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Thread: The Hidden Costs of Buying a Home

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    Default The Hidden Costs of Buying a Home

    from

    This comes as an adjunct to the thread about US rent prices being 'higher than they should be' in many parts of America


    (snip)The Hidden Costs of Buying a Home

    US News
    By Geoff Williams
    March 12, 2014 11:18 AM

    You're looking for a house and see the perfect listing. It has a big number on it. For simplicity's sake, say $200,000. If you're like most prospective homeowners, you think you will soon be talking to a lender and getting a loan for this amount.

    But as veteran homebuyers already know, you are going to pay much more than $200,000.

    True, almost everything we buy has a hidden cost. You buy a toothbrush for a couple bucks, and since you'll have to purchase toothpaste, the ownership cost of a toothbrush is more than $2 -- especially if you throw in a toothbrush holder. Obviously, the hidden costs of buying a house are far more complex. And if you aren't prepared for them, you may come away from the experience feeling as if you've been kicked in the teeth.

    So if you're thinking of buying your first house, be on the alert for these hidden costs.

    Home inspection costs. Before you close on a house, your mortgage insurer may require a home inspection, which can run several hundred dollars. But even if an inspection is not required, it's worth paying a professional to evaluate the house so you can avoid spending hundreds of thousands on a train wreck disguised as a house.

    Survey costs. Your lender may want you to have a professional survey of the property, so everyone knows exactly where your land's boundaries are. That's another several hundred bucks.

    Taxes. You probably know you're going to be paying taxes, but it can be easy to forget that you'll likely need to prepay those taxes at closing.

    "Escrow is such a confusing part of the loan process," says Jason Auerbach, divisional manager at First Choice Lending in New York City. "That really throws people for a loop. Four out of 10 times, we are having a discussion about escrow costs upfront, at the start of the lending process, and then right before closing as well."

    Auerbach is referring to an escrow account, which the lender uses to pay the homeowner's nonmortgage-related property ownership expenses. If your down payment is less than 20 percent, you'll be required to use one. An escrow account allows your mortgage company to pay the taxes for you -- without it, you'll be hit with property tax bills twice a year.

    At the beginning of your mortgage, it can be a shock when you're saddled with paying a couple months' worth of property taxes, maybe a year's worth of homeowner's insurance and possibly homeowner's association dues as well.

    Fees. Maclyn Clouse, a finance professor at the Reiman School of Finance at the University of Denver, rattles off a list of fees you'll also pay at closing:

    -- Government recording charges: The cost for state and local governments to record your deed, mortgage and loan documents.

    -- Appraisal fee: The cost for an appraiser to decide how much your house is worth.

    -- Credit report fee: Your lender had to pay to get your credit report; you cover the cost.

    -- Title services and lender's title insurance: Fees related to your home's title.

    -- Flood life of the loan fee: The government tracks changes in your property's flood zone status; you'll pay a small fee.

    -- Tax service fee: Another pretty minor fee; This service ensures the taxes previously paid on the house are up to date.

    -- Lender's origination fee: This charge for processing your loan application can be pretty pricey. On a $97,000 mortgage loan with an interest rate of 3.5 percent and no points -- the money you pony up if you want to lower your interest rate -- Clouse says the fee would be $795.

    It's worth noting that these costs aren't exactly hidden. They're routine and legal, and these days, they're more visible than in the past.

    In fact, Auerbach takes issue with the phrase "hidden costs," which many homeowners rightfully associate with closing.

    Referring to reforms passed in 2010 by the Department of Housing and Urban Development, Auerbach says lenders aren't allowed to impose hidden costs. When they give a buyer a Good Faith Estimate, a form that spells out the expected costs associated with your home loan, the final tally can't exceed 10 percent of the GFE.

    But 10 percent of closing costs isn't insignificant. Consider that closing costs are generally between 2 to 5 percent of the home's purchase price. So if a $200,000 house has $8,000 in closing costs, an extra 10 percent would be another $800.

