Equity

Capital Gains Tax, Other Real Estate Fees You Should Know

Real estate ads are all over the place these days. You see them in the pages of sleek magazines, in the local newspapers, and of course from the Internet. If you are like most buyers, you would probably notice first the price and then the other details next.

But did you know that the list price doesn’t tell you the whole real story? There could be a lot of other information and fees that are hidden from you and which could be a real shocker once the transaction starts to be formalized.

Many ads, not just with real estate but with other products as well, are subtly crafted to catch one’s attention and entice the prospective buyer into part ways with his money?

In real estate, there is a popular phrase that goes, “Caveat Emptor”, which translates to “Buyer Beware”. And when it comes to buying a property, you really have to know what you are getting into. As they say, the devil is always in the details.

This article is written to arm you with the right knowledge of the most important fees and charges related to a real estate purchase. Especially if you are cash strapped, that’s where the headaches really originate.

Outlined below are the various fees and charges — plus, who pays for what — that you need to be aware of.

real estate deal

1. Reservation Fee or Earnest Money (Paid by the buyer). The main purpose of this fee is to initially hold the property and assign it to the account of buyer so that no other interested buyers can take it for a specified period of time. Normally non-refundable, but should the prospect proceed with the transaction, this money will also form part of the down payment.

2. Down Payment (Paid by the buyer). Also called equity payment, this is normally in the range of 10% to 30% of the selling price which can be paid either in one-time or in a series of installments up to 24 months. The down payment is only required if the buyer is planning to finance the purchase by securing a mortgage loan from a financial institution like Pag-IBIG or a bank.

(Related Link : Mortgage Loan Fundamentals)

3. Appraisal Fee (Either paid by the seller or the buyer). Sometimes this is done only if the property is to be financed by a loan from bank or other lending institution. Usually, the appraisal is also conducted by the financing company through their Appraisal Team. The payment for this is collected together with the loan application fee before the loan is even processed. In the case of For Sale By Owner, the seller may also wish to have the property he is selling appraised by a third-party, independent appraiser.

(Related Link: Equity, Appraisal and Loan Amount.)

4. Loan Charges (Paid by the buyer-borrower). When you apply for a home loan, the lender has to make sure that you are a good borrower. And that implies a lot of work on their part. From documentary charges, to credit investigation and processing some documents, they have to make sure that you pay them for the time and efforts they spend doing the tasks.

5. Attorney’s Fees (Paid by both the buyer and the seller). These are fees for the services rendered by a lawyer and are needed by both parties to formalize the legality of a real estate deal . Some legal documents could involve the Special Power of Attorney, Contract To Sell, Deed of Restriction, Waiver of Rights, Deed of Absolute Sale, etc.

6. Agent’s Commission (Paid by the seller). Real brokers and agents are paid by commission based on the selling price of the property, typically in the range of 3% to 7%.

7. Value Added Tax (Paid by the Buyer). If you think the agent is a sucker for taking 5% off the transaction, remember that there is an even bigger sucker who takes on a bigger piece while doing nothing. The rate of VAT is 10% of the selling price, but some real estate properties are exempted from this tax, especially those which are very cheap. Please check with your agent or seller to know if the property could be exempted from EVAT.

8. Capital Gains Tax (Paid by the seller). This kind of tax is usually imposed if the property is being sold at a higher price than it was purchased. Hence, the term “Capital Gains”. But the BIR has pegged this value to 6% of the Selling Price, or Zonal Value, or Market Value whichever is higher.

9. Documentary Stamp Tax (paid by the buyer). This innocent-sounding tax is set to be 1.5% of the Selling Price or the Zonal Value whichever is higher.

10. Transfer Tax (Paid By the buyer). The rate of this tax depends on the location of the property. The range is from 0.25% to 0.75% of the Selling Price or the Zonal Value of the property, whichever is higher.

11. Registration Fee (Paid by the buyer). Graduated rate based on the selling price of the property. This one is determined at the office of the Register of Deeds, they have a table there of the updated rate of charges.

12. Realty Tax (Paid by the buyer). The rate also varies from place to place, but you can consult your respective local government for the computation.

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This article is written by Carlos Velasco.

When Is The Right Time To Buy?

by Pag-IBIG Financing Admin

“Please let me know the document requirements for buying a property and using Pag-IBIG Housing Loan. I want to buy my first home when I go back to the Philippines for my annual vacation leave.”

That’s taken from a letter sent to us by an OFW visitor. Most probably, you too are on the same boat. That is, you want to take advantage of your time in the Philippines to look for a property to buy – or, invest as what the real estate dealers would want you to believe.

