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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 is PITI 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 the PITI 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 a mortgage payment calculator just 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 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 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.com a national "for sale by owner" website.
MORE RESOURCES: The home builder's stock soars 11% after an announcement that there will be no action taken as result of an investigation into the company's accounting procedures. Shares of Los Angeles-based KB Home soared on Wednesday after the home builder said an investigation by the Securities and Exchange Commission into the company's accounting and disclosure procedures had concluded and no enforcement action would be taken. The Standard & Poor's/Case-Shiller index shows a modest 1% gain over May figures, with prices in Los Angeles, San Diego and San Francisco increasing. However, some experts predict that the expiration of federal tax credits will have a negative effect. A closely watched national index showed Tuesday that home prices rose in June, the last month that a federal tax credit probably boosted sales. Many experts predict a drop in values in coming months without the popular government stimulus. The number of homes in the $1-million-and-up slice of the market that have become bank owned has tripled during the last three years in Los Angeles County, and the trend has shown little sign of slowing. Foreclosure is blind. A Santa Monica residence completed in 2008 was inspired by historic homes in Belgium. It boasts 17th century limestone floors, Belgian bluestone details, elaborate ironwork and refitted antique doors. This 2-year-old house inspired by the historic homes of Belgium feels as if it could be sitting in the countryside rather than in a Santa Monica neighborhood just blocks from the boutiques on Montana Avenue. Despite earlier reports to the contrary, it turns out that your mortgage lender will not have to pull a second full credit report on you hours before closing on your home purchase or refinancing.
Renovations that reduce the number of bedrooms or bathrooms and poorly planned expansions may kill a sale in the future. Every real estate agent has seen them: home "improvements" that turn out to be anything but, at least down the road when it comes time to sell. Instead of deal sealers, they are deal killers. Question: Is a homeowner association legally responsible for the actions of any board member who has harmed any member of the association? What if the board member has moved away from the association when a lawsuit is pending against it?
The law regards this person as a tenant, even though he is not paying rent, so proper legal procedures must be followed. Question: About a year ago I found out that a casual friend had been laid off and become homeless. I let him move into my apartment's spare bedroom free of charge. Now I want my privacy back. I have asked him to leave, but he doesn't appear to be making any effort to do so. A real estate agent says my friend is a trespasser, since we have no rental agreement or landlord-tenant relationship. She says I can call the police to have him removed or I can change the locks on a day when he is away. I don't want to get into any trouble, so I am writing to ask what my legal rights are. U.S. sales fall for the third consecutive month to the lowest rate since 1999, pushing down stocks and fueling fears of a 'double dip' in the housing market. The end of a popular government stimulus program drove home sales in July to their lowest levels in more than a decade, fueling fresh concerns about the economic recovery. |
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