How Much Formula Do I Need For A Month How to Prequalify a Buyer When You Sell Your Home "By Owner"

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

Another question many “for sale by owner” sellers ask is “how do I find a potential buyer for my house?” In the real estate industry this is referred to as “pre-qualifying” the buyer. You might think this is a complicated process but it’s actually quite simple and involves little math. Before we get to the math there are a few terms you should understand. The first is PITI which is nothing but an acronym for “principal, interest, taxes and insurance. This figure represents the MONTHLY cost of the mortgage payment of principal and interest and the monthly cost of property taxes and homeowner’s insurance. The second quarter is the mortgage payment of principal and and interest “RATIO”. The ratio is a number used by many banks as an indication of how much of the customer’s monthly GROSS income they can spend on PITI. Do I still have it? Many banks use a rate of 28% without considering any other debts. (credit cards, car payments etc. .) This ratio is sometimes called the “front end ratio” When considering another month’s debt, a ratio of 36-40% is considered acceptable.

Now for the formulas:

The forward rate is simply calculated by dividing the PITI by the gross monthly income. The latter ratio is calculated by dividing PITI+DEBT by the total monthly income.

Let’s see the formula in action:

Fred wants to buy your house. Fred earns $50,000.00 a year. We need to know Fred’s monthly income so we divide $50,000.00 by 12 and we get $4,166.66. If we know that Fred can safely reach 28% of this number 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 monthly with PITI.

Right now we have about half the information we need to see if Fred can buy our house. Next we need to know how much the PITI payment will be for our house.

We need four pieces of information to determine PITI:

1) Selling price (Our example is 100,000.00)

From the sale price we subtract the down payment to figure out how much Fred needs to borrow. This result brings us to another time you can escape. Loan to Value or LTV. Ex: Sales price $100,000 with a down payment of 5% = LTV of 95%. Alternatively, he said, the loan is 95% of the property’s value.

2) Mortgage Amount (principal + interest).

The loan amount is usually the market value less the down payment. There are three factors in determining how much the PI&interest) portion of the payment will be. You need to know 1) loans; 2) interest rate; 3) Loan term in years. With these three numbers you can find a mortgage payment calculator almost anywhere on the internet to calculate the mortgage payment, but remember that you still need to add in the monthly portion of the annual property tax and the monthly portion of the accident 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 a monthly property tax dividend.

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

Dividing the annual accident insurance by 12 comes 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 will produce a monthly PI

Putting it all together

From our calculations above we know that our customer Fred can access PITI up to $1,166.66 per month. We know that the PITI needed to buy our house is $819.57. With this information we now know that Fred IS qualified to buy our house!

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

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