This post first appeared in the November edition of Cirios Trends: Getting to the Bottom of the Housing Market

When trying to determine if they can afford to buy their first home, many first time homebuyers leave out a whole host of costs that then become
unwelcome surprises once they’re already emotionally invested in a purchase.

There are a whole host of fees and costs that neither Realtors or lenders are terribly excited to tell you about, preferring to gloss over the details until they have you well along in the process.

It’s imperative to sit down and budget all the out-of-pocket expenses that go into buying a home, in addition to the down payment and of course monthly recurring payments to arrive at the total cost, err, joy of homeownership.

Keep in mind that these are the realities of buying, and eventually owning a home. They should be accepted, evaluated and budgeted just like more widely quoted expenses like interest rates.

But a quick scan of a list of the fees included in an estimated HUD (effectively a list of all costs associated with a home purchase) can show be a bit intimidating:

- Loan Origination Fee
- Document Fee
- Processing Fee
- Tax Service Fee
- Appraisal Fee
- Credit Report Fee
- Messenger Fee
- Flood Cert Fee
- Escrow Fee
- Notary Fee
- Recording Fee
- Other Title Fee
- Monument Fee

Now that is a lot of fees! Some are no more than $10, but others can be hundreds or even thousands of dollars. When you first meet with a lender to discuss pre-approval, always ask for a list of fees or a sample HUD statement so you can have this information ahead of time.

In addition to closing-related fees, buyers also need to be aware that they may need to pay pro-rata property taxes. Pro-rata what?

In California, property taxes are due twice a year, February 1st and November 1st. So, depending on when you buy your house, you may have to pay taxes to carry you through to the next payment at the time you make your purchase.

On top of these lesser known fees and costs, you have the down payment to consider, which in most cases is the biggest out-of-pocket expense for any home purchase.

Don’t forget moving costs, buying furniture, repainting and any other initial maintenance items that your particular home may need. Also, don’t forget upkeep, which should be expected to be around 1% of your home’s cost, per year.

Although potentially intimidating, any potential home buyer should take the time to make a detailed budget of these costs, after careful research and consultation with both a real estate broker (like Cirios!) and mortgage lender.

Then, based on your own budget and the mortgage calculator resources available online (see previous edition of Cirios Trends for thoughts on mortgage calculators), you can ultimately arrive at how much home you can afford.

Then … it’s time to go shopping!

Below are some details on the Fed’s proposed new mortgage rules courtesy of Briefing.com:

• New final mortgage rules ban prepayment penalties if payment can rise in first 4 years.
• New rules create category of ‘higher-priced mortgages’ including virtually all subprime loans.
• Lenders must verify repayment ability from income, non-home assets for higher-priced mortgages.
• Lenders must assess repayment ability on highest scheduled payment in first 7 years of mortgage.
• Lenders must establish property tax, insurance escrow on higher-priced first-lien mortgages.
• Lenders may offer borrowers opportunity to cancel escrow account after one year.
• Creditors must provide estimate of mortgage costs, payment schedule,within 3 days of application

If mortgage regulators can enforce their new rules on “higher-priced mortgages,” at least as well as they do for “high-cost mortgages,” (which they actually do surprisingly well) this new category of home loan means one thing: don’t bother applying for a mortgage unless you have nearly spotless credit and money in the bank.

And while many would argue this is a much needed change in the mortgage market, it does raise a few questions:

• Won’t this further increase demand for rental units?
• Won’t this force people to save if they want to own a home?
• Isn’t money saved different than money spent?
• Where was this legislation in 2006, at the height of the boom, even when regulators knew what was going on?
• Why do regulators seem to focus so much on making new rules, rather than enforcing the old ones?
• If the mortgage market figured out how to get around the old, “high cost loan” limitations, won’t it eventually work its way around these as well?