Concepts of Home Ownership

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Concepts of Home Ownership

• Chapter 3

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A variety of housing types are available under
the general Heading of Home Ownership
Small Multi-family Residence
Single family
High-rise Condos
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Types of Housing

• Apartment Complexes
• Condominium
• Cooperative
• Planned unit development
• Retirement Communities
• Highrise Developments
• Converted-use
• Manufactured Housing
• Modular Homes
• Time-Shares

- Common elements
- Proprietary lease
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The decision to Buy or Rent
1.How long a person wants to live in a particular
area,
2. A persons financial situation,
3. Housing affordability,
4. Current mortgage interest rates,
5. Tax consequences of owning versus renting
property,
6. What may happen to home prices tax laws in
the future
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Housing Affordability

• Mortgage Terms
• Ownership Expenses and Ability to Pay

• Federal Housing Administration (FHA)
• Department of Veterans Affairs (VA)
• Adjustable-rate Loans

Home ownership involves many expenses, including
utilities. Owners must also pay real estate
taxes, buy property and must repay the mortgage
loan with interest.
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Ability to Pay

• To determine whether a prospective buyer can
  afford a certain purchase, lenders mostly use
  automated underwriting and credit scores.

In the past, the formula for qualifying home
buyers that have 10 of the purchase price is as
follows

• The mortgage payment, both Principal and
  Interest, plus taxes and insurance impound
  _______could not exceed ___ of gross income
  (pre-tax)
• The payments on ALL debts (normally long term
  debts) could not exceedmore than ____ of
  monthly income.

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What is P.I.T.I. ?

• Principal
• Interest
• Taxes
• Insurance

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Investment Considerations

• If property value increases, a sale could bring
  in more money that the owner paid.
  ________________

• As the total mortgage debt is reduced through
  monthly payments, the owners actual ownership
  interest in the property increases _________

A tenant accumulates nothing except a good credit
rating by paying the rent on time
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Tax Benefits

• In the late 1990s the federal government enacted
  several federal tax reforms that significantly
  changed the importance of tax considerations for
  most home sellers
• Ex 500,000 is now excluded from capital gains
  tax for profits on the sale of a principal
  residence by married couples who fill jointly
• 250,000 excluded from capital gains tax for
  filling single
• This exemption may be used repeatedly as long as
  the homeowners have both owned and occupied the
  property as their Primary residence for at least
  2 of the past 5 years.
• On Investment Real Estate, the required period
  for a unincorporated taxpayer was changed from 18
  months to 12 months for long-term capital gains

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• Summary of Tax Benefits

• Mortgage interest payments on first and second
  homes (for mortgage balances below 1 million or
  500,000 if married and filing jointly.
• Real Estate taxes (but not interest paid on
  overdue taxes)
• Certain loan origination fees,
• Loan discount points (whether paid by the buyer
  or the seller)
• Loan prepayment penalties

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HOMEOWNERS INSURANCE

• Lenders usually require that a homeowner obtain
  insurance when the debt is secured by the
  property.

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Coverage and Claims
Basic Form
Broad Form
VS.

• Fire and lightning
• Glass breakage
• Windstorm and hail
• Explosion
• Riot and civil commotion
• Damage by aircraft
• Damage from vehicles
• Damage from smoke
• Vandalism and malicious mischief
• Theft and
• Loss of property removed from the premises when
  it is endangered by fire or other perils

• Falling objects
• Damage due to weight of ice, snow, or sleet
• Collapse of all or part of the building
• Bursting, cracking, burning, or bulging of a
  steam or hot water heating system or of
  appliances used to heat water
• Accidental discharge, leakage, or overflow of
  water or steam from within a plumbing, a heating,
  or an A/C systems
• Freezing of plumbing, heating and A/C systems
  domestic appliance
• Injury to electrical appliances, devices,
  fixtures and wiring from short circuits or other
  accidentally generated currents.

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Further Insurance is available from policies
that cover almost all Possible Perils
Apartment Condominiums

• Provide fire, windstorm, theft and Public
  ___________ ________ for injuries or losses
  sustained within the unit
• However, they do not cover losses or damage to
  the structure. The basic structure is insured by
  either the landlord or the condominium owners
  association

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Most Homeowners Insurance Policies contain a

• ____________________

Insurance equal to or at least 80 of the
replacement value
Insurance for Less than 80 of the replacement
cost
This does not include the price of the land With
this policy the homeowner may make a claim for
the full cost of the repair or replacement of the
damaged property without deduction for
depreciation or annual wear and tear
This claim will be handled in one of two ways

• The loss will be settled for the actual cash
  value.
• Prorated by dividing the percentage of
  replacement cost actually cover by the policy by
  the minimum coverage requirement ( usually 80)

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Federal Flood Insurance Program

• National Flood Insurance Act of 1968
• FEMA Federal Emergency Management Agency
• Army Corps of Engineers prepared maps that
  identify specific flood-prone areas through-out
  the country.
• To Finance property with federal or federally
  related mortgage loans, owners in flood-prone
  areas must obtain flood insurance.

Enacted by Congress to help owners of property in
flood-prone areas by subsidizing flood insurance
and by taking land-use and land-control measures
to improve future management for flood plain
areas.
Administers the program