Unit 3 - Overview

Question 1

Learning Objective: Identify the various types of housing choices available to homebuyers.

Answer 1

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.

Question 2

Learning Objective: Discuss the primary considerations for determining housing affordability.

Answer 2

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.

Question 3

Learning Objective: Explain the tax benefits of homeownership.

Answer 3

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.

Question 4

Learning Objective: Distinguish the various types of homeowners insurance policies and relate them to property-damage claims and CLUE reports.

Answer 4

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.

Question 5

Learning Objective: Describe the requirement for and the coverage provided by a flood insurance policy.

Answer 5

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.

Question 6

Key Term: Capital gains

Answer 6

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.

Question 7

Key Term: Coinsurance clause

Answer 7

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.

Question 8

Key Term: Common elements

Answer 8

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.

Question 9

Key Term: Condominium

Answer 9

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.

Question 10

Key Term: Cooperative

Answer 10

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.

Question 11

Key Term: Deductible clause

Answer 11

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.

Question 12

Key Term: Endorsement

Answer 12

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.

Question 13

Key Term: Equity

Answer 13

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.

Question 14

Key Term: Federal Emergency Management Agency (FEMA)

Answer 14

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.

Question 15

Key Term: Homeowners insurance policy

Answer 15

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).

Question 16

Key Term: Investment

Answer 16

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.

Question 17

Key Term: Manufactured home

Answer 17

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.

Question 18

Key Term: Mixed use

Answer 18

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.

Question 19

Key Term: Modular homes

Answer 19

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.

Question 20

Key Term: Planned unit development (PUD)

Answer 20

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.

Question 21

Key Term: Time-share

Answer 21

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.

Question 22

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 22

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.

Question 23

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 23

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.

Question 24

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 24

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.

Question 25

When choosing a location in which to live, a homebuyer is LEAST likely to be influenced by the area’s

A. Transportation facilities
B. Employment opportunities
C. Availability of medical facilities
D. Street signage

Answer 25

Answer: D. Street signage

Reasoning for the answer: Factors like transportation, employment opportunities, and access to medical facilities are major considerations when selecting a home. Street signage is typically a minor concern compared to these more significant factors.

Question 26

A homeowners insurance policy excludes

A. The cost of medical expenses for a person injured in the policyholder’s home
B. Riot and civil commotion
C. Theft
D. Flood damage

Answer 26

Answer: D. Flood damage

Reasoning for the answer: Standard homeowners insurance policies generally exclude coverage for flood damage. Flood insurance must be purchased separately, especially in high-risk flood zones, through the National Flood Insurance Program (NFIP).

Question 27

A building that is remodeled into residential units and no longer used for its original purpose is a

A. Converted-use property
B. Cooperative
C. Planned unit development
D. Modular home

Answer 27

Answer: A. Converted-use property

Reasoning for the answer: A converted-use property refers to a building that has been repurposed from its original function (such as a factory or office building) into residential units. This type of development is common in urban areas.

Question 28

In a homeowners insurance policy, the term coinsurance refers to

A. The specific form of policy purchased by the owner
B. The stipulation that the homeowner must purchase insurance coverage equal to at least 80% of the replacement cost of the structure to be able to collect the full insured amount in the event of a loss
C. The stipulation that the homeowner must purchase insurance coverage equal to at least 90% of the replacement cost of the structure to be able to collect the full insured amount in the event of a loss
D. Additional insurance held by the homeowner other than the homeowners policy

Answer 28

Answer: B. The stipulation that the homeowner must purchase insurance coverage equal to at least 80% of the replacement cost of the structure to be able to collect the full insured amount in the event of a loss

Reasoning for the answer: The coinsurance clause in homeowners insurance policies requires the homeowner to insure the property for at least 80% of its replacement cost. If the homeowner insures for less, the insurance company may reduce the payout on a claim.

Question 29

Federal flood insurance is

A. Required in certain areas to insure against flood damage for 100-year floodplain properties financed by federally related mortgage loans
B. A common part of a homeowners insurance policy
C. An option available to the homeowner on properties financed by FHA or VA mortgage loans
D. Optional for most homes in flood-prone areas

Answer 29

Answer: A. Required in certain areas to insure against flood damage for 100-year floodplain properties financed by federally related mortgage loans

Reasoning for the answer: Federal flood insurance is mandatory for homes located in high-risk flood areas (100-year floodplains) if the home is financed through federally related mortgage loans, including those insured by Fannie Mae or Freddie Mac.

