0:00:00.0 ANNOUNCER: The financial views and opinions expressed by the host and guest on this program do not necessarily reflect the viewpoints of 107.7 The Bronc, Rider University or Certified Wealth Management and Investment. The material discussed is not designed to provide the listeners with individual financial, legal or tax advice.
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0:00:26.8 ANNOUNCER: It’s time to grow your bank as 107.7 The Bronc presents Master Your Finances with Kurt Baker, a certified financial planner professional with Certified Wealth Management and Investment. Kurt and his team of financial guests will help you turn those singles into seas of green and plan your financial future accordingly. Now, here is your money managing host for the hour Kurt Baker.
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0:00:53.8 Kurt Baker: Are you fully aware of the financing options available for residential real estate and the usual goods and services to look for when buying, refinancing, or making home improvements? Does it make sense to wait to purchase a home later and rent for now? Do you understand how the Federal Reserve’s actions may impact short-term interest rates, the consumer rate environment, and viable alternatives to these drivers? Today, you will learn what questions to ask when looking into home financing, where the money comes from to buy, refinance or improve a home, and what variables influence lenders to make sound decisions. With over 30 years of experience working at different banks in the Princeton region, John Geodecke, is a mortgage banking professional, and the current co-chair of the Rutgers University Board of Equine Advancement, who will help you feel empowered and consumer confidence in the choices available. John, thanks for coming, sir.
0:02:01.8 John Geodecke: Oh. You’re welcome, Kurt. It’s great to be here.
0:02:02.5 Kurt Baker: Man. It’s awesome, man. It’s been a little bit of a wild ride. So why don’t we start. How it started, 30 years. That’s a long time.
0:02:09.0 John Geodecke: Yes.
0:02:09.6 Kurt Baker: So are you the guy that had the abacus when you were in the crib, just like adding stuff up?
0:02:13.2 John Geodecke: It’s funny you should ask. I have an HP 12C calculator that I’ve had for those 30 years. So I still use the same calculator.
0:02:20.8 Kurt Baker: They still work great too, don’t they?
0:02:21.9 John Geodecke: They do. Yeah, and you mentioned that I’m involved with Rutgers through their Equine Science Center, is kind of a divergence of opportunity in the financial world to bring that to that role.
0:02:40.2 Kurt Baker: Yeah, absolutely.
0:02:42.5 John Geodecke: But yeah, horses and mortgages don’t often go together.
0:02:44.3 Kurt Baker: The horses and mortgages is like, okay, I’m not really piecing that together exactly. Do you bring them in on a horse-drawn carriage, is that what happens? So the paperwork come across that way?
0:02:52.9 John Geodecke: No, sir, we want to happen much quicker.
0:02:57.1 Kurt Baker: Okay, alright, that sounds good, I like that.
0:02:58.5 John Geodecke: Great, great. But yeah, so my role over the last 30 years has been basically at that sort of consumer level retail direct to working with clients and kind of like the Wheel of Fortune, I can’t mention on air my current employer, but it’s a brand name bank in the area that does, it does great work in this type of field, but across all sort of financial services, if you will, but my expertise is on the lending side, and I really like and enjoy working with clients through that process. Sometimes the process is real quick because somebody comes in, their contract in hand and say, “I’ve already made the decision to purchase a home, and I’m already approved through multiple people, or I wanna be approved through you real quickly,” but other people need to get some education on it and get prepared for it, so it’s fun to do both, and sometimes they’re big ones, sometimes they’re small ones, sometimes they’re right here in our area, sometimes they’re in a different state, because somebody’s moving out. We’re planning a project.
0:04:00.1 Kurt Baker: Well, that’s awesome. So 30 years you’ve been doing this. So what got you motivated… ‘Cause this is one of those industries where you don’t… It’s not like a fire fighter or a police, where you say that’s what I’m gonna be when I grow up one day. So kind of how did you get hooked into this? I know everybody, there’s basically a lot of people I know in the business, once they get in, it’s like you can’t freaking get out you like it too much. It’s like…
0:04:21.0 John Geodecke: There are those moments.
0:04:21.4 Kurt Baker: Yeah so. But other times you’re like, I don’t know if I like this.
0:04:23.8 John Geodecke: And there are those moments.
0:04:26.8 Kurt Baker: So what was your initial exposure to this and why did you say let me just give this a shot, right?
0:04:32.7 John Geodecke: Well, back in the day, when I got my start, I was thinking of going to law school. And I was with a bunch of attorneys we were all in the softball league, I won’t say I was the ringer, but I was playing on a good softball team up in Essex County, and a good friend of mine said, “John, we don’t need more attorneys, but if what you want is a career, maybe you should talk to some friends of mine who are in this mortgage industry.” So he made the introduction, and I was hooked from the start because every situation involves similar processes or similar discussions, but every situation is different based upon the client’s needs. So you really get to know people through that process, some of whom I’ve known, and we use a phrase, and some people do in the financial industry, clients for life. Some clients you’ve known for years and it gets scary, ’cause now you’re doing loans for their kids.
0:05:27.0 Kurt Baker: Right. Yeah, that’s a little… I know we’re similar ages like… Oh wow, this is interesting.
0:05:31.4 John Geodecke: Right. So it is a people industry, and it’s an industry that everyone at some point in their life goes through a thought process of saying, “Okay, housing is core to my family and who I am and where I am.” So being part of that discussion, whether it’s the discussion about buying versus renting or whether it’s, no, we really want to buy, then leads into the discussion about how to prepare and what to look for and what to ask for.
