A lender wants two things: to sell you a loan and to do it with the least risk possible. The key to success is to be steady and consistent in repaying loans. Each lending company has a variety of products (loans), all with different rules and costs (interest rates, points and fees). The better your credit, the less risk the lender perceives and the less a loan will cost you.

What do lenders look for? “The first and most common answer is your credit score. They also look at employment history, debt history, liabilities, your job, how much you make,” says Ron Culver, account executive for Webster Bank, a Connecticut-based wholesale mortgage company. “There are other small things—bankruptcy history, collection history. A ‘lack of credit’ is an unknown. This person doesn’t use credit, and we don’t know if they are going to be responsible if they do.”

To assess the risk involved in lending to you, lenders piece together the story of your financial life, your spending and payment habits over the last few years, says David Rubinger, spokesman for credit reporting firm Equifax. Try to see your application through a lender’s eyes to assess the strengths and weaknesses of your story. Anticipate problems—a gap in employment history or late bill payments—and include a brief letter of explanation. You may have had an illness, for example, a divorce, a death in the family or a period of searching for work before landing a job.

Tell your own story by collecting supporting evidence. Well-prepared applicants are the most successful, says Vicki Rosenthal, home loan underwriter (she analyzes applications and decides which to accept and reject) with the private Mortgage Guaranty Insurance Corporation (MGIC).

A lender’s ideal: The perfect loan applicant
Credit over two years: A steady history of on-time payments on different types of loans. Bank cards with credit to spare. Numerous credit inquiries in the six months before applying for a mortgage can hurt your credit score.
Employment history: Two years (no gaps) in the same line of work.
Housing payments: No late payments in the last 12 months; a maximum of one in the last 24 months. The lender’s thinking: A borrower who has a history of making housing a payment priority will make a housing loan repayment a priority.
Liabilities: To qualify for the best rates, liabilities—car payments, credit card payments, mortgage loan, student loan, alimony, child support and the rest—shouldn’t amount to more than 42 percent of your income, says Webster Bank’s Culver.
Assets and reserves: An amount equal to at least two months’ mortgage payments, including principal, interest, taxes and insurance. Three months is better; some loans want up to six months’ reserves. Other assets—pensions, IRAs and CDs—can be included, but they are calculated at 60 percent to 70 percent of their value, to cover liquidation costs and early withdrawal penalties.

But if you’re not perfect…
Having no credit is not an impossible obstacle. Plenty of loans exist for such nontraditional borrowers, says underwriter Rosenthal, who has approved many first-time home-buyers’ loans. If you happen to be a nontraditional borrower, tell your story by documenting transactions with people who have extended you services: a childcare provider or a landlord, cell phone carriers, cable service, utilities, car insurance—none of which appears on a credit report. Include names, addresses, account numbers and phone numbers.

“The more prepared you are at application; the less follow-up you’ll need to do,” Rosenthal says. “A good application presentation makes a huge difference.”

Since your loan application will be viewed by people you’ll never meet, your winning personality alone won’t be enough to inspire confidence in your ability to repay a loan. Mysteries in your credit story may be interpreted negatively. The letter of explanation (keep it brief) is the best friend of the home buyer whose application veers from perfection. Scan your loan application for consistency in every detail with what’s in your credit reports and explain any variations in your letter. Look for flaws, errors or a place where timelines don’t exactly meet. (You left school in June, for example, and started work in November.) Include a good reason for the missing time period in your letter.

There’s another home-buying myth that Rosenthal wants to demolish: “One of the requirements to buying a home is not that you have to save 20 percent for a down payment,” she says. “There are [loan] programs out there and insurable programs for up to 100 percent of the value and beyond, based on your qualifications.”

What a 20 percent down payment does buy you is the opportunity to avoid paying for mortgage insurance, which protects the lender in case of a default.

Loans are offered, also, for those with damaged credit. The downside is, they’ll cost more. “Derogatory credit doesn’t necessarily mean you are not going to be eligible,” says Rosenthal.

With poor credit, however, your best friend is time, says Heather Greer, spokeswoman for Experian, a credit reporting firm. Positive information stays on your credit report indefinitely. Bad entries live for up to seven years, but carry less weight as they are replaced with a stronger record. Inquiries by merchants into your creditworthiness remain for two years.

“It’s important to take a peek at your report so there’s enough time to make changes,” Greer says. “Do this at least a few months before going into a lender. Then you can say, ‘Yes, I may have had this late payment, but for the last three or six months I’ve been paying on time and everything is good.’”

“Pay off what you can,” adds Equifax’s David Rubinger. “The more you can pay off your accounts and pay regularly, the more it will help your score. If you have many inquiries, it can potentially impact your score. But paying your bills on time and paying them off as much as possible is a more important factor. You should not open new credit cards if you don’t need to increase your available credit—to a lender, this means that you have all this extra available credit, making you a greater risk.”

The big score
To tell your story right, get copies of your credit reports. Three national agencies, Equifax, Experian and TransUnion, collect and report credit data. Their reports aren’t identical, so get all three.

