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

One inquiries many "for sale by owner" Sellers inquire is "how can I determine if a possible buyer can afford to purchase my house?" In the existent estate industry this is referred to as "pre-qualifying" somes buyer.  You might believe this is a complex procedure but in world it is actually quite simple and only affects a small math.  

Before we get to the mathematics there are a few terms you should understand.  The first is PITI which is nil more than an abbreviation for "principal, interest, taxes and insurance.  This figure stands for the monthly cost of the mortgage payment of chief 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 utilize as an index of how much of a buyers monthly gross income they could afford to pass on PITI.  Still with me?  Most banks utilize 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 stop ratio".  

Now for the formulas:

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

Let see the expression in action: 

Fred desires to purchase your house.  Fred earns $50,000.00 per year.  We need to cognize Fred's gross monthly income so we split $50,000.00 by 12 and we get $4,166.66.  If we cognize that Fred can safely afford 28% of this figure we multiply $4,166.66 Ten .28 to get $1,166.66.  That's it! Now we cognize how much Fred can afford to pay per calendar calendar calendar calendar calendar month for PITI.  

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

We need four pieces of information to determine PITI:

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

From the sales terms we deduct the down feather payment to determine how much Fred needs to borrow.  This consequence conveys us to another term you might run across.  Loan to Value Ratio or LTV.   Eg: Sale terms $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 terms less the down payment.  There are three factors in determining how much the P&I (principal & interest) part of the payment will be.  You need to cognize 1) loan amount; 2) interest rate; 3) Term of the loan in years.  With these three figs you can happen a mortgage payment calculator just about anywhere on the internet to cipher the mortgage payment, but retrieve you still need to add in the monthly part of annual property taxes and the monthly part of jeopardy insurance (property insurance).  For our example, with 5% down Fred would need to borrow $95,000.00.  We will utilize an interest rate of 6% and a term of 30 years.

 

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

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

 

4) Annual jeopardy insurance (Our illustration is $600.00)/12=$50.00 per month

Divide the annual jeopardy insurance by 12 to come up with the monthly part of the property insurance.

 

Now, let's set it all together.  Type A mortgage of $95,000 at 6% for 30 old age would bring forth a monthly P&I payment of $569.57 per month.  This figure was produced by our payment 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 bes $819.57.  

 

Putting it all together

From our computations above we cognize that our buyer Fred can afford PITI up to $1,166.66 per month.  We cognize that the PITI needed to purchase our house is $819.57.  With this information we now cognize that Fred bashes measure up to purchase our house!

 

Of course, there are other demands to measure up for a loan including a good credit evaluation and a occupation with at least two old age sequent employment.  Thomas More about that is our adjacent issue.