(Quick Check : Document Requirements for Pag-IBIG Housing Loan)

December is fast approaching. Nothing beats celebrating the Christmas seasons in the Philippines. And when you come home in the country, you will definitely see a lot of offers to buy a house or condo.
Should you bite the offer?

Is December the right time to buy a piece of property?

Many savvy real estate investors believe that there is such a thing as the right time to buy real estate. We’ll discuss some of them in the following lines.

Buy At the Buyer’s Market

Lacking access to the right information, not many Filipinos are aware of the two kinds of real estate market conditions:

Seller’s Market – There are more buyers than available properties in the market. Sellers, of course, are happy with such conditions. For anyone who is into build-and-sell business, this is the time for celebration.
Buyer’s Market – There are more properties for sale than there are buyers who would take them. Rush Sale, Discounted Offer, Low Down… these signs will be all over the place. Unfortunately, the buyers are not biting the offer.

Sounds like the Law of Supply and Demand in your Economics 101?

It’s a universal law the affects real estate as well.
A good advice worth remembering: “Buy when everyone is selling. Sell when everyone is buying.”

Buy Low (Sell High?)

Most real estate investors operate with this mindset: “Buy. Hold. Sell.”

real estate market philippines It works this way: They buy a piece of property, which is usually in a form of subdivision lot that is to be developed in some future time. Hold it for a couple of years or so, while waiting for the subdivision project to be completed and properly developed. Sell high at the current market price, which is usually higher than the cost of acquiring the property.

Buying low and then selling high leads to profit, right? This technique is sometimes referred to as real estate speculation. There could be inherent dangers with this approach, but for most investors who know what they are doing, this one works.

But even if you are not into buying and selling real estate for business, there is some wisdom in buying at a low price. If one is available and you think it is a good deal, go for it. There is nothing wrong about getting more for less.

Buy When You Are Ready

Forget about real estate investment techniques and all.

Real estate brokers and agents are crazy people. In a down market, they would say, “Now is the right time to buy while the price is still low.” When prices are rising they would say, “Buy now before the price goes even higher.” For them, it’s always time to buy. Why not? That’s their job. After all, they are licensed to do it.

It’s time you tell them to shut up.

This one had to do with good old common sense… and very useful at that.

Buying when you are ready means:

Your employment or business is stable. This is very important. Don’t buy a property if your employment or business is a little shaky. That’s why we have been advocating that you forget about asking if paying 24 monthly contributions to the Pag-IBIG Fund is enough to get a loan. There’s more to the getting a Pag-IBIG Housing Loan than just your contributions. Your employment track record and salary play an even bigger role.
You have saved enough for the down payment. So you think you can afford to pay for the monthly amortization on the house you are eyeing to buy? After all, Pag-IBIG allows you up to 30 years in loan term and you are eligible for that. Wait until you see the down payment. Remember, this is one area which you should prepare too.
You can afford to pay the loan. Make sure that the scheduled monthly amortization on your loan is not too much of a drain on your budget. Remember that you have other expenses too.
You are sure about the property you are buying. Owning a home entails a lot of responsibilities. Sometimes renting is even more beneficial than just buying a home. Make sure that you know the differences. Get your priorities in order. As a general rule, ask yourself if you will be staying in the property for five years or even longer. If the answer is yes, you are better off buying.

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“When Is The Right Time To Buy?” is written by Carlos Velasco.

Equity, Appraisal And Loan Amount – What You Should Know About These

by Pag-IBIG Financing Admin

Allow me to start off this article by quoting the question recently posted by a visitor of Pag-IBIG Financing Website:

“My husband and I are planning to buy a condo or a townhouse that’s worth P1.5M. We understand that the loanable amount is 3M. But the loan pag ibig can give is based on the monthly income of both husband and wife, is that right? The usual problem that we have is that how to pay for equity…. My question is, can we loan a full amount of 1.5M to Pag ibig so that we don’t have to pay for equity?”

That question is very important because it raises a lot of topics every Pag-IBIG Member should be aware of. Let’s tackle the following as it relates to the article:

Equity
Appraisal
Maximum Loan Amount

Your knowledge on these topics may save you from facing a possible foreclosure – something that you don’t want to happen with your property.

Now, before discussing the above terms, a general introduction on home loan is worth mentioning.

In general, when you apply for a real estate loan, you will be asked to pay for a down payment; say 20% of the appraised value of the property, that’s the standard down payment. The loan amount will actually be based on the appraised amount less the down payment.