Fortunately, that just got easier. With recent passage of an amendment to the Fair Credit Reporting Act, each agency must give consumers one free report annually. The law is being rolled out through the year, starting in the West in December, the Midwest in March, the South on June 1 and, finally, in U.S. territories and Eastern states on Sept. 1, 2005. See a map of states and roll-out dates and apply for free credit reports at Annual Credit Report.com, a Web site launched by the agencies.

You’d also want to buy—this one’s not free—your credit score, a three-digit rating of your creditworthiness. The higher your score, the lower the interest rate you command. According to Rubinger, about 70 percent of lenders use the FICO scoring system. Several firms, including the credit reporting agencies, use their own systems—similar to but different from FICO. To ensure you purchase the same score (or scores) as your lender, ask the lender you’re thinking of using which they prefer. Scores start at under $10.

Finally, knowing your story lets you shop for the right lender. Armed with your new self-knowledge, make lots of phone calls to learn which lenders have the most choices, the best rates, the lowest fees, the speediest processing times. Don’t be shy about describing your situation. If you have had credit problems, consider avoiding lenders whose loans require sterling credit.

“Compare what’s available, what types of programs they have,” says Rosenthal. “If you don’t know what the programs mean, they can get you the disclosures [fine-print rules and explanations].”

“With your homework done, you’ll be your own advocate, there won’t be as many surprises,” she says. You’ll be glad that you learned to see yourself through a lender’s eyes.

In the latest sign of how frothy the housing market has become, new data show the degree to which people are stretching to buy homes in a hot housing market.

The data, from the Mortgage Bankers Association, show that adjustable-rate and interest-only mortgages accounted for nearly two-thirds of mortgage originations in the second half of last year. Both types of loans have helped fuel the strong housing market since they carry lower initial monthly payments than do fixed-rate loans, enabling borrowers to purchase more-expensive homes.

With such loans accounting for an increasing portion of consumer borrowing, some mortgage analysts worry that the growth of these loans could cause problems for the housing market and broader economy. “The situation with interest-only ARMs is just one of several very scary things going on in the mortgage industry,” says Stu Feldstein, president of SMR Research Corp., a market-research firm in Hackettstown, N.J. The rise of interest-only loans, combined with other factors such as higher debt levels and changing bankruptcy laws, are likely to cause foreclosures to rise, he says, “possibly dramatically.

Though it has been clear that borrowers in high-priced markets have been gravitating to products that make homes more affordable, the shift has been greater than expected. In California, where home-price growth has been sizzling, interest-only loans accounted for 61 percent of the mortgages taken out to buy homes in the first two months of this year, up from 47.1 percent in 2004 and less than 2 percent in 2002, according to an analysis prepared for The Wall Street Journal by San Francisco researchers LoanPerformance, a unit of First American Corp. Just 18 percent of California households can afford to buy a median-price house using a conventional 30-year fixed-rate mortgage, according to a report issued this month by the California Association of Realtors.

In another report issued this month, mortgage strategists at UBS AG called the shift to ARMs and nontraditional mortgage products such as interest-only loans “symptomatic of …the end of the housing cycle. The thing that all of these loans have in common is that they allow homeowners to buy a more expensive home than they could have qualified for with a ‘traditional’ loan.”

The Mortgage Bankers Association conducted the survey of the interest-only and ARM share of mortgage originations in an effort to provide more accurate information about the housing market. The group’s survey found that interest-only mortgages accounted for 17 percent of loans originated in the second half of 2004. And 46 percent of loans were adjustable-rate loans that don’t carry an interest-only feature. The data reflect dollars lent, not the number of mortgages.

This is the first time the group has measured the share of interest-only loans, in which borrowers lower their monthly outlay by paying interest and no principal in the loan’s early years. It also is the first time it has looked at loans actually granted, not merely applications.

The findings are the latest evidence that borrowers have moved decisively away from traditional 30-year fixed-rate mortgages and have embraced ARMs and, in particular, interest-only loans, which used to be a niche product. Though borrowers take out these loans for many reasons, the shifts come at a time when both home prices and competition among mortgage lenders has climbed. The MBA’s weekly surveys - which look only at application volume, not loans that are actually made - had put the share of ARMs, including interest-only loans, at roughly 40 percent to 50 percent this year. That is up from as little as 18 percent of application volume in early 2003.

The surge in ARMs and interest-only loans is particularly notable because rates on 30-year fixed-rate mortgages remain below 6 percent, still low by historical standards. Borrowers typically turn to ARMs as interest rates climb, but so far the increase in rates has been modest. Many economists see the current popularity of ARMs and interest-only loans as the latest sign of how borrowers are stretching to buy homes they couldn’t otherwise afford - and of how lenders are more than willing to accommodate them.

Partly because of these products, mortgage originations are expected to total nearly $2.5 trillion this year, according to the MBA, down slightly from $2.6 trillion in 2004.

