Ask the Editors: Real-Life Home Buying & Mortgage Questions and Guidance

In its March 2010 cover story, Kiplinger’s Personal Finance tackled real-life questions on the minds of many of our readers these days. Extending our mission of personal service, we invited readers to send us more questions to be answered in this exclusive online companion package.

Walk away from a mortgage?

I purchased a home in May 2006. Fast-forward three years, and I find myself underwater on the mortgage. I estimate that I currently owe about $30,000 more than the house is worth. I tried to refinance last year, but the fees were prohibitively high, and I was better off keeping my 6.5% mortgage. I have a FICO score of 778 and little debt, and I can afford my monthly payment of $800. I cannot see how I can take advantage of any of the housing programs available. My financial sense tells me to walk away, but my ethical sense will not allow it. Anything out there I missed?

First, double-check your eligibility for a Home Affordable refinance. You may be eligible if your first mortgage is owned or guaranteed by Fannie Mae or Freddie Mac and doesn’t exceed 125% of your home’s current market value. (For example, if your home is now worth $100,000, then your mortgage couldn’t exceed $125,000.) Go to www.makinghomeaffordable.gov to learn more.

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Even if you qualified for a loan modification -- and given that you can afford your mortgage, you probably wouldn’t -- it’s unlikely that your lender would reduce your outstanding balance. Your best bet may be to try a short sale of your home -- you would obtain your lender’s permission to sell your home for a price that’s less than you owe on your mortgage. To pursue this, you need to consult with your lender and with a real estate agent with strong experience in short sales.

Aside from ethical considerations, if you stop making your mortgage payments and the property goes to foreclosure, the foreclosure will stay on your credit record for seven years, and your credit score would take a major hit. You wouldn’t be able to take a conforming mortgage (backed by Fannie or Freddie) to purchase another home for at least a couple of years, and the mortgage rate for which you would qualify would be higher, reducing your purchasing power.

Perhaps you can justify simply staying in your existing home. At a minimum, your home provides a roof over your head. The longer you live there, the more loan principal you will pay down, increasing your equity. And with any luck, you might also enjoy some home-price appreciation.

Buying a foreclosure

How do I find foreclosed homes for sale?

You may have heard of foreclosures sold "on the courthouse steps." That refers to auctions of foreclosed homes conducted by foreclosing lenders. You’ll find them advertised in your local newspaper. Even if you have the cash to compete with the investors who show up to snatch up these properties at auction, they pose some risk. That’s because lenders generally offer foreclosures in "as is" condition, which often means vpoor condition. You can’t get a home inspection before you bid on foreclosed homes.

A better alternative for novices is to buy a "real-estate-owned" property, or REO. Lenders have bought back REOs at the foreclosure auction, so they sell them themselves. Although the lender probably will sell the REO "as is," you have the right to an inspection and a title search (to ensure that the title has no legal impediments to ownership). You can finance the purchase with a conventional loan, too. However, you probably won’t get as steep a discount on price as you would with foreclosures purchased at auction. You’ll certainly face competition from other buyers for a nicer property.

To find REOs, visit the Web sites of local real estate agents or the local multiple listing service (MLS). National listing services include RealtyTrac.com (for a $60 per month subscription) and Foreclosure.com ($40 per month). Both offer a free, seven-day trial. If you decide not to subscribe, be sure to cancel during the free week or you’ll incur the monthly fee.

Also check out federal agencies and government-chartered corporations or their partners, such as HUD.gov, the Veterans Administration, FannieMae.com and FreddieMac.com.Other options: Loan servicers, such as Ocwen Financial Corp. And local franchise operators of Homevestors.com (the “we buy ugly houses” people) buy wrecks, fix them up and resell them in move-in condition, but they may also offer fixer-uppers.

Homeowners insurance

Most insurance companies don't write policies for Florida homeowners anymore -- state-sponsored Citizens seems to be the only solution. How can I be sure I explored all possibilities?

Florida does have one of the toughest homeowners insurance markets in the country. But some companies still offer policies in the state, and a few -- like PURE Insurance -- entered the Florida market in the past few years to provide homeowners insurance options for well-built, high-end homes.

No matter where you live, if you'd like help finding a policy in your area, it's a good idea to contact an independent insurance agent who works with several insurance companies and knows which ones are most likely to offer coverage in your situation. You can find a local independent agent at www.iiaba.org.

In states such as Florida, where coverage can be particularly tough to get, it's also a good idea to contact the state insurance department and find out which insurers do business in your area. You can find your state insurance department at www.naic.org.

Home-buyer tax credit

We recently moved to Florida, where we own a manufactured home. We plan to sell it or (if it doesn't sell in the present economy) rent it to snowbirds and buy a new manufactured home in the same community this spring. Will we qualify for the $6,500 tax rebate if we sign a home building contract by the end of April 2010?

Assuming your current home in Florida is your permanent residence and you can supply five years’ worth of proof of homeownership, such as real estate tax bills, property insurance or utility bills, you would qualify for the $6,500 home buyer's tax credit if you sign a contract for the property by April 30, 2010. You must close on the property by June 30, 2010.

Learn more about the new home buyer tax credits.

Energy credit

I hired American Solar Energy to install photovoltaic panels to generate electricity for my home in 2009. The cost was about $29,000 for a 4 kilowatt system. Once I was hooked up to my local utility, I received a rebate of about $12,000. This reduced my net cost to about $17,000. The big question: In calculating the federal energy tax credit, does the Feds' 30% credit apply to the total cost of $29,000 or to my net cost after the utility rebate?

The credit is based on your cost of the system after your state rebate. So the 30% tax credit would be applied to your net cost of $17,000. Learn about more ways the government will pay you to go green.

No tax credit

I upgraded my HVAC system on my home to the tune of $9,000 in early 2008. Can I amend my 2008 tax return and get an energy credit?

Unfortunately, there was no home energy tax credit in effect in 2008. The current $1,500 credit for installing energy-efficient windows, doors, insulation and home heating and cooling equipment applies only to 2009 and 2010. An earlier $500 credit was in effect in 2007.

Financing landscaping

I want to do about $10,000 in landscaping. I have a good emergency cash cushion and quite a bit of equity in my home. Am I better off paying cash or taking out a home-equity loan?

There is no one-size-fits-all answer to this question. But if you have a good credit score and lots of equity, you should be able to establish a home equity line of credit at an interest rate of about 6%. That would provide a bit extra cushion should you want to do more extensive work on the home or need other cash in a flash. Then you can decide whether to tap the credit line for the home improvements and repay the debt on your own schedule or if interest rates start rising.