To illustrate, assume for a moment that the appraised value is P 1,000,000 and you are asked for a 20% down payment. That means you are to personally raise P 200,000 before you are granted the P 800,000 loan. And if you are qualified for the P 800,000 loan, your monthly amortizations will be used to cover the interest and principal payment against the borrowed amount of P 800,000.

(See also: Mortgage Loan Fundamentals)

Now, back on track…

Equity

pag-ibig housing loan This is another word for Down Payment, a term mostly used by Banks; Pag-IBIG uses the term equity to mean the same thing.

The equity refers to your stake (or interest) on the property. This concept is very important because, in the eyes of the money lender (Bank or Pag-IBIG Fund), the more equity you have on the property, the more serious you are in paying the loan.

If you initially put down an equity of 20% of the appraised value the property, it means that you own 20% of the property; the other 80% is owned by the money lender. As you pay off your loan, your equity also grows over time.

Appraisal

Pag-IBIG Fund, or any lending institution for that matter, can’t just loan you any amount. They base it, first and foremost, on appraised value of the property and then on your capacity to pay.

Appraisal is simply the process if estimating the value of the property. Take note of the word “estimate,” … however advanced the tools being employed, appraisal is really just an estimate. That’s why it is not uncommon to see that the selling price of the property is very different from the appraised value of the property by a big factor. It would appear that the Seller has a different appraised value of the property he is selling compared to the Lender.

If you are getting a loan, its always the Lender’s Appraisal that determines the price and therefore your loan amount. After all, the flow of money is from them to you.

In the example above, just because the selling price of the condo unit is P 1.5M doesn’t mean that Pag-IBIG will also base it on the P 1.5M. This may be the case for Pag-IBIG accredited projects with their partner developers; otherwise, Pag-IBIG will conduct an appraisal on the property.

Maximum Loan Amount

Okay, you should know by now that Pag-IBIG Fund grants a maximum of P 3M only. That doesn’t mean you are also eligible for a 3-million loan. There are other factors that come into play.

Actually there are two maximum loan amounts that you must be aware of.

#1. Amount based on the appraised value minus your equity. If you are lucky, you will be granted with this amount.

#2 Amount based on your income, in other words, based on your capacity to pay. It goes to say that the bigger your income, the more advantageous on your part, because you are eligible to get a bigger loan amount also.

Don’t miss: Your Income, Contributions and Loan Entitlement.

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“Equity, Appraisal And Loan Amount – What You Should Know About These“ is written by Carlos Velasco.

Learn The 5Cs of Credit To Improve Your Chances Of Getting A Loan

by Pag-IBIG Financing Admin

One of the funniest definitions of a bank comes from Bob Hope. According to him, “A bank is a place that will lend you money if you can prove that you don’t need it.”

How true! It simply means that as a lending institution, the bank will consider a number of factors before granting you a loan. Just because you need a loan doesn’t mean you will get it.

Well, more or less, the same can be said of Pag-IBIG Fund. Just because you are a member of Pag-IBIG doesn’t automatically mean that you will get a loan anytime you want to.

However, your chances of success will be greater once you are aware of the most important factors they are considering when you apply for a loan, whether personal loan or housing loan.

Remember these so called 5 Cs of Credit and see how you can apply it in your respective situations.

1. Character

What sort of person are you from the point of view of the Loan Officer? Are you someone who can be trusted with the loan? Are you most likely to pay it on time or are you the one who will most likely be a candidate of loan defaults?

How long have you been a member of the Pag-IBIG Fund? How long have you been in your work or profession? Your employment record is one of the factors they consider in the evaluation process.

2. Capacity

How much is your salary or income? This will determine how much you can set aside to pay for the monthly amortization.

In general, the bigger the income, the better your chances of being approved. But don’t fool yourself. A lot of high-income professionals also maintain a high-maintenance lifestyle. But it all really boils down to how much is left before the next payroll takes it toll.

How much can you safely borrow? Pag-IBIG has a maximum limit of PhP 3M for the housing loan. Unfortunately, the maximum limit is not for everyone to enjoy. Your loan amount will most likely depend on your capacity to pay for it.

What Is Loan-To-Value Ratio?

by Pag-IBIG Financing Admin

A key concept in helping home buyers assess how much they can borrow to finance their real property investment is the Loan – To – Value Ratio.

The Loan–To–Value Ratio (LTV for brevity) is the amount of the borrower’s loan divided by the appraised value of the property.

LTV = (Loan Amount) / (Appraised Value)

To illustrate, assume that Mr. Delos Reyes purchased a new house by the countryside worth PhP 3,000,000. He plans to borrow Php 2,400,000 from a local bank to finance his real estate investment.

Applying the concept, we get a Loan–To–Value Ratio of 80% for Mr. Delos Reyes.