Products such as interest-only mortgages can be riskier than fixed-rate mortgages, particularly when interest rates are rising. If home prices fall as rates rise, some borrowers with interest-only loans could wind up owing more than the value of their home. Even if the growth in home prices simply flattens or slows, some borrowers could be squeezed by rising mortgage payments.

In another sign that worries about lending practices are increasing, federal banking regulators Monday issued new guidance for lenders making home-equity loans and lines of credit. The guidelines require banks to do a more in-depth analysis of borrowers’ income and debt levels and their ability to repay the loan - instead of relying simply on credit scores.

Initially aimed at sophisticated borrowers who wanted to free up cash for other purposes, such as investing in the stock market, interest-only loans have come to dominate some segments of the mortgage market. A report issued in January by UBS found that the interest-only share of jumbo loans - currently, loans exceeding $359,650 - had tripled since the end of 2003.

Michael Menatian, a mortgage banker in West Hartford, Conn., says he is seeing some borrowers opt for interest-only loans over mortgages that carry a lower interest rate but result in a higher monthly payment.

If home prices continue to surge, affordability could this year reach its worst-ever levels in hot markets such as Los Angeles, Boston and Miami, according to recent report by Goldman Sachs Group Inc. senior economist Jan Hatzius.

The MBA survey highlights other changes in the mortgage market that may increase risks to borrowers and lenders. More than half of the adjustable-rate loans were “traditional” ARMs, meaning the initial interest rate is fixed for less than three years. Borrowers who opt for these loans typically get a lower initial interest rate in exchange for giving up protection from future rate increases.

Until recently, so-called hybrid ARMs had been a more popular choice. These loans typically carry a higher initial interest rate, but are considered a more-conservative option because the interest rate is fixed for the first three, five, seven or 10 years. That makes it more likely that the borrowers will move or see their incomes increase before they face higher payments.

The shift to short-term ARMs has occurred even as the difference between rates on ARMs and fixed-rate loans has narrowed, reducing the attractiveness of adjustables. “To have a lower initial monthly payment, people have gone for shorter-term ARMs,” says Fannie Mae Chief Economist David Berson.

As the use of more novel lending programs becomes commonplace, some mortgage analysts worry that borrowers are adding to the risks by combining a number of features - using, for instance, 100 percent financing and an interest-only mortgage or a no- or low-documentation loan to buy a property for investment. “These things layer on each other,” says Mark Milner, senior vice president and chief risk officer of PMI Mortgage Insurance Co., a unit of PMI Group Inc. During the past year, PMI has increased its charges for insuring riskier loans, Mr. Milner says.

I am looking for a loan on which, whenever I make an extra principal payment, my monthly payment immediately declines. Is there such a thing?

The only mortgage that works that way is one on which the payment is interest-only. Not all interest-only mortgages work that way, however.

With a fixed-rate mortgage of the standard type, extra payments shorten the payoff period but do not affect the monthly payment. For example, if you borrow $100,000 for 30 years at 6 percent, your fully amortizing payment is $599.56. Pay this amount every month, and you are out of debt after making 360 payments. If you make an extra payment of $90,000 in month 2, your payment in month 3 and all subsequent months remains $599.56 until month 20, when the loan balance hits zero. Until then, you receive no payment relief.

With an adjustable-rate mortgage (ARM) on which the borrower is making the fully amortizing payment, extra payments do change the monthly payment, but not until the next rate adjustment. At that point, the payment is recalculated and the new payment will reflect all prior reductions in the balance.

Assume the $100,000 6 percent loan is a one-year ARM, and that an extra payment of $90,000 is made in month 2. The payment would remain at $599.56 through month 12, but (assuming the rate stayed at 6 percent) the payment would drop to $13.81 in month 13.

On ARMs with longer initial rate periods, the drop in payment following an extra payment would be further delayed. On the popular 5-year ARM, for example, the payment wouldn’t drop until month 61.

If a loan is interest-only, the payment should decline in the month following an extra payment, whether the loan is fixed-rate or adjustable-rate. The interest only payment on the $100,000 loan at 6 percent is $500. Following the payment of $90,000 in month 2, the interest-only payment should drop to $50 in month 3.

From the mail I have received on this topic, however, I get the distinct impression that not all lenders have their servicing systems geared to do this properly. This is not surprising, given the haste with which many lenders have incorporated interest-only into their program offerings. Even if the system calculated the new interest-only payment correctly, they need to communicate the new interest-only payment to the borrower. I have not done a comprehensive survey, but I do know that some lenders are not doing this.

In most cases, lenders who do not change the payment immediately will change it on the anniversary month, as specified in the note. Until that date, the payment will remain unchanged, but since the interest due is lower, a part of the payment will be credited to principal.

If the loan in my example is of this type, the interest due in month 3 will drop to $50, but the borrower will continue to pay $500 until month 13, which is the anniversary month. $450 will be applied to principal in month 3. In each subsequent month 4-12, the interest portion will drop a little and the principal portion will rise, until month 13, when the borrower will once again be able to pay interest only.

