my new thing.
Hey, you've already stolen it. You can't steal it again. It's yours now.
It's mine now? So Bobby, I think this is great. I appreciate you taking the time to come on our podcast and talk about these renovation loans.
Oh my pleasure.
But if somebody wants to reach out to you and learn more about it, possibly get a proposal quote. Sure. How do they reach you.
Cell phone, right. To the cell. They could call, text anytime, 908-295-8609. The technology at Guaranteed Rate is amazing too. So a simple text. I've done transactions through the phone and computer without ever speaking to the client. That's kind of a brave new world out there.
Great for us millennial buyers they hate the phone.
That's it and I'm cringing.
Yeah. Nobody wants to talk. So they just want to text. And what a simple text, you send a mortgage application over. Clients are able to fill it out in 20, 30 minutes and you've got every document and bit of information you need to apply for a mortgage at your fingertips. So it's pretty amazing.
With your permission. We're going to put your phone number and your email address if that's okay on our show notes.
That would be great. And that would appreciate
It is funny as a quick aside. So I was born in 1980. My wife was born in 1978, so we tease each other. I tease her about being a Gen Xer and she teases me about being a millennial.
The big gap between the two, right?
Yeah, even though we're both on that border. Unless it's something for my business, I hate making a phone call. You give me a chance to do something online or a chat or a text. I will take that every single time. So I love that you're flexible like that, Bob, and you can deal with clients of all ages and preferences when it comes to communication.
Sure. Absolutely. And then it's the other thing too, with our technology just came out was eClose as well. So especially during the pandemic. I know when I bought my house, it was right before COVID took off. We closed in our driveway of the new house. Nobody knew what to do. Somehow they sent the wire, title agent brought the package and he didn't know whether to even stand near you go close to you. He said, start on the trunk of the car and we sign it there. But we can eClose these transactions from anywhere, which is especially important going back to the VA loans. So, if a soldier's deployed and they're in the middle buying a house, what do you do?
Oh, wow. Yeah, that's great.
We send an email.
Or even if they were injured in war and they're not able to understand get around very well. That might be great too. Yeah.
What is the average turnaround for a refi now? Or let's say these renovation loans?
Guaranteed Rate it's 10 days or bust. So we try to turn these loans around in 10 days. Renovation you'll see a little bit more time.
You're saying someone who wants to refinance. Yep. They get their rate lock today. Yep. They have 10 days to close it?
That's our goal.
So, that means they have to get you all the documents. You have to come back with any issues.
That's so from time of application to clear to close is our goal.
Yep. So unlike anything, the cleaner file you put in upfront. So if you put your application in, you provide your pay stubs, your W2s, tax returns, assets, all that. It's going to an underwriter in 24, 48 hours to get that initial review if we're missing anything we're chasing it down.
And your company spits out the best banks to write with.
All right. Bobby Dmuchowski, VP of mortgage lending at Guaranteed Rate MLS, 181885. Thank you for your time today. Now that I've covered the legal disclaimer, Rich, let's give our listeners a way to contact you if they want to talk to you about their financial future at New Century.
Sure. As we all pointed out that I'm the old guy in this group, I don't mind you picking up the telephone and actually calling me. My phone number is (609) 924-2049 extension 126. If I don't pick up, just hit zero, ask one of the staff in my office to schedule a call with me. I'll try to schedule it that same day or the next day the latest. You can always shoot me an email at email@example.com. Of course, you can always go to the website at ncfg.com and there's a link to schedule a meeting right there.
Thank you both for the time today. Really great information. We'll talk again soon.
Appreciate it. Take care.
Richard Oring's branch office is 1 Airport Place, Princeton, New Jersey 08540. The branch phone number is 609-924-2049. Securities offered through Royal Alliance Associates, Inc., member FINRA SIPC. Advisory services offered through New Century Financial Group, LLC. Our registered investment advisor not affiliated with Royal Alliance Associates, Inc.
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