0:06:05.3 Kurt Baker: So how do you start that process? Somebody out there is interested in… Especially right now, because we’ve had a big change in the market, let’s just say it nicely, and some people that were ready to go, they’re like, “For one reason other,” especially the buyers’ side, the sellers are like… They’re like jumping for joy ’cause they can just… Within a few days, the house is gone or whatever the case may be, whereas the buyers now, they might have been basically ready to go, or thought they were ready to go, and also they find out, “Wow, not only did interest rates essentially double, but the price of the house has gone up significantly as well.” So we start incorporating these different factors together, it becomes a little bit troublesome for somebody who was just getting ready to do something all the sudden now it’s harder, now they just can’t quite grab what they’re trying to grab or they’re gonna be looking for something significantly different than they might have been looking for originally.
0:06:55.0 John Geodecke: Yeah, he headwinds that exist right now for a home buyer across all those things that you just mentioned. So I think the important thing is primarily understanding and then helping to define the numbers, but understanding that this is a place in an area where you’re gonna be some time, and that you understand that by committing to purchase a home, you’re committing to making that essential part of your life. We often look at the investment of buying a home, and it’s understandable, but I think if you start with the commitment to say, “This is where I’m going to live, this is where I want my family to live, and this home will be central to it,” the numbers are the numbers.
0:07:39.3 John Geodecke: And yeah, right now, there is a lack of supply in many, many markets, not just here in the Mercer region, but also across the country. And there are also this issue of, well, home prices have risen and risen to a point where it’s not affordable as it once was if I looked at this a year ago, or for that matter, five years ago. So I think that the main point starts with that commitment to doing it, and then the numbers follow, so having a realistic discussion about affordability. But we’re also looking at the same affordability issues on the rental side. Rents are rising too in many markets. So the great thing about the math is that it shows in conversation what can happen as a result of owning a home and the right home over a period of time. And yeah, there are those moments historically, where home prices begin to go the other way.
0:08:37.4 Kurt Baker: Oh yeah, I was here in ’08 too.
0:08:38.9 John Geodecke: Right. But I think the difference between now and ’08 is that there was an over-supply to the degree that we can monitor how many homes are on the market and the absorption rates as they’re described. The difference between now and then was, now there is unlimited supply, the homes aren’t being built and created at the level that they were being created leading up to 2008.
0:09:03.5 Kurt Baker: Yeah, ’cause they’re suffering from essentially what we’d call, I guess generically, the supply chain issue, right? ‘Cause they’re not really ramped up like builders. I read a story a while back where a new construction… Some division was… They were closing the houses with plywood in front of the garage doors because they were waiting six months to get the garage doors, so that’s, is that still filtering out where these new houses… ‘Cause that’s one of the solvers, right? Once you start adding more capacity, then you’re gonna have more competition and then the buyers have some more choices, sellers aren’t quite as much control. Do you see any of that starting to happen where maybe developers are like, “Hey, we just start get back out there again, build some new ones.”?
0:09:41.0 John Geodecke: In some regions and in some states, not necessarily New Jersey, because, A, there’s a lack of buildable space and, B, the regulations for builders in New Jersey have driven some of the larger ones to places like Pennsylvania, and even the Carolinas. You can look across the country and say, “This is where the big builders are in these big projects.”
0:10:02.3 Kurt Baker: Okay, so New Jersey, ’cause we’re the most densely populated state, so that kinda means we’re running out of room. I know the town I live in, I know it’s all laid out, they’re done. There’s no other place to go anymore, so if you wanna build something you’re gonna end up tearing something down right, so that happens a lot more in a place like New Jersey than maybe Pennsylvania, where you’ve got too large city and a lot of empty space that’s fairly rural where there’s a lot of capacity as far as land availability and things like that. So each region is a little different, so how do people here start to prep? So you have to start somewhere. So what would you recommend some of the first steps now that we kinda know the market has definitely shifted, but people are definitely doing transactions, things are definitely happening?
0:10:43.1 John Geodecke: Right. And I think it’s that awareness within the area that you want to purchase or that you may wanna move. A realtor associate can be real helpful to say, “Look, based upon what you’re telling me is important in what you want in a home, this is where you can find that, and there is a scope of housing available.” I think we all have this vision of moving into the dream home, but I remember back in my day, starting out with my family, it was, “Well, this is a home that fits our needs now, but our needs may change and those could change, I don’t know, five, six, seven years later.” And indeed they did. So the home that we had as our first home, actually it’s our second home, because we started with the Town House, moved to a single family home and then moved up to a larger home. So I think that that’s where the partners that you choose can be real helpful because you can say, “This is what we are seeking and is it available now, or when it becomes available let us know because we wanna move quickly.”
0:11:43.4 Kurt Baker: Got it. Well, that’s awesome, John. We’re gonna take a quick break. You’re listening to Master Your Finances.
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0:11:53.8 ANNOUNCER: Yeah. You’ve got loads of money, but it’s all about how you manage it. Let’s get back to learning how to grow your green with with Kurt Baker, of Certified Wealth Management & Investment only on Master Your Finances.