    "All of those costs can very scary if you've been counting your pennies to get enough money for a down payment at your closing," says Dianne Saatchi, an associate broker at Saunders & Associates, which sells real estate in the Hamptons, a group of villages and hamlets on Long Island, N.Y.

    Moving costs. Will you be gathering friends to help you move a hodgepodge of possessions into your home, or do you need a moving truck? Don't forget about those costs.

    Total cost of ownership. Someone will have to mow the lawn with the mower you're fated to buy, or you'll hire a service. You'll also probably need furniture and maybe a major appliance, like a washing machine.

    "People also need to take into consideration how much they'll need to fix up the house," Saatchi says, for those who purchase homes in less-than-premium condition. "Painting is expensive."

    Just be ready for anything, OK? Saatchi says some houses come with propane or oil tanks. At the closing, she says, some buyers have been asked to reimburse the sellers for the fuel remaining in the tank.

    "Years ago, that wasn't such a big deal, but at the current prices, if you have a 500 gallon tank, that could be $2,000 the homebuyer is being asked to pay," she says. "Everybody's shocked by that." (snip)

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    Default Re: The Hidden Costs of Buying a Home

    Apart from the moving costs and the maintenance costs of home ownerships, what are the hacks to save in buying? For example, there must be some way to haggle with a seller on inspection costs and even covering some taxes?
    "Don't piss off a motivated stripper."


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    Default Re: The Hidden Costs of Buying a Home

    Depending on the type of mortgage and if there is equity, all of these costs can be rolled into the mortgage.

    When you are purchasing a home that is already occupied there is a negotiation process that happens through real estate agents.

    My big warnings are about buying foreclosures. There so many pit falls that can happen with foreclosures for any buyer, but especially first time buyers. If you can afford an attorney to help you with the process it would be money well spent.

    One of the biggest scams recently is rent-to-own from current owner. Some of these rent to own contracts are set up to fail which leaves you with a huge bill and no house. A couple I tried to help got tied up in a rent-to-own as their first house. The original contract over valued the house by 100k+. After the first five years they were required to get a traditional mortgage or the original owner takes back the house and still charged them for what was owed on the house. Because the contract was written by the owner they could put in any terms they wanted.
    Five years later the couple couldnt find a mortgage because the house was totally over valued. Because they signed the contract they couldnt get out of it, without a huge law suit.

    The easiest way to save yourself alot of grief if you dont have the money for your own attorney.....

    Get your mortgage through a traditional bank. They will go thru the property with a fine tooth comb to make sure it is worth the loan amount, especially now a days. They do not want more foreclosures. All the fees Melonie mentioned are worth paying for the protection.

    Have a Fico score over 700 with a clean credit report when you start shopping. Most nightmares in regards to the mortgages are because of terms for sub prime borrowers. Refinancing after the fact to get a better loan cost more then what it is worth. Stick with fixed rate mortgages 30 or 15 year fixed. Anything else has a greater chance of having crazy terms and fees.

    Lastly, if you cant do anything else or in addition to above, get your own appraisal. I dont care if the bank or owner or whoever else is doing one, get your own appraisal. If you cant afford anything but a few hundred dollars (costs vary based on location), getting your own appraisal is worth it. It tells you more then just the value. It will also tell you what foreclosures have happened in the area, what factors are driving prices up or down, is everyone leaving the area? If there is anything fishy going on with a house the first place you will find it is in the value vs purchase price. It will also give you leverage to bargain with.

    I know, some are going to say, I never got that info when I had my appraisal!!!! Who paid for your appraisal, you or the bank (owner, etc)? Who ever pays for it is the customer and gets all the information.

    If you do it right the first time, you can save yourself alot of headaches and alot of money!
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    Default Re: The Hidden Costs of Buying a Home

    I forgot something....