Question 30

Under the provisions for liability coverage in a homeowners insurance policy, the insurance company may settle a claim for

A. Physical damage to the insured’s property
B. Funeral expenses for the insured’s child
C. Personal injury to a delivery person who is injured on the insured’s property
D. Flood damage

Answer 30

Answer: C. Personal injury to a delivery person who is injured on the insured’s property

Reasoning for the answer: Homeowners insurance typically includes liability coverage, which pays for injuries that occur on the insured’s property, such as a delivery person being hurt. It does not cover flood damage or funeral expenses.

Question 31

A town house is MOST closely associated with which of the following types of housing?

A. Highrise development
B. Cooperative
C. Converted-use property
D. Single-family residence

Answer 31

Answer: D. Single-family residence

Reasoning for the answer: A town house is most closely associated with a single-family residence, as town houses are individual homes that share walls with other units but are owned by the occupant, similar to a single-family home.

Question 32

As a conservative rule of thumb, many mortgage lenders will not make a loan in which the DTI housing-expense ratio exceeds what percentage of a borrower’s monthly income?

A. 28%
B. 36%
C. 20%
D. 30%

Answer 32

Answer: A. 28%

Reasoning for the answer: Many mortgage lenders use the debt-to-income (DTI) ratio as a guideline, where the housing expense (including principal, interest, taxes, and insurance) should not exceed 28% of a borrower’s gross monthly income.

Question 33

Under the Taxpayer Relief Act of 1997, the profit that homeowners receive from the sale of their residence

A. Is never taxable
B. Is always considered “taxable gain” for tax purposes
C. Can be excluded from taxation (up to specified limits) if a couple has occupied the residence for at least two years before the sale
D. Cannot be excluded from taxation for a couple if one spouse has previously taken the exclusion

Answer 33

Answer: C. Can be excluded from taxation (up to specified limits) if a couple has occupied the residence for at least two years before the sale

Reasoning for the answer: Under the Taxpayer Relief Act of 1997, homeowners who meet the residency and ownership requirements can exclude up to $500,000 (for married couples) or $250,000 (for single homeowners) of profit from the sale of their principal residence.

Question 34

A homeowner sold his house for $127,500. The house had been purchased new three years earlier for $75,000. Assuming there are no adjustments to the purchase price and no expenses of sale, what is the homeowner’s gain on this transaction?

A. $53,250
B. $52,500
C. $51,750
D. $75,000

Answer 34

Answer: B. $52,500

Reasoning for the answer: The homeowner’s gain is calculated as the difference between the sale price and the original purchase price. In this case:
$127,500 (sale price) - $75,000 (purchase price) = $52,500 gain.

Question 35

In question 13, how much of the gain will be subject to income tax?

A. All of it
B. $20,700
C. $21,300
D. None of it

Answer 35

Answer: D. None of it

Reasoning for the answer: The homeowner can exclude up to $250,000 of profit (if single) or $500,000 (if married and filing jointly) under the capital gains exclusion for the sale of a primary residence, provided they meet the ownership and use requirements. Therefore, the entire gain is excluded.

Question 36

Brendon and Sara, a married couple ages 36 and 38, sell their home and realize a gain from the sale. If certain conditions are met, the tax levied on the profit from the sale may be

A. Excluded up to $250,000 if one spouse has used the exclusion in the last two years
B. Excluded up to $500,000 if the couple occupied it as a residence for one year before the sale
C. Excluded up to $500,000 if both spouses have used the exclusion within two years before their marriage
D. Excluded up to $500,000 if one year has passed since the last exclusion

Answer 36

Answer: A. Excluded up to $250,000 if one spouse has used the exclusion in the last two year

Reasoning for the answer: Married couples can exclude up to $500,000 in capital gains from the sale of their home if they have lived in it as their principal residence for at least two of the last five years. However, if either one has already used that exclusion in the last two years then the MAX exclusion drops to $250,000. If both have used it then they are taxed on the total capital gains.

Question 37

A development that includes office space, stores, theaters, and apartment units is an example of

A. Planned unit development
B. Mixed-use development
C. Converted-use property
D. Cooperative

Answer 37

Answer: B. Mixed-use development

Reasoning for the answer: A mixed-use development integrates different types of properties, such as residential, commercial, and entertainment spaces, within the same building or complex, offering convenience for residents.