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0:12:07.3 Kurt Baker: Welcome back. You’re listening to Master Your Finance. I’m here with John Geodecke, and we’re talking about financing, getting ready for home. And as the market has changed, so must we as consumers. Whether you’re buying a home or you’re selling it, you have to be kind of aware of that. Interest rates have gone up a little bit, but actually they’re kind of more close to the normal historic range, even though everybody’s like, “Oh, this is really high, high.” Well, yeah, 5 1/2, 6% is high if you’re used to 2 1/2, 3%, but if you look historically, at least I remember mother standing in line to get 10.95% bond money, and she was ecstatic. And nowadays people are like, “What do you mean 10.95?” But back then, that was what you did. So it’s all can be worked through.
0:12:50.3 Kurt Baker: Some of the things I’ve seen is this product that we used to hear about a lot is starting to come back a little more, the ARM product, where you can do something a little differently. So there’s other things out there. Maybe people don’t understand, but just let’s start with the real basics, because I know there are people out there that were waiting during the shutdown, and they’re like, “Hey, I wanna go buy a house,” but literally, you couldn’t really show a house. You got a video tour and things like that. It was kind of hard to even get access at one point, but now things are opening up, market’s getting back to normal, people are starting to feeling more confident, their jobs are kind of rolling along, and so they’re getting serious. That’s one of the reasons, I think, the market has done what it’s done. But if you’re one of those ones that’s prepping, what would you recommend to a young couple or to anybody that wants to move from rental or move out of their parents’ home or whatever the case may be, and go out on their own and own that piece of property?
0:13:36.8 John Geodecke: Correct. And I think there’s that ramp up to the education about home ownership, and everyone has a home ownership experience. Typically, parents get involved and start telling their kids, “Yeah, you should do this,” or, “Here are the things to look out to,” and that’s wonderful advice. Relatives weigh in. Sometimes they’ll help too. So people will know, “Okay, you’re gonna buy a home. You’ve got a cash need here. You’re gonna need a down payment and closing costs, and once you acquire that home, you may wanna furnish it, fix it up a little bit, buy the new car.” All those things that statistically have occurred as a result of the decision to buy a home, so being prepared for that is important. But we’ve noticed, and I think we can all speak to the fact that when you commit to doing that, it becomes essential part of your life, including your family life. So it is something that is treasured as a result, and you take care of it, and it grows in hopefully in value over time, and typically, it has. We can look at appreciation rates and say, “Yeah, that’s where a lot of people have built equity and built value over the years because they bought at a time in the market at X date and it increased in value over time.” So we’ll call that the appreciable rate.
0:14:53.2 John Geodecke: And yeah, if you look at rates of appreciation across the country, they’ve been at a higher level in the last few years than they typically do, but I think 10% has been a number that’s floated around a lot. 10% appreciation in a year is a lot.
0:15:10.1 Kurt Baker: Correct.
0:15:10.2 John Geodecke: But, okay, maybe maybe a more modest one is to look at to plan for the future is 2, 3% over time. So I think back to your question, preparing for the process involves understanding your finances to say, “Well, what type of income do you receive? How is your credit? Do you have the assets to make this happen because you’ll need a down payment, you’ll need closing costs, and in some cases, you’ll need reserves. You’ll need… And you’ll want to have them. Money is left over in your accounts. You’re not emptying them out to buy this home.
0:15:45.8 Kurt Baker: Right.
0:15:46.2 John Geodecke: So understanding those, then it becomes that discussion with a realtor to say, “Well, what about the sort of housing that’s out there?” We’ll call it the collateral for the mortgage, and that is that home. “Is it reasonable to expect that we can find a home in this price point?” That can then dictate what your down payment is. And with these property taxes, this is what your monthly expense is going to be. So defining in advance of finding that home is my recommendation and many professionals, because last thing you wanna do is cross the threshold looking at homes, fall in love with something you wanna buy and then realise, “Yeah, this is out of our price point,” or, “I’m not ready to do this, but my heart is. I wanna commit to this, but I’m not financially prepared to make this happen as it needs to happen right now at a very quick pace.”
0:16:40.5 Kurt Baker: Right. So a lot of times, people, in order to get ready for this process, they’ll go in and kinda do a dry run where they get qualified ahead of time, so now you go, “Okay, here’s my income.” So you got a couple of areas, you’re right. So you’ve got the one person who maybe works for a large Fortune 500 company, that’s one person, and you got the other person, like they just started up an online…
0:17:00.7 John Geodecke: They’re self-employed.
0:17:01.6 Kurt Baker: Storefront, and they’re like, “Okay. Well, now what do I do?” So do you wanna give us a little bit, a difference and maybe the different types of ways people would get income and how that even impacts them as far as being able. ‘Cause first-time home buyers, you know that through this, so there’s a couple of things. We’ll start with the income part of it. So what should they do to kinda understand how their income works? Because some people will say, “Hey, I started this business. I’m doing really great. I’d like to go buy a house now.” And so that may not be quite the time they can do it. There’s a little more that has to go into that. You wanna kinda describe that process a little bit?
0:17:33.2 John Geodecke: Sure. My recommendation, it’s been one that’s been a standard, is whether you’re renting or purchasing, what is your income, and how does it come to you? And are you spending more than maybe a quarter percent of your monthly income in housing or for housing?
0:17:47.0 Kurt Baker: Right.
0:17:48.6 John Geodecke: We can all look at and remember times in our own lives where yeah I was paying a little bit more for housing than I was bringing in. I didn’t have a lot of extra money left over at the end of the month, but I made it happen. On the mortgage side, it’s an examination of that by ultimately an underwriter somewhere that says, “Okay, does the math work here?” And the math can vary, it’s not necessarily 25% of your monthly gross income, but what is your income? And that’s part of the dialogue with any prospective home buyer is, “Well, here’s where you are now. It will change over time, and hopefully, particularly with the younger borrower or younger borrowers, plural… ” You can talk about their increase is as a result of the job that they have… Well, there’s discretionary income bonuses or commissions.
