Unit 3 - Overview Flashcards
Learning Objective: Identify the various types of housing choices available to homebuyers.
Explanation: Homebuyers can choose from different types of housing, including single-family homes, condominiums, cooperatives, townhouses, manufactured homes, modular homes, planned unit developments (PUDs), and time-shares. Each housing type offers varying degrees of ownership, maintenance responsibility, and living experience, making it essential for buyers to select what best suits their needs, lifestyle, and budget.
Learning Objective: Discuss the primary considerations for determining housing affordability.
Explanation: Housing affordability is primarily determined by a buyer’s income, current debts, and mortgage terms. Lenders use formulas like the debt-to-income ratio to assess affordability. The monthly cost of purchasing a home (including mortgage principal, interest, taxes, and insurance) should typically not exceed 28% of a buyer’s gross income, and the total debt should not exceed 36%. These considerations help determine if a buyer can manage the financial responsibility of homeownership.
Learning Objective: Explain the tax benefits of homeownership.
Explanation: Homeownership provides significant tax benefits, such as deductions for mortgage interest, property taxes, and certain loan origination fees. Homeowners may also benefit from capital gains exclusions when selling their primary residence. Married couples can exclude up to $500,000 in gains, while single homeowners can exclude up to $250,000, provided they meet the ownership and use requirements.
Learning Objective: Distinguish the various types of homeowners insurance policies and relate them to property-damage claims and CLUE reports.
Explanation: Homeowners insurance policies vary in the level of coverage they provide. The most common policy types in Texas include HO-A, HO-B, and HO-C:
HO-A policies offer limited coverage and typically only cover certain named perils (such as fire or wind) and provide actual cash value for damages, meaning depreciation is factored into the payout.
HO-B policies are the most common type in Texas and provide more comprehensive replacement cost coverage for the structure, covering many more perils than HO-A. For personal property, however, they offer actual cash value unless an endorsement for replacement cost is added.
HO-C policies provide the most extensive coverage, including replacement cost for both the structure and personal property, and cover more types of damage, making them the most expensive option.
CLUE (Comprehensive Loss Underwriting Exchange) reports track property-damage claims made against a property and can affect the cost and availability of future insurance coverage. Understanding which policy offers the right protection and how claims impact insurability is crucial for homeowners.
Learning Objective: Describe the requirement for and the coverage provided by a flood insurance policy.
Explanation: Flood insurance is required for properties located in high-risk flood zones, particularly if financed by federally regulated or insured loans. The National Flood Insurance Program (NFIP) provides coverage for damage caused by flooding, such as overflow from bodies of water, rapid runoff, or mudslides. Standard homeowners insurance typically does not cover flood damage, making separate flood insurance essential for homes in flood-prone areas.
Key Term: Capital gains
Definition: The profits realized from the sale or exchange of an asset, including real property. Homeowners can exclude a portion of these gains from taxation if certain conditions, such as length of ownership and use, are met.
Key Term: Coinsurance clause
Definition: A provision in homeowners insurance policies requiring that the property be insured for at least 80% of its replacement cost. If the insurance coverage is below this amount, the homeowner may not receive full reimbursement for damages.
Key Term: Common elements
Definition: The shared parts of a condominium or cooperative property, such as hallways, elevators, and recreational facilities, which are jointly owned by all unit owners.
Key Term: Condominium
Definition: A form of ownership in which an individual owns a unit in a multi-unit building and also holds a shared interest in the common elements of the property.
Key Term: Cooperative
Definition: A type of residential property where the individual does not own the unit but instead owns shares in a corporation that holds the title to the entire property. The individual has a proprietary lease to occupy a specific unit.
Key Term: Deductible clause
Definition: A provision in an insurance policy that specifies the amount of money the insured must pay out-of-pocket before the insurance company will pay for a covered claim. Larger deductibles typically result in lower insurance premiums.
Key Term: Endorsement
Definition: An addition or amendment to an insurance policy that alters or adds to the coverage provided. Common endorsements include increased coverage limits for certain items or coverage for additional risks.
Key Term: Equity
Definition: The difference between the market value of a property and the amount still owed on the mortgage. As mortgage payments are made and the property value increases, the homeowner’s equity in the property grows.
Key Term: Federal Emergency Management Agency (FEMA)
Definition: A U.S. government agency responsible for coordinating responses to disasters and overseeing the National Flood Insurance Program (NFIP), which provides flood insurance for homeowners in high-risk areas.
Key Term: Homeowners insurance policy
Definition: A package policy that provides financial protection for homeowners against risks such as fire, theft, personal liability, and property damage. Coverage levels vary depending on the type of policy (HO-A, HO-B, HO-C).
Key Term: Investment
Definition: An asset or property purchased with the goal of generating income or appreciation over time. Real estate is often considered a stable, long-term investment due to its potential for value appreciation.
Key Term: Manufactured home
Definition: A housing unit that is constructed in a factory and transported to the home site, where it is either permanently or semi-permanently attached to the land. Manufactured homes offer lower-cost housing options compared to traditional construction.
Key Term: Mixed use
Definition: A development that combines residential living spaces with commercial, retail, or office spaces in the same building or complex. Mixed-use developments are common in urban areas and offer convenience to residents.
Key Term: Modular homes
Definition: Homes that are built in sections at a factory and then transported to the home site, where the sections are assembled. Modular homes are generally more affordable and quicker to build than traditional homes.
Key Term: Planned unit development (PUD)
Definition: A type of real estate development that includes a variety of housing types, as well as commercial and recreational areas. The common areas and facilities are maintained by a homeowners association, and ownership in a PUD often comes with mandatory membership in the association.
Key Term: Time-share
Definition: A form of shared ownership in which multiple individuals own a fractional interest in a property, typically a vacation home. Owners are entitled to use the property for a specific period each year and may exchange time slots with other owners or properties through a time-share network.
The real cost of owning a home includes expenses that many people tend to overlook. Which is NOT a cost or an expense of owning a home?
A. Interest paid on borrowed capital
B. Homeowners insurance
C. Maintenance and repairs
D. Taxes on personal property
Answer: D. Taxes on personal property
Reasoning for the answer: While property taxes, interest, homeowners insurance, and maintenance are common costs of homeownership, personal property taxes typically apply to movable items like cars or boats, not real estate. Therefore, this expense is not directly tied to owning a home.
If a single person who is eligible for a tax exclusion marries someone who has used the exclusion within the two years before the marriage, what is the maximum exclusion she may claim?
A. $500,000
B. $125,000
C. $175,000
D. $250,000
Answer: D. $250,000
Reasoning for the answer: If one spouse has used the exclusion within the past two years, the maximum exclusion available for the other spouse would be $250,000, as the $500,000 exclusion only applies to married couples filing jointly when both meet the ownership and use requirements.
The difference between the mortgage owed on a property and the property’s current market value represents the homeowner’s
A. Tax basis
B. Equity
C. Replacement cost
D. Capital gain
Answer: B. Equity
Reasoning for the answer: Equity is the difference between the current market value of the property and the remaining balance on the mortgage. It represents the homeowner’s ownership interest in the property.