There are some interest-only loans on which the interest-only payment in month 1 continues until the end of the interest-only period—five or 10 years.

If it is an ARM, the payment will adjust when the rate adjusts, but if it is fixed-rate, the payment won’t change for five or 10 years.

If you are contemplating an interest-only loan and find immediate payment adjustments in response to extra payments a highly desirable feature, ask about it. Don’t expect the subject to be volunteered by the loan officer or mortgage broker. They are not involved in loan servicing and the chances are that they don’t know the answer and will have to ask. Make sure they do.

WASHINGTON - Rates on 30-year mortgages, after falling for five straight weeks, edged up a bit this week, reflecting in part indications that the recent economic slowdown would be short-lived.

Mortgage giant Freddie Mac reported Thursday in its weekly survey that rates on 30-year, fixed-rate mortgages averaged 5.77 percent this week, up from 5.75 percent last week.

It marked the first increase in rates since March 31 when the 30-year hit 6.04 percent, the high point so far this year.

Analysts attributed this week’s increase to stronger-than-expected economic reports including news that the economy added 274,000 jobs in April. But analysts said they did not expect mortgage rates to rise quickly, given continued uncertainty about the economy’s direction.

“The bond market isn’t exactly sure how fast or slow the economy will expand in the long term and thus bond yields have remained remarkably low,” said Frank Nothaft, Freddie Mac’s chief economist.

The housing market has continued at a strong pace this year, reflecting the still historically low mortgage rates.

Analysts predicted that mortgage rates will rise in the months ahead but at a gradual pace that would leave the 30-year mortgage at around 6.5 percent by the end of the year.

Borrowing costs for other types of mortgages also rose this week, Freddie Mac reported.

Rates on 15-year, fixed-rate mortgages, a popular option for refinancing, rose to 5.33 percent, up from 5.31 percent last week while rates on one-year adjustable rate mortgages edged up to 4.23 percent, compared to 4.22 percent last week.

Rates on five-year hybrid adjustable rate mortgages rose to 5.21 percent, up from 5.16 percent last week. These hybrid mortgages have a fixed-rate for five years and then adjust each year after that.

The nationwide averages for mortgage rates do not include add-on fees known as points. The 30-year mortgage carried a nationwide average fee of 0.5 point while the other three mortgage categories carried an average fee of 0.6 point.

A year ago, 30-year mortgages averaged 6.34 percent, 15-year mortgages were at 5.72 percent and one-year ARMs averaged 3.90 percent. Freddie Mac does not have historical data on the five-year ARM which it began tracking this year.

Thirty years ago, first-time home buyers were often encouraged to stretch as far as they possibly could to buy a house. Back then, that advice made some sense.

Today, it can be a recipe for disaster.

A too-big house payment can, at the very least, leave you with too little money for other goals: retirement, vacations, college funds for the kids. At worst, it can leave you vulnerable to foreclosure and bankruptcy.

What’s more, you can’t count on your real estate agent, a mortgage loan officer, your friends and family or an Internet calculator to know what you can really afford. That’s a decision you have to make yourself after reviewing your finances, your future obligations, your goals and your gut.

Yet many first-time buyers are still being pushed into mortgages that are bigger than they can handle, based on old-fashioned advice

Here’s what’s changed in the 30 years (or more) since your parents bought their first house:

Inflation. Rapidly rising prices in the 1970s and early 1980s meant you could count on hefty annual raises. Today, you can’t rely on double-digit income boosts to make your mortgage payment less of a burden each year.

Two-income couples. A generation ago, single-income families were more common. If the breadwinner lost a job, the other spouse could go to work to save the house. With more two-income families needing both paychecks to make the mortgage payment, there’s no one on the sidelines to take up the slack – unless you put the kids to work.

The lending industry. Thirty years ago, it was pretty tough to get a mortgage for more than you could really afford. Today, it’s fairly commonplace. More lenders have loosened their criteria, knowing that the vast majority of their borrowers will do whatever it takes to pay their mortgage – even if it means trashing the rest of their financial lives.

Retirement. A much bigger proportion of the workforce was covered by traditional, defined-benefit pensions 30 years ago – which means they didn’t have to save massive amounts of money on their own to have a decent retirement. Today, the onus is typically on you to carve enough out of your budget to fund 401(k)s and IRAs.

Let’s get real
So how much should you spend on a house? The traditional way to calculate that is to add up all your income and make sure that your housing expenses – mortgage payment, homeowners insurance and property taxes – don’t exceed a certain amount of that total. The traditional limit, still used by many lenders, is 28% of gross monthly income. Some financial advisers recommend capping your outlay at 25%; others suggest stretching to 33% or more.

These limits, by the way, apply only if you don’t have a lot of other debt. Most lenders don’t want more than 36% of your total income to go toward mortgage and other debt payments. If your total debt would push you over that figure, most lenders will reduce the size of the mortgage for which you qualify.