0:18:37.7 John Geodecke: In the case of a self-employed borrower it’s not often a number that they can readily define. They know what they’re bringing in perhaps in cash. But for banks and lenders it’s what’s on the tax return and what’s on the preceding two years worth of tax returns. So it can present some stumbling blocks for someone who’s self-employed, that small business owner who is just starting out who doesn’t have that two years worth of tax returns, whereas somebody who just got the job offer out of college and has a salary that will commence on September 15th, a lender can use that and say, “Well, okay, as of September 15th, we know what your salary is because it’s part of the offer letter.” So the math is easier to define.
0:19:19.8 Kurt Baker: So we get the offer, take the offer, buy the house [laughter] and then get the job and not nothing next week, [laughter] but its something to do with self-employed, if you want to.
0:19:27.6 John Geodecke: Or again just prepare yourself for that time in moment where this is right for you and entered in. So we talked earlier about that discussion, we can call that discussion a pre-qualification. The next step would be the formal pre-approval where you’re saying to the lender, “Okay, go ahead and pull my credit, let’s look at this, and I want a more formal letter that I could use if I’m out actively home buying.”
0:19:53.4 Kurt Baker: So you just said, “Well, now we pull the credit we look at it.” So what’s the significance of actually taking a look at that, ’cause some people are like, “I have no idea what’s going on with my credit.” Even nowadays where they have a lot of services where you can see it yourself, that didn’t use to be the case years ago, but… So what are you looking for when somebody does that, what are the factors that are important when you look at that initially?
0:20:11.6 John Geodecke: Well, ultimately an underwriter somewhere or a system backed by an underwriter is looking to see that this person has this sort of character based upon their credit, we’ll define that oftentimes by credit score. So I think anyone with a credit score below 620 is at a point in their credit history where they ought to look at what’s being reported to see if there are some things that they can do to up that score, because otherwise a lender can say, “Well, you don’t meet the minimum credit score. Your income’s great, you have the assets, but you don’t meet the minimum credit score.” Or you’re limited now to borrowing using this one type of loan that’s been built for somebody who has credit scores below a certain level. So I think that understanding your credit is an important aspect to enter into the process of pre-qualification with. And yeah, there are those services, but there’s also annualcreditreport.com, any consumer can… Any of us can go online and get a copy of what has been reported in my name this year, and I don’t have to subscribe to a service to get that, that’s…
0:21:19.1 Kurt Baker: That’s the true free version. Right?
0:21:22.1 John Geodecke: That’s true free version. And as a result, you can see, “Well, hey, everything looks in order, I checked Credit Karma, my score seems to be in line, or many of the banks where I have a credit card or will give me my score if I ask for it, my FICO Scores.” That’s all.
0:21:36.4 Kurt Baker: Right. Yeah, most apps now that if you have a credit card, it’ll give you that option, “Would you like to know what your current score?” ‘Cause they want to be higher too. So the bottom line is what you’re saying, so basically, for most programs, you wanna be at least 620 or above, but even there, if you’re a little, the higher you are, so to speak on that scale, it affects the pricing a little bit and it affects some of the programming a little bit. Right? So the idea is you wanna really optimise that as best you can, and so what are some of the ways somebody optimises the credit report itself? So basically, if you’re… Let’s say I have a credit limit of, I don’t know, $20,000 or something. So what can I do with that if I go, “Wow, I’m paying my payments on time.” But let’s say I owe $15,000 on the thing, so what could I do in that case to maybe bring that score up a little bit if I wanna try to help out with buying the house?
0:22:26.8 John Geodecke: Well, there are companies and people who work for those companies that provide that type of advice. My experience has been if you have a $20,000 line of credit and you owe $15,000, even though you make that payment on time, your credit score is probably a little lower than it would be if your balance was reduced to maybe $5000 on that card. So not only are you paying a higher rate every month in interest fees, but yeah, your credit score isn’t as high as it would be, even though you pay on time, and you’ve had this credit card because you were maxed out or you were at a higher level of the balance that you…
0:23:02.6 Kurt Baker: The utilisation of ratio. Right? So yeah, you wanna… So you wanna try to get that down a little bit, so.
0:23:07.8 John Geodecke: Correct.
0:23:09.1 Kurt Baker: So what? You can just… You could either pay it down, or you can say, “Hey, Mr. Bank” or “Miss Bank.” However you wanna say it. “Instead of $20000, maybe I’d like to go to $25000, at least to get my utilisation rate.” But don’t spend the money, frankly, if you pay it down to five, then it’s, you got two ways to go at it, which might help out a little bit.
0:23:28.1 John Geodecke: And I think paying it down to five makes more sense particularly with a higher rate environment where you’re being charged more in finance, costs to maintain that balance at $15000. So that would be my recommendations.
0:23:38.8 Kurt Baker: Absolutely.
0:23:39.3 John Geodecke: Yeah, take a look at this and get yourself prepared.
0:23:41.2 Kurt Baker: Absolutely. Well, John, we’re gonna take another quick break. You’re listening to Master Your Finances.
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0:23:44.8 ANNOUNCER: We’re not just doing this for money, we’re doing it for a shit load of money.
