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How to Prequalify a Buyer When You Sell Your Home By Owner
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| Thursday, December 18, 2008 |
A large number of questions "for sale by owner" sellers ask is "how do I determine if a potential buyer can afford to buy my house?" In the real estate industry that we called "pre-qualifying" a buyer. You may think this is a complex process but in reality it is very simple and requires only a little mathematics.
Before turning to mathematics, there are some terms you should understand. The first is Piti, which is nothing but an abbreviation for "principal, interest, taxes and insurance. This figure represents the cost of the monthly mortgage payment of principal and interest and the monthly cost of taxes and homeowners insurance. The second term is "RATIO." The report is a number that most banks use as an indicator of how many buyers of a gross monthly income they could afford to spend on Piti. Still with me? Most banks use a ratio of 28% without taking into account other debts (credit cards, car payments, etc.). This ratio is sometimes called the report front. "Where you take into account other monthly debt, a ratio of 36-40% is acceptable. This is called the "back end ratio".
Now for the formula:
The front-end ratio is calculated by simply dividing by the piti gross monthly income. Back end ratio is calculated by dividing piti + debt by the gross monthly income.
I see the formula in action:
Fred wants to buy your home. Fred earns $ 50,000.00 per year. We need to know Fred's gross monthly income that divide us by 50000.00 $ 12 and $ 4166.66 us. If we know that Fred can safely afford 28% of this figure we multiply $ 4166.66 X, 28 for $ 1166.66. That's it! Now we know how Fred can afford to pay per month for Piti.
At this point, we have half the information we need to determine whether or not Fred can buy our house. Now we need to know how the payment piti will be our home.
We need four pieces of information to determine piti:
1) Selling Price (Our example is 100,000.00)
From the sales price we subtract the down payment to determine how much Fred must borrow. This result brings us to another term you can run through. Loan to value ratio or LTV. Ex: Selling price $ 100,000 down payment and 5% LTV = ration of 95%. Stated another way, the loan is 95% of the value of the property.
2) Mortgage amount (principal + interest).
The amount of the mortgage is generally the selling price minus the advance. There are three factors in determining the amount of P & I (principal and interest) of the payment will be. You need to know 1) the loan amount, 2) interest rates; 3) Term in years. With these figures you can find a calculator mortgage payments almost everywhere on the Internet to calculate mortgage payments, but remember you still need to add in the monthly annual property taxes and the portion of the premium risk insurance (property insurance). For example, with 5% Fred would need to borrow $ 95000.00. We will use an interest rate of 6% and a term of 30 years.
3) annual fees (Our example is $ 2400.00) / 12 = $ 200.00 per month
Divide the annual fees of 12 to come to the part of the monthly tax.
4) annual risk insurance (Our example is $ 600.00) / 12 = $ 50.00 per month
Divide the annual risk insurance 12 to come to the monthly party property insurance.
Now we are going to put together. A mortgage of $ 95,000 at 6% for 30 years to produce a monthly P & I payment of $ 569.57 per month. This figure was produced by our payment calculator. Add taxes of $ 200.00 per month and add the assurance of $ 50.00 per month and piti to buy our house is equal to $ 819.57.
Putting It All Together
From our calculations above, we know that our buyer can not afford to Fred piti $ 1166.66 per month. We know that piti to buy our house is $ 819.57. With this information we now know that Fred qualifies to buy our house!
Of course, there are other requirements to qualify for a loan, including a good credit rating and employment to at least two consecutive years of employment. Learn more about who is our next issue.
Bruce Andrews has been in the real estate sector for over 20 years. He has experience in real estate investment and the practice of real estate as a broker for several years. He is currently chairman of the Fifty States Realty, www.fiftystatesfsbo.com national "for sale by owner" website. |
posted by neptunus @ 10:53 PM
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