    When you are shopping around for mortgage lenders....... ask them what fees they cover. Some lenders cover some of the fees for all their customers ie credit report fee. Some will cover alot of fees if the loan is over a certain dollar amount. Which means they will pay for the fees just to have your business. Once again you are more likely to get this kind of service with a high Fico score and clean credit report. Not mention the better terms and low interest rates etc...
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    Default Re: The Hidden Costs of Buying a Home

    ^^^ that's a very important point. The comparative cost of a mortgage includes a lot of factors besides the interest rate and/or points charged. Also in many cases where 'distressed' sellers are involved you can negotiate the seller to absorb some of the fees on their end versus your end. And while some of these 'transaction' related costs can be significant surprises ( i.e. having to pay for $1000 worth of fuel oil or propane left in the tanks ), at least they are 'one time' costs.

    However, in terms of the more general point of this thread, these days there are many mandatory costs associated with buying and owning a home that may not be obvious since they aren't a direct part of the mortgage costs ( but are usually mandated by the lender to be escrowed via elevated monthly mortgage payment ) . A big one is the gov't redrawing flood map 'risk zones' and allowing flood insurance premium costs to be priced according to actual risk. This has recently resulted in some homeowners starting to face $5,000-$10,000+ per year flood insurance premiums ( depending on the value of the property and the gov't risk level for that location ) where they used to cost <$1,000. And yet another is local property and school taxes, which may similarly subject some homeowners to 'sticker shock' i.e. $5,000-$10,000+ per year where they used to cost half of that ( or cost the former owner half of that, thanks to % annual increase caps which you discover don't apply to you 6 months after you bought the property ). Also, as mentioned earlier, there is also the Alternative Minimum Tax 'settlement', which may cost you hundreds or thousands of extra dollars per year via a higher IRS bill ( due to partial exclusion of your mortgage interest tax deduction above an X dollars per year income level ). These are not one time costs, but recurring annual costs, and can potentially render continuing to own a home unaffordable if not researched in advance.

    I would also be amiss if I didn't specifically point out that buying a mortgaged home ... and then 'losing' a mortgaged home to foreclosure ... now involves LARGE loss risk. For starters, the 'disposal' price of the house may fall far short of the price you paid for it ... with you winding up being responsible for paying any negative difference back to the mortgage lender. This is usually accomplished by the lender 'seizing' ( part of ) your 20% down payment money and principal payments, but if that isn't sufficient many mortgage lenders are increasingly filing for a 'deficiency judgement' against you for additional money ( even though you are no longer able to live in the foreclosed home ) . A short sale is now likely to be accompanied by an after the fact IRS bill attempting to collect additional taxes on the 'forgiven' amount of mortgage debt ( which the IRS considers to be taxable income even though you never actually saw dollar one of the 'forgiven' debt money ). And while you can declare bankruptcy on a mortgage lender, you CAN'T go bankrupt on an IRS bill.

    From an investment standpoint, mortgaged home ownership is a 'leveraged' bet. The pre 2008 paradigm was that you're essentially betting that the value of the US dollar will become inflated ... thus both increasing the asset value of the home plus allowing you to make future year mortgage payments in devalued dollars. However, as a result of the 'new normal', the same 'leverage' has the potential to work against you !
    Last edited by Melonie; 03-14-2014 at 01:40 PM.

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    Default Re: The Hidden Costs of Buying a Home

    Yes but alot of the mortgages that existed pre 2008 do not exist anymore. For example piggy back mortgages trying to avoid pmi, mortgages for over 125% of an already over inflated value, etc. These are the type of mortgages that lead to bankruptcies.

    Many mortgage lenders today wont even consider a mortgage for 100% of the appraisal price. They are demanding at least 20% equity or down payment. Prices of homes have leveled off in many areas of the country as well. FHA and HUD have also stepped up their lending requirements. Getting a traditional 15-30 year fixed rate prime mortgage is not even close to being as risky as the insane mortgages spit out pre2008.