Here’s how the varying limits translate. The figures assume you earn $45,000 a year and that you would pay $480 in homeowners insurance and $2,000 in property taxes annually. (In reality, those figures would fluctuate with the value of the home you buy.) This also assumes a 30-year loan at 5.5% interest and a big enough down payment that you’ll avoid private mortgage insurance, or PMI.

How large a mortgage can $45,000 a year get you
If share of income devoted to housing is: The monthly cash requirement is: Less: taxes and insurance … … leaves cash needed to pay the mortgage … … and translates into this loan amount

*If gross income is $45,000 a year. **$480 a year for insurance, $2,000 for taxes. *** Assumes a 30-year, fixed-rate loan at 5.5% interest.

As you can see, the percentage of income used has a huge effect on how much house you can buy.

Fixing a glitch in the calculators
Most Internet mortgage calculators use the 28%-of-total-income figure. If you want to see how much mortgage you could afford under other scenarios, adjust your income by using the following multipliers:

Income converter to make online calculators work better
If you want the share of your income*
devoted to housing to be: Multiply your income by
25% 0.9
28% 1
31% 1.11
33% 1.18

* Gross income

Then, use the calculators.

Your own math is more important
The best way to figure out how much house you can afford is to do your own math.

Figure out how much money you need to contribute to various goals, such as your retirement and your kids’ college educations.

Estimate how much your house is going to cost you in maintenance and repairs each year (figure about 1% to 3% of the home’s total value annually, depending on its age and condition – see “The hidden costs of homeownership” for more details). Then see how much of your remaining income is eaten up by your housing costs (including insurance and taxes), and see how you feel about that.
All that math making your head hurt? Here’s the short version: You’ll probably be most comfortable using the 25% lid. You may want to go even lower if:
You plan to have children. Kids can be expensive, and many couples discover they want to have the option of one partner staying home, or working part-time, once kids arrive. That’s tough to do if you need every penny of both incomes to make ends meet. If you really want to be conservative, do your calculations based on the income you think you’ll have post-baby.

You have an expensive hobby, like travel. Most homeowners are willing to put their wanderlust on the backburner to buy more house. If that’s not you, buy less house.

Your income varies considerably. Most American workers have variable incomes, thanks to the prevalence of overtime pay and bonuses. If yours swings wildly from year to year, though, consider basing your calculations on your average earnings over several years or (even more conservative) on the minimum you expect to make.
You may think you can’t possibly limit your housing expenses by that much, especially if homes cost a lot where you live. You do, in fact, have plenty of alternatives, as I pointed out in “Find a bargain in a hot housing market.”

However, you can stretch further if:

You’re absolutely debt-free. No credit card debt, student loans or car payments – and none anticipated in the near future? You probably can handle a bigger nut.

You don’t have to worry about retirement. Many teachers and civil servants have terrific pensions – so good that to be sure they’ll be fine, they just have to throw a few bucks each year into an IRA or deferred-compensation plan.

You’re pretty sure your income will climb steeply in coming years. Fresh out of law school and doing a few years in the public defenders’ office? If private practice is your goal and you don’t want to wait to buy a home with the bigger income that’s coming, stretching now can work out okay.

There is a saying on Wall Street that speaks to the powerful influence of Federal Reserve interest rate hikes. The expression is “Don’t fight the Fed,” and it reminds investors that periods of rising interest rates tend to be pretty ugly for the stock market. Thus far in 2005, the expression holds true.

But with an eighth quarter-point interest rate hike arriving today, another even larger contingent of the American public – homeowners and home buyers – should pay close attention to this mantra. (For more on the Fed move and the markets’ reaction, see Market Dispatches.)

Sure, fixed mortgage rates remain below 6%, and the housing market is strong, as evidenced by record sales of new homes in March.

However, several trends among home buyers and new homeowners seem to defy where the Fed is going. Buyers increasingly rely on borrowed money because of smaller down payments. In the highest-priced housing markets, borrowers are turning to interest-only loans and short-term adjustable-rate mortgages in record numbers, ignoring the consequences of rising rates on monthly payments a few years from now. Also prevalent among homeowners is the notion that they can always sell at just the right time, or refinance to another, more appropriate, loan at a later date.

The number of areas across the United States with real estate booms grew nearly two-thirds last year to 55, the Federal Deposit Insurance Corp. said, warning that these booms may be followed by busts.

The boom areas represent 15% of the 362 metropolitan areas the Office of Federal Housing Enterprise Oversight analyzes, the highest proportion of boom markets in 30 years of price data and more than twice the peak of the late-1980s booms. California had 21 of the 55 boom markets in 2004; Florida had 11 and the Northeast had 18.

Boom areas were defined as having inflation-adjusted prices at the end of 2004 that were up 30% or more in three years.

Adding recent data and analysis to a study released in February, FDIC economists Cynthia Angell and Norman Williams repeated their view that credit market conditions may make current housing market booms different than past ones, which have tended to taper off rather than bust.