0:23:49.6 ANNOUNCER: If you want to learn how to make and manage that kind of money, turn the volume up as we get back to Master Your Finances with Kurt Baker of Certified Wealth Management and Investment.
0:24:01.6 Kurt Baker: Welcome back, you’re listening to Master Your Finances. I’m here with John Geodecke, and we’re talking about financing and buying a home right now, and some of the options there. There’s many people out there, they’ve been waiting, they wanna rent, they had been renting maybe, and they noticed that rent went up a little bit, start thinking, “Well, maybe I wanna buy.” And then they notice they wanna buy and maybe the house went up too. So it’s a little bit frustrating, but there are some steps you can take, and we went over some of the basics of the income side of it, where basically, if you’re self-employed, it takes usually about two years to get that all set up, if you’re self-employed, you just started a career that way, or if you got out of college, you get a nice job that pays a W-2 regular paycheck, then that might be a little quicker way to get qualified because they can use that right away because that’s a stable form of income that they can rely on, and as far as the credit, you wanna make sure you got a good score and you wanna get that utilisation rate down to something reasonable, which will help keep your score up higher. So once you do that and don’t take on extra debt unnecessarily, now you’re ready from the income and the credit, but of course, you might need a little bit of money, and one of things I’ve…
0:25:02.6 Kurt Baker: There’s a common misunderstanding that I’ve come across is, I think I need 25% the house to buy this thing. Which is nice if you have it, but it’s not necessarily true. If you have a very strong income, there are ways to kinda manage. So what do you wanna tell us a little bit about the asset side and how that impacts the mortgage itself?
0:25:21.7 John Geodecke: Great. So on the asset side, you need the cash to purchase a home, and you want that cash on deposit. So you wanna be able to show your lender that, yes, this has been on deposit in my account, or is coming to my account, and these are the sources from which it’s coming. It could be a gift from a relative, it could be a grant. So for many of the first-time home buyers in many markets, but certainly in New Jersey, we’ll be very specific, you could buy a home with as little as 3% down. So that is your initial equity contribution to the home. And we talked earlier about the home appreciating, so your home appreciation as well as the component of your payment that is reducing the mortgage creates greater equity. So your initial equity is the down payment. That’s 3%.
0:26:10.6 Kurt Baker: So yeah, it would be wonderful if you could have a larger down payment ’cause it means you’re borrowing less and your equity in that home is greater. But that may not be, and is in many cases, the opportunity for many in the first time of buying a home, so they’ll contribute that initial down payment and borrow 97% of the price of the home. So you’ll need closing costs, so you need to budget, “How much does it cost to hire an attorney to help me look at the contract, and how much is it gonna cost me to pay the title agent?” Those are all things that a lender in advance of an actual mortgage application can walk somebody through and say, “Well, this is a budget, and here’s what it’s gonna look like, not only for the monthly mortgage payment, but in terms of that cash down payment.” Assets, again, for the purchase need to be ultimately brought to closing [chuckle] in a cash form so that the lender is gonna look to see that that cash was on deposit in an account somewhere, whether it’s a major bank or maybe it’s an investment account that is being… A portion of it is being turned into cash liquidated from an equity position or a stock position, or it could be, as I said earlier, a check from a relative that’s documented as a gift.
0:27:29.8 Kurt Baker: Right. And when you said cash, and you kind of explained, I wanna make sure we realise that that’s not actual hundreds in a bag, you have to actually be able to source the cash, like, where did it come from, which I’m glad you clarified, because I know years ago when I was younger, [laughter] literally, I remember talking to a teller agent once, and she was like, “Yeah, they came and they bought cash. Although they sat down for like two hours and counted out like hundred dollars of bills.” [laughter]
0:27:52.8 John Geodecke: Suitcase. Right.
0:27:56.8 Kurt Baker: I was like, “I don’t know. This sounds a little bit shady to me. [laughter] This doesn’t sound good.” Can’t do that stuff anymore ’cause they track all this stuff.
0:28:01.0 John Geodecke: Yeah, and that’s the anti-money laundering regulations.
0:28:05.4 Kurt Baker: Yeah, good old AML. I’m very familiar with that, so it’s good. [laughter]
0:28:08.0 John Geodecke: Alright, good. So we all get… We’re all watched.
0:28:09.3 Kurt Baker: Yeah, so you have to really source all of this. So and other things you point out that I think really important is that sometimes they go, “Well, I don’t have all this money I need,” but maybe you’re fortunate and the parents can help you out, relatives of some sort. And you also mentioned there are… Some people, they qualify for different grant programs. Do you wanna touch on a little bit just like what that means, what is the grant, and how does that kind of basically work?
0:28:31.7 John Geodecke: Well, as we’re on Wheel of Fortune, I can’t mention my employer’s name, [laughter] but we have a grant program for first-time home buyers. If the buyer is qualified for that grant, it’s a grant for $3000. There’s a grant in some areas for up to $7500. So that’s coming through a lender, but it could also come through a county or the state. If we look at New Jersey, there are many counties that have a grant program. So looking at a county website and seeing if there is a housing program, and if there is a specific grant program, going to the New Jersey State website, you can look up this type of material to say, “Does a grant program exist, and am I qualified for it?” So grants are one way to supplement the down payment. Another way is to also look at the deal, and in some markets at sometimes, you can say to a seller, “Well, I’ll purchase your home for x number of dollars, but I need you to contribute $3000, $5000, $8000 towards my closing costs.” So the day of closing, from the proceeds of the purchase come funds through the seller to pay some of those closing costs. So there are ways to look at the budget and say, “Okay, if you can’t meet it, then there are ways to supplement the cost of doing this, so you can, with the money that you do have, purchase a home, and here’s how you could do it.”