    Getting a mortgage does not lead to bankruptcy. Not doing your homework about what you can afford and not finding a good lender leads to bankruptcy. Loosing a house has always involved large loss risk. Owning a house you can afford comes with alot of benefits.
    Last edited by Vamp; 03-14-2014 at 02:20 PM.
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    Default Re: The Hidden Costs of Buying a Home

    For the record, I am not a tax preparer. The advice I am giving is based on my experience and information. For your personal finance always consult a tax preparer who has all your information to know what applies to you.

    I just want to point out that AMT has nothing to do with purchasing a house by itself. Alternative Minimum Tax usually only takes effect if you have many sources of income ie stocks, bonds, commodities. If you are buying multi properties this may be an issue. Other then that, It doesnt really apply to purchasing a home. If you havent had to pay AMT before, buying a home isnt going to change that.

    http://www.irs.gov/Businesses/Small-...or-Individuals

    Should you use the AMT Assistant?
    Check here first. If you received or claimed any of the following items in the tax year, you must complete Form 6251 and there is no need to use the AMT Assistant:

    Accelerated Depreciation
    Stock by exercising an incentive stock option and you did not dispose of the stock in the same year
    Tax exempt interest from private activity bonds
    Intangible drilling, circulation, research, experimental or mining costs
    Amortization of pollution-control facilities or depletion
    Income (or loss) from tax-shelter farm activities or passive activities
    Income from long-term contracts not figured using the percentage-of-completion method
    Interest paid on a home mortgage NOT used to buy, build or substantially improve your home
    Investment interest expense reported on Form 4952
    Net operating loss deduction
    Alternative minimum tax adjustments from an estate, trust, electing large partnership or cooperative
    Section 1202 exclusion
    Any general business credit in Part I on Form 3800
    Empowerment zone and renewal community employment credit
    Qualified electric vehicle credit
    Alternative fuel vehicle refueling property credit
    Credit for prior year minimum tax
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    Default Re: The Hidden Costs of Buying a Home

    Getting a mortgage does not lead to bankruptcy. Not doing your homework about what you can afford and not finding a good lender leads to bankruptcy. Loosing a house has always involved large loss risk. Owning a house you can afford comes with alot of benefits
    Generally no argument on these points. However, the probability of having the market value of a house decline significantly, the probability of property taxes, insurance costs etc. rising significantly, as well as the probability of having net income potential remain stagnant or decline over the next decade, is higher now than at any time in the last three generations ! Thus along with running the calculations regarding how much house you can afford today, you need to also run simulations based on whether you can continue to afford the house if property taxes double, insurance costs double, heating and cooling costs double, net income potential drops 20% etc.

    Failing to take these future trends into account can easily create a situation where a home that can be afforded today ( but without much budgetary 'safety margin' ) simply CANNOT be afforded any more 5-10 years down the road. However, the negative consequences of potential foreclosure remain in place for ( most of ) the 15-30 year term of the mortgage. Before the 'new normal' this was never much of a concern, since home prices thus homeowner equity was expected to rise, since net income was expected to rise, since property taxes / heating and cooling costs / insurance costs weren't expected to become a 'major' component of overall home ownership costs, etc..


    If you havent had to pay AMT before, buying a home isnt going to change that
    As to the potential for AMT consequences, this obviously depends on individual situations. However, you need to add deductions for state and local income taxes to the list of 'pre-existing' deductions to which home mortgage interest payments and property tax payments will be added ... something which is now arguably becoming a very big deal in high tax rate states that are ratcheting their tax rates even higher !!! It's entirely possible for a 'full time' dancer or camgirl earning a pre-tax $100k per year to suddenly be 'pushed' over the AMT threshold after buying a home, since the AMT phase-in threshold for a single person in 2013 is ( only ) $ 51,900 !!!

    from

    (snip)Per Code Sec. 56, in calculating alternative minimum taxable income (AMTI), a
    taxpayer must add or subtract amounts from regular taxable income due to
    the different treatment of certain tax items for AMT. These additions and
    subtractions are called AMT adjustments.

    ***

    Some of the adjustment items are very common, while others only affect a
    small number of individual taxpayers. The items that are subject to adjustment
    for AMT for individual taxpayers include:

    The limitation on overall itemized deductions.