“To the extent that credit conditions are driving home price trends, the implication would be that a reversal in mortgage market conditions – where interest rates rise and lenders tighten their standards - could contribute to the end of the housing boom,” they say.

Busts are relatively rare
The FDIC economists found that only 17% of local U.S. housing booms in the 1978-1998 period ended in busts, defined as a 15% or greater drop in nominal home prices over five years. This economic stress as economies stumbled in Oil Patch states weighed heavily on their housing markets. In the worst cases, nominal home prices fell by 40% and 33% in Lafayette, La., and Casper, Wyo., respectively, between 1983 and 1988.

Have you ever forgotten to claim a tax deduction until after you sent your tax returns to the IRS? I have. Several times, in fact. The result was that I later filed an amended tax return on IRS Form 1040X.

One time, while cleaning out a desk drawer, I luckily discovered a substantial forgotten tax deduction I should have claimed on my tax returns filed two years earlier. Fortunately, tax returns can be amended up to three years from the date they were due.

But it’s better to claim all the deductions when the tax return is filed because amended tax returns often trigger a tax audit before the IRS will issue a refund check.

Especially if you bought, sold or refinanced your home, you might have forgotten to claim some big tax deductions. Here are the most often forgotten real estate tax deductions:

1. Deduct principal residence acquisition mortgage fee if you bought a home last year. If you bought your principal residence last year and if you paid the mortgage lender a loan fee, usually called “points” (each point equals 1 percent of the amount borrowed), that “home acquisition mortgage loan fee” is tax deductible as itemized interest on Schedule A of your tax returns.

But don’t count on your mortgage lender to include this loan fee on your annual IRS Form 1098 sent to you reporting annual mortgage interest paid. Some lenders only report your monthly interest payments, neglecting to remind you of the deductible loan points you paid to obtain the home acquisition mortgage.

Your best proof of loan fee payment to obtain the home mortgage is your closing statement received when the acquisition mortgage was recorded.

2. Remember to deduct home mortgage refinance loan fees over the life of the home loan. If you refinanced your home loan or obtained another type of real estate loan, any loan fee or points you paid can only be deducted over the life of the mortgage, such as 15 or 30 years.

To illustrate, suppose you paid a $2,000 loan fee to refinance your 30-year home mortgage. Rather than deduct the full $2,000, as you could do when obtaining a home acquisition mortgage, because it is a refinanced home loan all you can deduct is $66.67 annually for the next 30 years. For this reason, when refinancing a home mortgage, many borrowers prefer to get a so-called “no cost” mortgage without any loan fee or points. The general rule is for each loan-fee point paid, the mortgage interest rate should decline by one-eighth percent.

To avoid the hassle of remembering to deduct the small loan fee amount each year for 15 or 30 years, many refinancing home loan borrowers prefer to pay a slightly higher loan interest rate. Another reason to avoid paying a loan fee when refinancing is most home loans are paid off in less than 10 years, either due to property sale or a subsequent mortgage refinance.

3. Deduct undeducted loan fees from a prior home loan refinance. If you refinanced a previously refinanced home loan, don’t forget to deduct any remaining undeducted loan fee in the tax year of the second refinance.

For example, suppose you refinanced your home mortgage last year and had $1,500 undeducted loan fees from a prior refinance. That $1,500 is fully deductible as itemized interest in the tax year of the second refinance.

4. Deduct any mortgage prepayment penalty you paid. Many home loans have prepayment penalties if they are paid off early, usually within the first three to five years. If you paid a prepayment penalty because you sold the home or refinanced, the prepayment penalty qualifies as deductible itemized interest.

5. If you changed job location and your residence, your moving costs may be deductible. Whether you are a renter or a homeowner, you may qualify for the moving-cost deduction if you changed both your job site and your residence but were not reimbursed for household moving costs.

This can be a big tax deduction, especially if you made a major cross-country move to take a new job. Use IRS Form 3903 to calculate and claim this deduction.

To qualify, the distance from your old residence to your new job location must be at least 50 miles further from your old home than was your old job location. For example, suppose your old home was three miles from your old job location. In this example, if your new job site is at least 53 miles (3 plus 50) from your old home, you can qualify.

After you pass the distance test, the second moving-cost deduction test requires you to be employed at least 39 weeks during the 52 weeks in the vicinity of your new job location. You need not work for the same employer. Either spouse can qualify.

If you are self-employed, however, you must work at least 78 weeks during the next 24 months in the vicinity of your new worksite.

6. Remember to deduct any casualty loss. If you suffered a “sudden, unusual or unexpected” loss, such as fire, flood, hurricane, tornado, earthquake, mudslide, theft, accident, water damage, riot, embezzlement, vandalism, snow, rain or ice storm, but were not paid by insurance or other reimbursement, you may be able to claim a casualty loss tax deduction.

However, slow losses are not deductible. Non-deductible examples include termite damage, dry rot, dry well, rust, corrosion, plant loss, moth damage, Dutch elm disease, erosion and mold.

