Should lenders factor utility spending into loan limits?

On Aug. 31, I appeared on a local real estate and economics radio show as one of four guests talking about real estate. The show’s theme was “relationships”–relationships we have to our real estate agents, mortgage brokers, home inspectors, and, ultimately, the place we call home. Unfortunately, a lot of the problems that homeowners can encounter with their properties emerge after the purchase–and after all these wonderful helpmeets who take commissions on your purchase are no longer legally bound to give you advice. 

Specifically, if homeowners can’t manage their own money, experience hardship (job loss, relationship status change, health expenses), mess with their home equity, or miscalculate the costs of ownership, they may wind up in trouble on their mortgage.  Owners should try to plan ahead and take responsibility for themselves after they buy, of course. But then, all the people who “sell” homeownership don’t really talk about the extent of the ownership-related costs that ultimately play a big role in homeowners’ post-purchase budgets. These costs aren’t central to the loan qualification process, but they are central to owners’ future budgets and financial positions.

What are these costs? They include the costs of furnishing the home, maintenance costs (projected to cost anywhere from 1% to 4% of the home’s purchase price annually–and that’s on a run-of-the-mill home, not a run-down distressed property), commuting (if owning costs so much you now drive a gallon a day to get to and from work), and utility expenses. Rent versus own calculators rarely ask owners to project these costs into their future housing expenses.  And there’s also remodeling–the ultimate discretionary spend.

But as of October 19, at least one of these rarely-mentioned costs–utilities–is now on the table in a new way: Indeed, two senators claim loan underwriters should factor utility spending into mortgage loan limits. The senators, Michael Bennet (D-Col.) and Johnny Isakson (R-Ga.) are pushing the Sensible Accounting to Value Energy (SAVE) Act, which would mean Fannie Mae, Freddie Mac, and Federal Housing Administration (FHA) loans would have to factor buyers’ projected future energy expenditures into loam limits. Housingwire covered the story today.

I’m unsure if factoring for utilities should be a legislated requirement for borrowers and underwriters. Once a person or family moves into their new home, they might drastically underperform or outperform prior residents with regard to energy consumption based on how much time they spend at home, how they set an adjustable thermostat, appliance mix, how many people live in the property, the energy efficiency of the home at move-in or post-remodel etc. etc. But I like that two senators are shining a light onto the notion that a home is a locus of multiple, future expenses that are rarely discussed in the pre-purchase phase. Their bill notes that utilities can cost about $2,000 a year. That’s a figure consistent with prior reporting I’ve done–and with what I spent when I made the move from renter to owner of this home pictured here. (Oil alone cost at least $1200 per year, with electricity, water, sewer, and garbage quickly toting my annual energy spend up to the $2k range.) I don’t know about you, but when I rented utilities cost about one-fourth of that.

Asking future owners to budget for utilities–and other expenses–isn’t a bad idea. Whether the legislation sinks or floats, it’s good there’s a new (and healthy) recognition about the true costs of homeownership.