    Miscellaneous itemized deductions subject to the 2% floor.

    Standard deduction and personal exemptions.

    Certain state, local and foreign taxes.

    Medical expenses.

    Certain interest (including home mortgage and investment interest)."(snip)

    Please understand that your conclusion is probably true for most dancer and camgirl home buyers. But effectively making a blanket statement that no dancer or camgirl will face negative AMT consequences due to adding home mortgage interest and property taxes to her 'pile' of tax deductions may not be true for every situation.
    Last edited by Melonie; 03-14-2014 at 03:35 PM.

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    Default Re: The Hidden Costs of Buying a Home

    One cost you do not want to cut when buying a home is an "Owner's" title insurance policy. With the mess that banks have made of real estate titles you want a good title insurance policy standing up for your title and not just the bank.

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    Default Re: The Hidden Costs of Buying a Home

    ^^^ Indeed that's true ... although these days the mortgage lenders themselves are requiring buyers to pay for much more extensive title searches than was the typical case in past years. Title insurance costs thus get lumped in with all of the other insurance costs ( fire, flood etc. ) mandated by the mortgage lender.

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    Default Re: The Hidden Costs of Buying a Home

    circling back to the original line of thought ... from


    (snip)here is why those in the market for a house should be worried. Very worried. From page 40 of the IMF's paper on "Fiscal Policy and Income Inequality":


    Some taxes levied on wealth, especially on immovable property, are also an option for economies seeking more progressive taxation. Wealth taxes, of various kinds, target the same underlying base as capital income taxes, namely assets. They could thus be considered as a potential source of progressive taxation, especially where taxes on capital incomes (including on real estate) are low or largely evaded. There are different types of wealth taxes, such as recurrent taxes on property or net wealth, transaction taxes, and inheritance and gift taxes. Over the past decades, revenue from these taxes has not kept up with the surge in wealth as a share of GDP (see earlier section) and, as a result, the effective tax rate has dropped from an average of around 0.9 percent in 1970 to approximately 0.5 percent today. The prospect of raising additional revenue from the various types of wealth taxation was recently discussed in IMF (2013b) and their role in reducing inequality can be summarized as follows.

    •Property taxes are equitable and efficient, but underutilized in many economies. The average yield of property taxes in 65 economies (for which data are available) in the 2000s was around 1 percent of GDP, but in developing economies it averages only half of that (Bahl and Martínez-Vázquez, 200. There is considerable scope to exploit this tax more fully, both as a revenue source and as a redistributive instrument, although effective implementation will require a sizable investment in administrative infrastructure, particularly in developing economies ( Norregaard, 2013 ).


    And there you have it: if you are buying a house, enjoy the low mortgage (for now... and don't forget - if and when the time comes to sell, the buyer better be able to afford your selling price and the monthly mortgage payment should the 30 Year mortgage rise from the current 4.2% to 6%, 7% or much higher, which all those who forecast an improving economy hope happens), but what will really determine the affordability of that piece of property you have your eyes set on, are the property taxes.

    Because they are about to skyrocket."(snip)


    The author's point, as well as my embedded original point, is that the commitment to a mortgaged home purchase also commits the home buyer to a host of indirect future costs. However, unlike any fixed interest rate mortgage payments, the size of these indirect future costs is both unknown and very difficult to predict. As such, home buyers must actually now assume a large amount of future loss risk, since significantly increased future property tax rates, significantly increased future insurance costs, etc. have the potential to render the future total costs of continuing to live in that mortgaged home unaffordable even if it appears to be affordable today.

    In a 'crystal ball' future context, at the link the author also points out the supposed logic behind the assertion ...