To qualify, the casualty loss deduction must exceed 10 percent of your adjusted gross income, plus a $100 “floor” per casualty event. Use IRS Form 4684 to calculate your deductible amount.

But be aware you will need proof of loss, such as your uninsured repair cost. Replacement estimates alone usually are not enough if you didn’t repair or replace.

7. Deduct prorated property tax in year of home sale or purchase. An easily forgotten deduction in the year of a home sale is your share of the prorated property taxes.

This deduction is usually paid to the local tax collector as part of the sale closing procedure, so you might not have a cancelled check or other proof of payment. Your closing settlement statement should show your prorated property tax share, based on the number of days you owned your home during the tax year.

8. Deduct prorated mortgage interest in the year of home sale or purchase. If you bought your home last year and either assumed or purchased “subject to” its existing mortgage, you are entitled to deduct your prorated interest share for the month the sale closed.

Again, the buyer’s and seller’s shares are usually calculated on their closing statements, even if the other party made the actual interest payment to the mortgage lender.

9. Deduct prepaid property taxes and mortgage interest. Millions of U.S. homeowners prepay their property taxes and mortgage payments each December even though these payments are not due until the next year. The reason is these payments are deductible in the tax year of actual payment.

Not all local property tax collectors allow early payments, but many do. If you prepaid your January mortgage payment in late December, be sure your lender received the payment and included it on your IRS Form 1098.

10. If your home is on leased land, you may be entitled to deduct ground rental If your home is one of the millions located on leased land, and if you have an option to buy that land, your ground rent payments may be deductible as itemized interest.

Internal Revenue Code 163© permits homeowners living on leased land to deduct their ground rent payments if (a) the ground lease is for at least 15 years, including renewal periods, (b) the land lease is freely assignable to the buyer of your residence, © the land owner’s interest is primarily a security interest (like a mortgage), and (d) you have a current or future option to buy the land under your home.

If your situation does not meet all four of these tests, your ground rent payments are not deductible. For example, if you rent a “pad” or “lot” in a mobile home park, your monthly rent paid to the park owner is not deductible unless you have at least a 15-year lease with a purchase option.

Additional homeowner deductions: Although rarely forgotten, additional homeowner deductions include the property taxes and mortgage interest. However, payments into your escrow impound account with your mortgage lender do not become deductible until the loan servicer actually remits the money to the local tax collector.

Most lenders include the deductible property tax and mortgage interest amounts on the borrower’s annual IRS Form 1098. Of course, if you pay your property taxes directly without an escrow account, then your lender won’t include that amount on your Form 1098.

If you were among the more than 12 million home buyers and sellers last year, you probably paid additional closing costs such as transfer tax, recording fees, escrow, title, or attorney fees, and other nondeductible expenses.

Home buyers should add these nondeductible expenses they paid to their purchase price cost basis for the house or condo. Residence sellers should subtract these costs paid as sales expenses from their home’s gross sales price. For full details on these and other homeowner and real estate investor tax benefits, please consult your tax adviser.

Selling a home costs money thousands of dollars by the time you total up the closing and moving costs, and thousands more if you have to outfit your next home with new appliances and furniture. If you don’t have to sell immediately, weigh your decision carefully especially if the market is slow and chances are high you won’t get top price for your home.
Consider remodeling to upgrade your living space or better suit your needs. Make a list of the improvements you want, then get some estimates from a local contractor. Total up the cost of selling your home (usually 7 percent to 10 percent of your sales price) and moving ($1,500 on up), and compare the two. Ask yourself:

Do you have the space to expand?
If not, and you need space, the issue may be moot. But consider other ways to maximize the space you have.

What is your house’s condition?
Do your own inspection to see if you have any major problems lurking, such as an aging heating system that needs replacement or potentially serious wood damage.

How much can you do before you start over-improving for the neighborhood?
Whatever your improvements, they should match the size and sensibility of the area in which you live. Too many improvements do not always translate into higher resale value, and your massive addition may alienate your neighbors.

Will remodeling do the trick?
Be realistic about how much remodeling can do. If you want to live in a spacious home on a large lot right now, no contractor will be able to turn your tiny urban bungalow into the home of your dreams.

Will it pay off in the long run?
In a slow market, you can expect to get a lower price for your home and much less of a payback for improvements than you would receive in a fast market. Kitchen and bathroom remodeling projects consistently return the most in resale value while converting a basement into a family room yields the smallest return. Factor in any financing costs you incur if you refinance or use a home equity loan to complete your project.

April, May and June are the peak home sales season. This is the time of year when there are more prospective home buyers in the marketplace than any time of the year. If you want to sell your house or condo, to earn top dollar this is the best time of year to do so.

2005 is an especially good year to sell your home in most communities because (1) there is a shortage of homes listed for sale in many areas and (2) mortgage interest rates recently rose slightly. When mortgage interest rates go up, undecided home buyers get busy and buy before interest rates go higher.

How to sell your home for top dollar.
Presuming your house or condo is ready to sell because you’ve repaired, cleaned and painted it to show it at its best, your next step is to list it for sale with the right real estate agent.