0:29:58.5 Kurt Baker: Yeah, that’s awesome. Yeah, so there’s definitely ways to kind of work around… If you don’t feel like you have quite enough money, if you feel like your income is pretty strong, there are ways to kind of structure around it that is really what we’re getting to, and so it’s important to understand there’s some things out there that you might qualify for. So now we have our income and our credit’s all set, our assets are good. Now we’re gonna go out and look at what we call the last piece, the collateral, right? The house or the condo, or whatever it might be. So you wanna give some thoughts about how that process works, and what do they do as far as that, the actual property as far as the lender side is concerned. I realise the realtor is gonna walk them through and show them the house, but the lender has a viewpoint on that too, so what are some things that maybe a lender’s gonna look for, the realtor’s like, “Yeah, that’s fine, don’t worry about it?” Or what do you wanna pay attention to when you look at the collateral itself?
0:30:45.8 John Geodecke: Sure. So the collateral assessment or review for a lender, we’ll call it an appraisal because that’s what’s ordered shortly after an application is made, and the lender sends out a third party licensed appraiser to look at the home, and typically, that appraiser is determining a value based upon what is sold and closed in the last six months that’s of similar style and size to the home in question. So effectively, the appraiser is providing a market analysis of value. Now, they will look at the home and obviously they’re taking pictures for a lender, but they are not a licensed engineer and they say that, “Look, I’m appraising this home to value.” So effectively, the lender is looking at that. Now, if the appraiser says, “Well, look in the picture, you can see there’s shingles missing on the roof. I noticed a crack in the foundation that was very visible, or water stain on the side of a room,” then effectively, a lender may say, “Well, we wanna know more about this issue.”
0:31:45.1 John Geodecke: And I think it’s wise as a buyer of a home to also look at getting inspections of a home. Having hiring a licensed inspector, or a licensed contractor to come out, an engineer to look at the home and tell you, “Well, look, here’s what I see as an engineer. I see a 10-year-old water heater. The expected life of a water heater might be 15 years. So some time in the next five years you might have the expense of replacing this.” Or, “Hey, I noticed a water stain, but it looks like what caused the water has been repaired and replaced.”
0:32:20.0 John Geodecke: So hiring a licensed engineer early on as a home buyer is a wise decision, because then you know what you’re buying and you know, effectively, some of the maintenance issues you may have. I’ve seen cases where someone’s buying an older home and they’ll see knob-and-tube wiring. So, effectively, that’s a major township issue in many townships, because it’s a safety issue. And lenders are concerned about the health and safety of their new homeowner who’s paying this mortgage. So they’ll look at the appraisal to see if there’s any sign of that, and ask the borrower, perhaps, for an engineer’s report, because the engineer’s report will often pick that sort of defect up and say, “Yeah, this needs to be repaired, replaced or removed.”
0:33:08.6 Kurt Baker: Yeah. So you bring up some very important points, I think, is that, one, the appraisal is being done, in this case, for the benefit of the lender, because they wanna know that the house is in good shape from a health and safety perspective, because they have a vested interest in this. If they’re lending you 97% of the value of this house, they wanna know that, one, you move in and you can actually live there, and it’s safe for you to live there. And the collateral really does have the valuation because there’s not some major foundation issue where it’s gonna have to be rectified where the house may literally collapse or something like that, or a moisture issue or those shingles things like… So these are important things for them, but… And to step a little further, you said that you have the home inspector, which really kinda digs deeper. The appraiser is not going to go in and really criticise quite as much the age of the heater, other than…
0:33:56.7 John Geodecke: He or she’s not gonna go into the crawl spaces or up into the attic.
0:34:00.4 Kurt Baker: Correct.
0:34:00.5 John Geodecke: They may take some pictures. But yeah, an engineer is looking at the home from top to bottom.
0:34:04.4 Kurt Baker: Yeah, yeah. People are amazed at how fast an appraiser goes through that, ’cause they usually do the work on the… They do the work up front. They get the data, they walk in, “Yup, everything looks fine. I’m walking out. I don’t see anything visibly wrong with it,” so… And they’re pretty much happy with it. Whereas the home inspector does a much deeper dive into the house. They’ll check the water pressure, they’ll check the actual set. They’ll just go through everything. The windows, everything work and all that kinda good stuff, whereas… So from a… Just from an understanding standpoint, as you point out, even if you don’t get a negotiation from the seller, they don’t pay for it, at least you know, “Hey, I have to start budgeting…
0:34:39.0 John Geodecke: Correct.
0:34:39.8 Kurt Baker: For this roof is gonna need to be replaced in four or five years, and this is gonna need to be done, and I need to… The water heater.” So even if it’s… You need to understand what you’re getting into, because when you’re renting, you just make a phone call, and hopefully, your landlord’s good, and they just come out and take care of it, whereas if you’re a home owner, you…
0:34:55.9 John Geodecke: You own it.
0:34:56.4 Kurt Baker: You definitely own it. And for good or bad, you’re gonna have to go out and take care of that.
0:35:00.9 John Geodecke: And every home has something that’s gonna need to be fixed or replaced at some point in its future. So understanding that and talking to the professionals involved, your attorney, the engineer, your realtor and your lender, can give you the information you need to say, “I’m still okay with this, and yeah, I get it, I’m gonna have some expenses in the future that I need to have reserves for or be prepared to put into my budget so that, yeah, next year the project is.”