    - gov'ts are now having difficulty simply 'printing new money out of thin air' forever ( due to negative effects on currency 'purchasing power' ), thus for gov't spending to continue at elevated levels new tax revenues will be required

    - the taxing of 'incomes' has limited upside potential on future tax revenues, because many people no longer have significant incomes, because the 'top 5%' are able to classify the lions share of their earnings as capital gains (from stocks and bonds) rather than 'ordinary income' from paychecks, because ( remaining ) middle class citizens cannot afford to pay higher income taxes without a direct negative effect on their present standard of living ( with negative blowback potentially being exercised at the ballot box ) etc.

    - however, the taxing of 'assets' instead of 'income' has far less blowback potential ... since it has no effect on the 'lower 50%' who don't have significant assets, and limited actual effect on the 'top 5%' ( whose non-real estate based assets are transportable to other countries ) although from a PR standpoint it appears to be a 'tax the rich' effort. But in point of fact, the persons most vulnerable to the increased taxation of 'assets' are the middle class ... the majority of whose assets are 'tied up' in real estate ( their home ) which is not transportable.

    - Also, since property taxes are local in nature, any blowback by middle class voters over increased property taxes is likely to be focused at the local level as well. This will happen despite the fact that the actual reason for increased property taxes may be the direct result of reduced 'reimbursements' to local gov't entities by federal and state gov't entities ( reduced Medicaid funding, reduced HHS aid to schools, reduced DHS aid to local police, etc. )


    As exemplified by Greece, the 'middle class' did not revolt when the gov't applied a 10% 'asset' tax to their bank account balances to 'bail-in' failing Greek banks. Of course, the 'top 5%' had the means to move (much of ) their Greek bank balances outside the country before this 'asset' tax took effect. As such, increasing property taxes significantly is likely to be the 'least dangerous' way for gov't to increase future tax revenue collections.

    To bluntly restate the bottom line point ... the decision to purchase a house today via a long term mortgage not only obligates the home buyer to make 30 ( or whatever ) years worth of known mortgage payments, but also obligates the home buyer to also make 30 ( or whatever ) years worth of unknown insurance payments, unknown property tax payments, etc. Failure to keep current on ANY of those payments places the home buyer's previous 'equity' investment at 100% risk. Actually, the home buyer is now risking more than 100% loss of 'equity' investment, since via a 'deficiency judgment' the homeowner may additionally be forced to also pay to the mortgage lender any negative 'gap' in the property's market price between the time the property was purchased and the point where the home buyer is no longer able to keep current on mortgage, insurance, and property tax payments. And while the fixed mortgage payment involves a known cost over time that will not increase, the costs of insurance, property taxes etc. are 'moving targets' which could increase significantly in future years. Also, the potential size of any future negative 'gap' in the home's market value will be a function of the ability of future home buyers to afford not only significantly higher costs for insurance and property taxes, but also higher mortgage interest rates.
    Last edited by Melonie; 03-16-2014 at 08:39 AM.

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    Default Re: The Hidden Costs of Buying a Home

    Lots of good advice here! One fact I learned is that while hiring a home inspector is a good idea, beware that if they miss anything, they are not liable, so they really are just a 'tool' to get concessions from the seller, but if your roof turns out to be leaky and rotten you're still on your own...
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    Default Re: The Hidden Costs of Buying a Home

    Quote Originally Posted by Melonie View Post
    ...
    I would also be amiss if I didn't specifically point out that buying a mortgaged home ... and then 'losing' a mortgaged home to foreclosure ... now involves LARGE loss risk. For starters, the 'disposal' price of the house may fall far short of the price you paid for it ... with you winding up being responsible for paying any negative difference back to the mortgage lender.
    US mortgages aren't non-recourse loans anymore? That's quite a big change from 2008! One of the big reasons people assure themselves that the Aussie housing bubble isn't like the American one is that Americans could hand back their deed and wash their hands of the loan, where we would still owe the money to the bank.
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    Default Re: The Hidden Costs of Buying a Home

    ^^^ lots of newly issued US mortgages are now 'recourse' loans ... for precisely the reason you cite. Millions of Americans holding earlier 'non recourse' loans simply dropped the keys into the mortgage lender's mailbox ( which prompted the industry slang 'jingle mail' ) and walked away from their mortgages ... which in turn saddled the mortgage lender thus the US taxpayer with both losses on the unpaid mortgage payments plus additional losses incurred by the mortgage lender based on a decline in market value of the property between the time of original purchase and the time the mortgage lender 'disposed' of the distressed property.