But your house or condo is not fully ready to sell until you have had it professionally inspected. Required and recommended inspections vary by community. For example, you definitely need a termite inspection for a Florida home, but not for an Alaska house. It is a big sales advantage to show prospective buyers the completed inspection reports customary for your community.

Professional inspection reports obtained before putting a house on the market for sale prevent problems. A competent inspector will spend two to three hours checking out your house. Be sure to accompany your inspector to discuss any defects discovered and have any serious defects repaired before listing your home for sale.

A “clean report” is especially impressive to buyers. Professional home inspectors with the toughest standards belong to the American Society of Home Inspectors (ASHI). Go to their site to find local ASHI members or phone 1-800-743-2744.

Local realty agents can inform you about additional customary local inspections such as for energy efficiency, building code compliance and radon.

My experience has been it is best to get recommended repairs completed before putting the house on the market for sale. Buyers will often accept the seller’s inspection reports, showing repairs completed, thus saving sales marketing time and obtaining a maximum sales price.

Even if you think you can “save the sales commission” and sell your home alone without professional help, it’s smart to interview at least three successful local agents who sell homes in your vicinity. The reason is you will learn what is involved in today’s home sales and the market value of your home.

If you haven’t sold a residence for several years, times have changed radically. More seller written disclosures are required than ever before. If you fail to properly provide paperwork to your buyer, that person might sue you years later for damages.

After your home is ready to sell, interviewing at least three successful agents will reveal the details involved in today’s home sales. More important, you will obtain three written market value evaluations of your home’s likely sales price from agents who sell homes in your vicinity.

Select the three or four agents to be interviewed from among successful agents who sell homes in your neighborhood. By interviewing three or more agents, you won’t be misled by one “charismatic” agent who might overprice or underprice your home’s estimated value.

Contact agents who have nearby “for sale” signs that recently turned into “sold” signs within 30 to 60 days. But don’t forget the agent who represented you when you purchased your home if you were satisfied with his or her service and if that agent has kept in touch. Also, interview agents who send monthly real estate newsletters with recent sales prices of comparable nearby homes.

If you can’t find any local agents to interview, a good Internet source is Home Gain. There you can check recent comparable nearby home sales prices and ask local agents to inform you of their services. This Web site never reveals your name or address, just the vicinity, to nearby registered realty agents who want to make written listing proposals. Then you can decide if you want to contact those local agents.

10 key questions to ask each agent.
During your interview of three or more successful local agents, even if you think you want to sell your home alone without professional help, be sure to ask lots of questions. Jot those questions down before each interview so you won’t forget.

Each agent, as part of his or her listing presentation, should give you a written CMA (comparative market analysis) report to study. Disregard any agent who refuses to allow you to keep their CMA.

As a home seller, you need each agent’s CMA to (1) compare with the other agent CMAs, and (2) to help arrive at your asking price.

Each CMA will show recent sales prices of comparable nearby homes, asking prices of neighborhood homes like yours (your competition), and asking prices of comparable homes with recently expired listings which were probably overpriced.

Here are the 10 key questions all but the very best real estate agents hope you don’t ask:

How long have you been selling homes in my vicinity?
What are the names, addresses and phone numbers of your five most recent home sellers?
What is your written marketing plan for my home?
Do you sell real estate full-time (dismiss part-time agents unless you want part-time service)?
How many listings do you currently have (beware of agents with too many listings who won’t have personal time for your home sale)?
Do you have any office assistants (if so, will I be dealing with you or an assistant)?
What day of the week do you take off and which agent covers for you when you are gone?
Do you plan any vacation during my listing period?
Will you be able to sell my home within a 90-day listing period?
What is your sales-commission fee schedule?

A word of caution: if you don’t like the answer to one question, consider the agent’s other qualities, which might be overwhelming strong points.

For example, suppose you interview a relatively new but very enthusiastic agent. He or she might have more time available to concentrate on your listing than an experienced agent who has 20 or 30 listings. Or a part-time but very successful agent, who is a local school teacher, might have lots of contacts with prospective home buyers.

List for no longer than 90 days.
In today’s very active house and condo sales market in most communities, a top-quality listing agent should be able to sell your home within 90 days.

However, some very successful agents will insist on a longer listing, such as 120 to 180 days. If you decide that is the best agent for your home, to avoid an unpleasant situation, your best protection is to insert a clause in the listing such as “After 90 days, seller may cancel this listing unconditionally with no reason and at no expense.”

Some homes take longer than 90 days to sell, especially high-priced or unusual homes. But a 90-day cancellation cause protects home sellers just in case the wrong listing agent was selected.

However, the best agents don’t fear such a cancellation clause because they have confidence in their abilities to sell the home within 90 days or to satisfy the seller with their superb service.

Summary:
Home sellers who want to earn top dollar for their homes should ask lots of questions, especially the “top 10″ questions realty agents hope sellers don’t ask.