LTV = (2,400,000) / (3,000,000)
LTV = 80%

Take note that in this example, we are assuming that the selling price is also the appraised value. In reality, banks will conduct their own appraisal of the property. The resulting Appraised value is used instead of the selling price, to divide the loan amount to finally determine the LTV ratio.

Equity and Loan-To-Value

Actually, the LTV ratio is the reverse of a borrower’s equity. Therefore, in our set example, since Mr. Delos Reyes has an 80% LTV ratio; he has equity of 20%.

By equity, we mean “how much a borrower owns in the value of his / her real property investment.”

So in Mr. Delos Reyes’s case, he only owns 20% of the value of his investment and owes 80% of it.

From the lender’s viewpoint, the higher equity you have tied up on your property, the less risky you are as a borrower.

A high loan-to-value ration also means that a home buyer owes more than he owns in the value of his investment. Therefore, banks will see the home buyer’s loan as one that is risky.

Low Down, High Loan-To-Value

Pag-IBIG Fund is a leading company in the Philippines that offers lower down payment and a high loan-to-value ratio, as high as 97.0% is some cases.

Other financial institutions are offering the same. But you will be required to pay for a private mortgage insurance to lessen the impact of the risk that they are placing on you as a borrower.

Financial Leverage and Loan-To-Value Ratio

Financial Leverage means the use of borrowed money to finance a real estate investment. From an investor’s viewpoint, the higher the leverage, the better because of the following reasons:

Their risk is minimized
More Cash available for other investments

The Importance of Loan-To-Value Ratio

Financial institutions generally look for three vital factors when qualifying you for a loan. These are:

credit score
debt-to-income ratio
loan-to-value ratio

These factors are the benchmarks that helps the banks determine the following:

the amount of loan to give you
the interest rate of the loan
the loan term
whether the borrower is required to pay for a private mortgage insurance

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This article on Loan-To-Value ratio is written by Niel Kyro Jo.

Mortgage Loan Fundamentals

by Pag-IBIG Financing Admin

Real estate properties are seldom bought on spot cash. The vast majority are purchased with a little down payment and mortgage loans on the balance.

A mortgage loan is a form of secured financing; that is, the lender gives you the needed financing and in return you pledge the property as collateral.

In a mortgage loan, there are two very important documents that you will be committed to:

Note – is a promise to repay the loan on a timely basis
Mortgage or Deed of Trust – is a pledge to secure the loan with the real estate in question in case the borrower fails on his loan obligations.

A mortgage creates a lien on the property, which gives the lender the right to foreclose the property in question.

A loan default happens when you fail to repay the loan “on time” as stipulated on the contract. If that happens, the lender can foreclose the mortgage and take on the property.

Interest Rate and Loan Term

A mortgage loan has two very important components that you need to be aware of.

Interest rate – is the price of using the lender’s money and is applied to the principal balance. A lower interest rate means a cheaper use of the lender’s money and should be good for you.
Loan term – the time it takes to pay off the whole amount borrowed. Loan term usually spans a number of years.

These two factors primarily affect the installment payments, which is usually on a monthly basis.

The amount shown on the monthly installment schedule always remains constant. When you pay off a loan, a portion goes to the interest payment and another portion goes to pay off the principal amount. In other words, the principal balance is reduced with each payment that you make. And as a consequence, the interest is also reduced as the loan matures. Early installments mostly go to the interest payments while later installments mostly cover the principal.

Down Payment and Mortgage

Most lenders will not grant you a loan that is equivalent to the selling price of the property. In many cases, they will have to appraise the property and you will be asked to put a down payment and loan the remaining balance of the appraised value.

The down payment is sometimes referred to as equity on the property.

The standard down payment is 20% of the appraised value of the property; 80% being your loan or the financed amount.

The more money you put as down payment, the lower your loan will be. And always remember that the loan bears an interest.

Now comes the question: Which is better of the two?

A low down payment and large loan.
A large down payment and small loan.

There are arguments favoring one over the other. It’s all up to you and your circumstances. But sometimes, the lender will force you to take on lower loan (with large down payment) to lower their risk of loaning you the money to finance your real estate purchase. That’s just pure business.

Pag-IBIG Mortgage Loan

Depending on the property and where you are buying it, Pag-IBIG Fund may give you a large amount of loan which is almost equal to the selling price of the property. But always bear in mind the maximum loan amount the Pag-IBIG Fund can grant you. If you find the amount too small for the property you are considering, you may need to come up with a large down payment or you may use an alternative financial institution.

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Mortgage Loan Fundamentals is written by Carlos Velasco.