Real Estate Information

How to Prequalify a Buyer When You Sell Your Home By Owner


One questions many "for sale by owner" sellers ask is "how can I determine if a potential buyer can afford to buy my house?" In the real estate industry this is referred to as "pre-qualifying" a buyer. You might think this is a complex process but in reality it is actually quite simple and only involves a little math.

Before we get to the math there are a few terms you should understand. The first isPITI which is nothing more than an abbreviation for "principal, interest, taxes and insurance. This figure represents the MONTHLY cost of the mortgage payment of principal and interest plus the monthly cost of property taxes and homeowners insurance. The second term is "RATIO". The ratio is a number that most banks use as an indicator of how much of a buyers monthly GROSS income they could afford to spend on PITI. Still with me? Most banks use a ratio of 28% without considering any other debts (credit cards, car payments etc.). This ratio is sometimes referred to as the "front end ratio". When you take into consideration other monthly debt, a ratio of 36-40% is considered acceptable. This is referred to as the "back end ratio".

Now for the formulas:

The front-end ratio is calculated simply by dividing PITI by the gross monthly income. Back end ratio is calculated by dividing PITI+DEBT by the gross monthly income.

Let see the formula in action:

Fred wants to buy your house. Fred earns $50,000.00 per year. We need to know Fred's gross MONTHLY income so we divide $50,000.00 by 12 and we get $4,166.66. If we know that Fred can safely afford 28% of this figure we multiply $4,166.66 X .28 to get $1,166.66. That's it! Now we know how much Fred can afford to pay per month for PITI.

At this point we have half of the information we need to determine whether or not Fred can buy our house. Next we need to know just how much thePITI payment is going to be for our house.

We need four pieces of information to determine PITI:

1) Sales Price (Our example is 100,000.00)

From the sales price we subtract the down payment to determine how much Fred needs to borrow. This result brings us to another term you might run across. Loan to Value Ratio or LTV. Eg: Sale price $100,000 and down payment of 5% = LTV ration of 95%. Said another way, the loan is 95% of the value of the property.

2) Mortgage amount (principal + interest).

The mortgage amount is generally the sales price less the down payment. There are three factors in determining how much the P&I (principal & interest) portion of the payment will be. You need to know 1) loan amount; 2) interest rate; 3) Term of the loan in years. With these three figures you can find amortgage payment calculatorjust about anywhere on the internet to calculate the mortgage payment, but remember you still need to add in the monthly portion of annual property taxes and the monthly portion of hazard insurance (property insurance). For our example, with 5% down Fred would need to borrow $95,000.00. We will use an interest rate of 6% and a term of 30 years.

3) Annual taxes (Our example is $2,400.00)/12=$200.00 per month

Divide the annual taxes by 12 to come up with the monthly portion of the property taxes.

4) Annual hazard insurance (Our example is $600.00)/12=$50.00 per month

Divide the annual hazard insurance by 12 to come up with the monthly portion of the property insurance.

Now, let's put it all together. A mortgage of $95,000 at 6% for 30 years would produce a monthly P&I payment of $569.57 per month. This figure was produced by ourpayment calculator. Add in taxes of $200.00 per month and add in insurance of $50.00 per month and the PITI necessary to purchase our house equals $819.57.

Putting it all together

From our calculations above we know that our buyer Fred can afford PITI up to $1,166.66 per month. We know that the PITI needed to purchase our house is $819.57. With this information we now know that Fred DOES qualify to purchase our house!

Of course, there are other requirements to qualify for a loan including a good credit rating and a job with at least two years consecutive employment. More about that is our next issue.

Bruce Andrews has been in the real estate business for over 20 years. He has experience in real estate investing as well as practicing real estate as a broker for several years. He is currently President of Fifty States Realty, www.fiftystatesfsbo.coma national "for sale by owner"website.


MORE RESOURCES:

CNBC

Real estate investment trust sees business booming post-Hurricane Harvey
CNBC
Camden Property Trust has seen a "total transformation" of its business since Hurricane Harvey slammed into Texas, its CEO told CNBC on Tuesday. The Houston-based company, which develops and manages multifamily apartment communities, has seen ...

and more »


Forbes

Unusually Large Loans Mask Decline In NYC Commercial Real Estate Lending
Forbes
Take a look at loan originations for commercial real estate properties in New York City in the second quarter and you'll find something unusual: The quarter's biggest loans aren't just big, they're really, really big. And the size of those loans ...

and more »


CNBC

Trump lawyer: Moscow Trump Tower 'solely a real estate deal'
CNBC
The proposal to build a Trump Tower in Moscow during his presidential election was "solely a real estate deal and nothing more," says Pres. Trump's lawyer.

and more »


Forbes

Two Smart Long-Term Real Estate Options
Forbes
But if you think you're going to make it, now might be a good time to take a serious look at where you want to establish your business. Long-term business real estate planning means either direct ownership or long-term lease. I've covered the direct ...



Trumbull real estate up 3% after two periods of falling values
Youngstown Vindicator
The first data coming out of the most recent three-year Trumbull County real-estate reappraisal show an average increase of 3 percent, county Auditor Adrian Biviano says. That may seem like a modest increase, but compared to the 5 percent drop during ...

and more »


Mashable

Women in STEM get prime real estate on Grand Central's ceiling for an inspiring reason
Mashable
There are plenty of ways to recognize the pioneering women who've made unique contributions to science, technology, engineering, and math. But GE chose an unorthodox strategy by creating custom-designed animations of 12 influential women in STEM ...

and more »


New Data Shows Strong Sustainability Improvement in the North American Real Estate Sector
Markets Insider
AMSTERDAM, Sept. 19, 2017 /PRNewswire-USNewswire/ -- GRESB, the Global ESG Benchmark for real assets, today released the results of its annual 2017 GRESB Real Estate Assessment for the North American real estate sector. Globally, a record 850 ...

and more »


Newser

Welcome to the Depressing New Real-Estate Game
Newser
(Newser) – A story in the New Republic pronounces "a new era of real estate speculation" in the US, one that's taking a depressing toll on poor neighborhoods across the country. Two factors are at play: the housing bust of 2008, which left a glut of ...



Business Insider

Russian real estate heir marries social media star: PHOTOS ...
Business Insider
This past weekend, Karen Karapetyan — son of Russian real estate mogul and billionaire Samvel Karapetyan — married social media star Lilit in a glamorous ...

and more »


CoinTelegraph

First Bitcoin-Only Real Estate Transaction Completed in Texas
CoinTelegraph
In Texas, buyer and seller come to terms for a home sale in Bitcoin.

and more »

Google News

home | site map | Blog |
Portland Oregon Real Estate Listings | real estate investing | real estate in greece | for sale by owner in atlanta | House for sale: Louisville KY
Exchange Links Here | Links page |
© 2006