If you plan of buying a property anytime soon, it will help a great deal if you understand these concepts relevant to Philippine real estate.
1. Credit Assessment
Although the Philippines does not have a credit scoring system similar to the one in the United States, our banks and lending institutions do have a checking system in place. Before a customer can apply for a loan, he or she fills out an application for credit from a bank, then his or her information is forwarded to a credit bureau who then analyses the information to determine creditworthiness (i.e., the ability and track record of repaying a debt). Before the loan is approved, the lender may also ask for credit references and personal or corporate financial statements, and also verify the applicant’s salary with his or her employer. All these will be used to determine whether credit will be extended to the loan applicant.
2. Appraised versus Assessed Value
Although both may refer to the value of the real property in question, these two concepts have slightly different undertones. Appraised Value is the financial worth placed on a real property based on a report by an appraiser, who is a PRC-licensed professional who has the knowledge and expertise necessary to estimate the value of an asset. An appraiser also determines the likelihood of an event occurring, and the cost of such an occurrence.
On the other hand, Assessed Value is the financial worth placed on a real property by the town or city’s assessor’s office. This is done for the purpose of determining the tax due for the said property. Assessed Value is computed by multiplying Fair Market Value by Assessment Level (FMV AL), the latter is determined either by the provincial, city, or municipal council where the property is located.
3. Equity versus Profit
The term Equity has many uses in business, but in the context of real estate, it is the difference between the current market value of the real property and the amount the owner still owes on the mortgage. Equity increases as the value of the property appreciates overtime and the owner pays off the mortgage. Profit from an investment property, meanwhile, comes from the income generated by the said property through rent or a profitable resale.
4. Maceda Law
This is also known as Realty Installment Buyer Act (RA 6552), a piece of legislation that aims to provide protection to buyers of real estate on installment payments. When a buyer has paid at least 2 years of installments, he or she is entitled to the following rights in case he or she defaults in the payment of succeeding installments:
- To pay the unpaid installments due within the total grace period earned, which is fixed at 1 month for every 1 year of installment made.
- If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the payments on the property. This is equivalent to 50 percent of the total payments made and an additional 5 percent every year after 5 years of installments, but shall not exceed 90 percent of the total payments made.
In cases where the buyer has paid less than 2 years of installments, the seller shall give the buyer a grace period of not less than 60 days from the date the installment becomes due. If the buyer fails to pay the installments due after the grace period, the seller may cancel the contract after 30 days from the day the buyer receives the notice of cancellation or the demand for rescission of the contract.
5. Adjustable-rate versus Fixed-rate Mortgage
An Adjustable-rate Mortgage (ARM) is one in which the bank or lender adjusts its interest rate periodically based on changes in a specified index. On the other hand, a Fixed-rate Mortgage (FRM) has a fixed interest rate for the entire term of the loan, which is what the rate is at the time the mortgage started.
Both have their own advantages and disadvantages.
ARM, for instance, is characterized by lower initial rates (which is one of the reasons why it’s attractive to first-time borrowers). It also allows borrowers to take advantage of falling interest rates without refinancing, and offers a cheap way for borrowers who don’t plan on living in one place for very long. However, the main danger of getting an ARM is that rates and payments can rise significantly over the life of the loan. For example, a 6 percent ARM can end up at 11 percent in just 3 years if rates rise sharply.
Rates and payments under FRM, meanwhile, remain constant during the entire duration of the loan. Therefore, there won’t be any surprises even if mortgage rates head to 20 percent. This makes budgeting easier. Another plus is that FRMs are easy to understand, even for first-time buyers. The biggest disadvantages are that FRMs are more expensive and the mortgage holders have to refinance if they want to take advantage of falling interest rates.
6. Default
Default became a buzzword during the late 2000s Eurozone crisis when countries like Greece, Ireland, and Cyprus became at risk of failing to fulfill their obligations to service sovereign debts. Strictly speaking, default could happen to anyone (including companies) who has acquired debt (e.g., a mortgage loan) and is unable to meet the legal obligation to pay off that debt. A default usually places a company or individual in financial trouble, and if a borrower stops making mortgage payment, the bank is legally allowed to start the process of foreclosing the property.
7. Foreclosure
Although nobody wants you to be in such situation, it’s judicious to understand this concept anyway. Foreclosure is the legal process by which a borrower in default is deprived of his or her interest in the mortgaged property. Under the law, in a foreclosure a bank who has financed the purchase of the property is given the chance to recover the balance of a loan through a forced sale of the property.
Contrary to popular belief, banks do not want to take people’s homes through foreclosure, because the process is an extra expense for them, not to mention they need to report the property as a nonperforming asset, which will affect their overall credit rating. What they do like, however, is to use the threat of foreclosure, which is the only tool at their disposal to persuade borrowers to make the mortgage payments. Most of the time banks will work with borrowers if they are facing financial hardships to come up with repayments plans that will let them get back on track and remain in their homes.
8. Loan-to-Value Ratio versus Maximum Loan Amount
Loan-to-value (LTV) ratio is the term used by banks and other lenders to express the ratio of a loan to the value of the asset purchased, and typically is used as a lending risk assessment ratio before a mortgage is approved.
Typically, high LTV ratios are seen as higher risk; therefore, if the mortgage is accepted, the loan will cost the borrower more or he or she will need to purchase mortgage insurance. To give an example, if a potential homebuyer would like to borrow Php4.5 million to purchase a Php5 million property, the LTV ratio is 90 percent, which is quite high and presents a higher risk for the lender. Philippine banks generally require 70 percent for a mortgage to be approved. An LTV ratio, however, is not a comprehensive criterion to assess the risk of a mortgage application and is usually used in conjunction with other measures.
In contrast, Maximum Loan Amount is the maximum amount a person can borrow from a bank (or any other lending institution). This is based on a combination of different factors, including the specific loan program, the value of the property that secures the loan, and the borrower’s overall creditworthiness. Banks usually offer various loan programs with maximum loan amounts tailored for people belonging to different classes of borrowers.
9. Contract to Sell versus Deed of Sale
A Contract to Sell (CTS) is a legal document in which the property developer or owner promises to transfer to the buyer the ownership of a real property upon the buyer’s fulfillment of the terms of the sale, and the buyer obliges himself to pay the purchase price and comply with the other terms and conditions of the sale. In essence, a CTS stipulates the obligations of the seller and the buyer to fulfill their obligations to each other. However, it is also important to note that there is, at this stage, no transfer of ownership of the property.
A Deed of Sale (DOS), on the other hand, is the document that transfers ownership from the seller to the buyer. Hence, only the seller signs the deed at closing and receives a copy of it. The closing agent will then record the deed with the buyer listed as the new property owner. Unlike a CTS, the DOS obligates the property developer or owner to transfer ownership of the property to the buyer.