0:35:29.5 Kurt Baker: Right. Excellent, John. Alright. We’re gonna take another quick break. You’re listening to Master Your Finances.
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0:35:34.6 ANNOUNCER: Do you want to prevent this from happening to you?
0:35:37.5 ANNOUNCER: And it’s gone. It’s all gone.
0:35:40.6 ANNOUNCER: Listen closely as we now return to Master Your Finances with Kurt Baker of Certified Wealth Management & Investment.
0:35:52.0 Kurt Baker: Welcome back. You’re listening to Master Your Finances. I’m here with John Geodecke. And we’re talking about finance. So we just got through the major four points: Income, credit, assets and collateral. So if all that works out, you’re happy, a new homeowner, so… But there’s different scenarios out there, let’s say. And you wanna tell us maybe some of these stories like, let’s say, I go see a house, I think it’s kinda okay, but might need a little what we call tender loving care, which probably means the house is leaning a little bit to the left, and you might have to prop it up. Usually, TLC is code for bring your hammer and your saw and your a tool belt ’cause you’re gonna have some work to do. [laughter]
0:36:24.2 John Geodecke: Yes. It is charming house, located in Ewing, New Jersey.
0:36:28.5 Kurt Baker: I love realtors. They’re so funny, you’re, like, “Wait a minute. Wait, wait. What you said and what I’m looking at, [laughter] it’s not the same to me,” so…
0:36:34.0 John Geodecke: Right. Pictures looked great.
0:36:35.9 Kurt Baker: Right. So what… ‘Cause that’s definitely a scenario now, because if somebody’s trying to save some money and you’re looking at a house, and you’re like, “Look, I’ll take it with a few dings and dents, knowing that I have to do some work to it.” Now, there’s different levels of work. So you wanna speak to that a little bit because then you say, “Well, I can spread this money out over time. At least I have my house now, ’cause I can live with it with the way it sits currently.” Or there’s other scenarios where it’s a little more difficult. You can’t really move in. The house is in pretty rough shape. So just describe some of these scenarios and some experiences you’ve had.
0:37:07.4 John Geodecke: Well, I can describe an experience in the last two years. We had a couple moving up to take a job at a university. And they were moving from the southern state, and the home that they were moving out of was newer. And they were looking at the housing stock in this area, saying, “We can’t find the equivalent house here.” But what they did find was a house they could acquire for a decent sum, but it was in the area that they wanted to buy. And they just said, “Look, we’re gonna acquire this home, but we’re probably gonna tear it down and build a new one.” So that was helpful advice. And as a result, we were able to structure the financing for the acquisition of the home, because many sellers will say, “Well, I’m not gonna wait six months while you find a builder and get your plans and specifications and all the materials needed to build a home ready. I wanna sell a home now.” And it’s… It is habitable. It’s fine. And they were right.
0:38:04.2 John Geodecke: So what we did was we helped the client acquire the home, and acquire the home with, yes, a down payment, their equity, which they would retain, but with minimal costs for that loan, other than the carrying costs, the monthly interest rate, so that in two or three months when they did have their plan, specifications and builder selected, we could then commence with a construction to permanent loan, which is a mortgage, and it is a format where you close, and then the work commences. And the work could take 12 months, 15 months or 18 months, however long it takes. But we try and pre-define that in the discussion with that homeowner and their builder to say, “Alright, if it’s gonna… If you think it’s gonna take 12 months, maybe we gotta plan for 15.”
0:38:51.5 Kurt Baker: Right, that’s typically what happens.
0:38:53.5 John Geodecke: So that we can help you redo the financing, yes, but build the home that you wanna build. So that’s one story, if you will… One scenario where a home buyers says, “Yeah, I like this home, but I also have a dream of a different home.” And yeah… We put together some options for them to make that happen on the finance side.
0:39:16.5 John Geodecke: So we do construction lending, and that’s done by some of the larger lenders, and I’m with one. And it’s not just done in this market. I have a client who recently purchased in the Virginia area. And her purchase was of a lot. [chuckle] But it was with the developer of and a builder who are putting together a neighbourhood and she is buying into that neighbourhood. She’s building a house, as we speak. Yeah, we’ll take the next 12 months. We’ll be dispersing funds over the next 12 months. And we can predict because it’s the same interest rate, she’s locked in. We know what her permanent interest rate is. We can predict what that permanent payment is for that loan. She has the ability to influence that because she could always reduce what she’s ultimately taking out from us ’cause she’s drawing every month, and it’s cumulatively adding up to what will be her permanent mortgage 11, 12 months from now.
0:40:15.8 John Geodecke: So those sorts of situations and options exist for home buyers in this market and in others, where you could buy a home and renovate it to a full extent. For home owners that own a property now there may be people saying, “Well, look, I’d sell my home, but I can’t find the equivalent to what I want in the market. So I don’t wanna sell my home and then be homeless.”
0:40:39.7 Kurt Baker: No, definitely not.
0:40:42.5 John Geodecke: But “Hey, we really do like this home. Perhaps there’s a way for us to talk to a builder or a realtor to say, ‘If I made these types of improvements to this home, knocked down the wall, built a second floor, blew out the back of the house, expanded the kitchen, what value would that create in the collateral? What value would that mean for us?’ Because it’s something, again, that it is important to our lifestyle because we need a bigger kitchen. And, yeah, come to think of it we could use another bedroom and bathroom.” So as we look at that, we can also use that similar product, if you will, for that situation. But it could also perhaps be a home equity line of credit that could be used for that type of renovation.