    While it may not be receiving a whole lot of mainstream US media publicity, it's pretty clear from both the most recent calls for yet more Fannie / Freddie / FHA bailout money from US taxpayers, as well as from the most recently proposed gov't mortgage guarantee programs that will force the lending banks to take losses before gov't guarantee payments kick in, that the 'powers that be' are no longer willing to support taxpayers being 100% responsible for future losses on mortgage loans. As a result, lending risk now 'matters' to the mortgage lenders ... and as a result higher risk borrowers will be charged higher fees, and/or down payments, and/or interest rates, reflecting their higher risk.

    Transition to 'recourse' loans also gives those mortgage lenders a mechanism to attempt to recover losses incurred as a result of declining market value of the ( defaulted ) mortgaged property ... by being able to 'come after' the ( defaulted ) mortgage borrower and collect additional moneys to cover any decline in market value of the property ( if such decline exceeds the net 'equity' value of the mortgaged property / loan payments to date ).

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    Default Re: The Hidden Costs of Buying a Home

    Recourse in commercial law generally refers to the ability of a purchaser of debt to assert any losses up the chain of title to the original lender. All too many loans in the U.S. were sold from the originators to subsequent purchasers without recourse. Not all though. Bank of America has found out rather painfully how recourse works with regard to the poorly thought out purchase of Countrywide.

    With regard to borrowers, almost every loan is a "recourse" loan. Although that is not the usual terminology. In most states, if the home is foreclosed and there is a deficiency between what is owed and what the home brings, the note holder can pursue the borrower for that deficiency. A few states have an anti-deficiency statute, but not many. That said, the deficiency is always unsecured. That means unless the borrower has significant income or assets (in which case he or she probably would not have defaulted on the home loan in the first place) the borrower can simply discharge the deficiency in bankruptcy. Thus, very few note holders pursue the borrower after they get the home.

    HTH
    Z

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    Banned Melonie's Avatar
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    Default Re: The Hidden Costs of Buying a Home

    That said, the deficiency is always unsecured. That means unless the borrower has significant income or assets (in which case he or she probably would not have defaulted on the home loan in the first place) the borrower can simply discharge the deficiency in bankruptcy
    Very true. However, this is one of the reasons that potential mortgage lenders are now seeking information regarding the potential borrower's other assets / net worth. If the potential borrower has very little in the way of personal assets ( i.e. savings, stocks & bonds, unincorporated business property, etc. ), then that potential borrower has very little to lose should bankruptcy be declared ... which in turn increases the probability that the mortgage lender may be 'stuck' with very sizeable losses from a mortgage default + bankruptcy filing. Again, the potential mortgage lender is likely to respond via a) refusing to approve the mortgage application, or b) approving a 'high risk' mortgage loan carrying a high down payment requirement, high fees, and a high interest rate.

    While somewhat off the center line, the fact that student loans cannot be discharged in bankruptcy ... as well as the fact that student loan deficiency recovery has priority over other lenders where seizure of assets / garnished wages etc. are concerned, now effectively places mortgage lenders and other lenders in a 'subordinate' position to the government in terms of 'partial' loss recovery. Thus the existence of sizeable student loans has become a new factor in the mortgage approval process ... a factor which goes beyond the actual amount of money owed. Put another way, owing $20k in student loans is NOT the same as owing $20k on a car loan. Whereas with the car loan a bankruptcy declaration would leave the mortgage lender and the car lender on an equal footing regarding repayment of 'deficiencies' via liquidation of other assets, with the student loan a bankruptcy declaration would effectively leave the mortgage lender without dollar one of repayment unless and until the student loan debt was first repaid.
    Last edited by Melonie; 03-20-2014 at 08:38 AM.

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