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:
This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news


New York Times

Recent Commercial Real Estate Transactions
New York Times
$54.50/SQ. FT. $366,022 approximate annual rent. 86 Chambers Street (between Broadway and Church Street). Manhattan. A national law firm, established to defend corporate clients against toxic tort claims and mass tort claims, has signed a five-year ...



Hartford Courant

Real Estate Alphabet Soup
Hartford Courant
Like many industries, real estate offers many of its own unique and varied terms and phrases. Turn those terms into acronyms, and what you have is little more than alphabet soup to those new to buying, selling, or investing in real estate.
Louisville Commercial Real Estate Summit: Celebrating another booming yearREjournals.com

all 6 news articles »


Salt Lake Tribune

Former real estate guru Rick Koerber's fate on fraud allegations is once again in the hands of a jury
Salt Lake Tribune
Prosecutors allege Koerber told investors that their money would go to purchase real estate but that he also spent money on a hamburger franchise, funding a horror movie and other personal expenses like luxury cars. They also accuse the businessman of ...



Forbes

Scammers Are Increasingly Targeting Real Estate Transactions
Forbes
Scams targeting real estate transactions are on the rise, according to the FBI. Experts say there are many simple ways that consumers and real estate professionals can protect themselves and each other. Cyber crimes (crimes carried out by digital means ...



Palm Beach Daily News

Palm Beach agency now part of William Raveis Real Estate network
Palm Beach Daily News
A Palm Beach real estate agency has a new name, a new Worth Avenue address and a broader reach after entering into a joint venture with New England-based powerhouse agency William Raveis Real Estate, according to the principals of both ...
Fite Group merges with William Raveis Real EstateThe Real Deal

all 9 news articles »


Forbes

San Francisco's New Salesforce Park Is Prime Real Estate
Forbes
San Francisco's newest public urban park, Salesforce Park located on Mission Street, South of Market, is prime real estate. The 5.4-acre rooftop park atop San Francisco's new regional transportation hub, Salesforce Transit Center which connects eight ...

and more »


Politicians, Journalists and Real Estate Agents Fall Short in Public Trust Survey
Builder Magazine
Purplebricks Group plc (AIM:PURP) recently commissioned a national study to uncover which professions are deemed the most and least trustworthy today. Home builders were not considered, but real estate agents didn't fare too well. Politicos and journos ...

and more »


RisMedia.com (press release)

The .realestate Member Pre-Sale Has Begun!
RisMedia.com (press release)
NAR PULSE—Your agents cover a lot of ground…your digital presence should, too. From Sept. 18-Nov. 16, REALTORS® with an active .realtor™ domain—FREE for the first year, one per individual member—have exclusive access to purchase .realestate ...
NAR's '.realestate' domains are available for pre-order nowInman.com

all 6 news articles »


Forbes

Six Essential Lessons Aspiring Real Estate Investors Should Know
Forbes
As an aspiring real estate investor, you may feel lacking in knowledge about building a successful business. It might seem like the days of managing employees, having a constant flow of deals and leads or even just having enough money to invest with ...



HousingWire

FTC shuts down real estate websites that allegedly preyed on Section 8 renters
HousingWire
The Federal Trade Commission shut down a series of real estate websites that allegedly targeted Section 8 voucher recipients and falsely promised “exclusive” access to rental listings in exchange for a monthly or weekly subscription fee.


Google News

home | site map
© 2007