0:41:23.7 John Geodecke: So that conversation with the lender is important at the early stages for any homeowner, if their plans are, “Hey, we may consider this. What’s this going to look like?” And we can walk them through a variety of choices that they may have to make that happen. So that’s happened. And that’s part of, I think, a role of any mortgage loan officer and bank in the areas to say, “Well, what is it that you wanna do and how can we help you get there?” Some of the other situations that I think we’ve seen, and we were talking about earlier, were first time home buyers. And we have one situation now with a client… Actually, it’s a father and son. They wanna buy a home together. It’s their first home. They’ve been renting. And, yeah, they’re paying about $1800 a month in rent.
0:42:13.1 Kurt Baker: Wow.
0:42:14.2 John Geodecke: Where we do the analysis… And this wasn’t their reason for purchasing, but we do the math and say, “Well, you could end up with a mortgage payment that’s… Call it $2000 a month. Slightly higher than you’re paying in rent.” But of that $2000, there’s a couple of hundred dollars paying down principle. As I said earlier, building equity in the home that you own. So not only is your home increasing in value over time, and it’s your home, but you’re also reducing what you owe, which increases the equity and helps build…
0:42:42.8 Kurt Baker: Rent doesn’t pay down very fast.
0:42:44.1 John Geodecke: No.
0:42:44.2 Kurt Baker: Rent pays in advance. And you get a tax benefit, which sometimes people forget about. Rent, you don’t get a tax benefit. So depending on their tax bracket, they may actually net a little bit more money at the end of the year.
0:42:54.4 John Geodecke: Correct.
0:42:54.5 Kurt Baker: Depending on what the differential is. Right?
0:42:54.6 John Geodecke: Correct. So this father and son, tandem… Yeah… Had some nest egg money, which was great. But we said, “We can minimise your down payment to 3%, if you prefer. You can put more down if you want.” And again, you look at the math and say, “Okay, for every $1000 that I put down or $1000 that I borrow, it’s gonna save me or cost me six bucks a month more.” So either there’s a… You can assign the math to it and say, “How can we help you acquire this home, retain some of your assets using the grant program that’s out there and take advantage of some of the specialised lending programs.”
0:43:33.0 John Geodecke: And again, some of those programs the general public can look up on… The New Jersey has the mortgage and finance agencies, the NJHMFA is a great resource for potential home buyers to look at, because they have a mortgage program too, but they also have a grant program. And those grants are available and they’ll list some of the criteria that are needed for buyers. Because they’re not available to someone buying a home to then rent it, or somebody who owns multiple homes. It’s a program designed for first-time home buyers. So there are some advantages to being in that category, and many lenders really wanna help defray some of the expenses for our first-time home buyer to help them get into a market that otherwise… Yeah, some people will say, “Well, you need 20-25% as a down payment.”
0:44:19.8 Kurt Baker: Now you hear that term first time homebuyer if you wouldn’t mind defining it everybody. Because sometimes somebody will be like, “Well let’s say I owned a home and let’s say I had to sell it in 2018 and I didn’t buy anything.” I ended up renting when I moved to the area. And the pandemic hit. I wasn’t able to buy something. Then I went back out, let’s say several years later, like three, four years later. So what are they gonna think of me? Because I’ve owned a home before, I’m not really a first-time home buyer if you wanted to look back in my history, but I haven’t actually owned a home in a few years. So what does the bank think about that?
0:44:47.8 John Geodecke: A few years is the important time period. So it’s a three-year look back to say, “Yeah, you haven’t owned a home in the last three years.” Or you may have been in a relationship with a spouse that ended, so as a result of you buying for the first time on your own, you are a first-time home buyer. So that’s one way to… Or a couple of ways to define a first-time home buyer for somebody who may have owned a home in the past or have been part of home ownership in the past. So the first time home buyer programs are certainly something to explore for people who have been involved in situations like that.
0:45:23.2 Kurt Baker: Right, so this has been pretty awesome. And do you wanna give us some last thoughts here? We’ve got about a minute left here. You wanna give us some last thoughts about what people should really be focused on when they’re thinking about either buying or refinancing a home. What are the key points?
0:45:35.7 John Geodecke: Well, I think the key points are to educate yourself. What is available and where, and what are my best options based upon not only those numbers, but also the people that I’m involving? Your lender, your realtor, these are partners in that process. And they wanna be partners not just for the short-term transaction, most of them wanna be partners for life, as I mentioned early on. We wanna help you because becoming part of the community, being a homeowner means a lot for the community around you as well. Not just you, but the people that… Who will be your neighbours. They want people who are… They care about their homes, and you are one of those people, so let’s help you make it happen by walking you down through these numbers and these options that you have as you prepare.
0:46:26.7 Kurt Baker: Awesome, John. I really appreciate it. That was a great walk down financing your home. A lot of options out there, and I appreciate you coming and share with us. You’re listening to Master Your Finances. Have a great day.
0:46:37.7 ANNOUNCER: That’s all for today’s episode of Master Your Finances. Missed Kurt Baker’s biggest money managing tip or even a full episode? Head on over to masteryourfinances.us or 1077thebronc.com/masteryourfinances. Look for Master Your Finances on Anchor, Spotify, or anywhere you get your podcasts. We’ll see you next time only on 107.7 The Bronc.
