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How to prequalify a buyer when you sell your home by owner - real-estate


One questions many "for sale by owner" sellers ask is "how can I affect if a ability buyer can allow to buy my house?" In the real estate commerce this is referred to as "pre-qualifying" a buyer. You might think this is a complicated course of action but in actuality it is in point of fact quite down-to-earth and only involves a a small amount math.

Before we get to the math there are a few terms you be supposed to understand. The first is PITI which is nil more than an abbreviation for "principal, interest, taxes and insurance. This be included represents the MONTHLY cost of the finance payment of principal and advantage plus the monthly cost of chattels taxes and homeowners insurance. The be with term is "RATIO". The ratio is a come to that most banks use as an indicator of how much of a buyers monthly GROSS earnings they could allow to spend on PITI. Still with me? Most banks use a ratio of 28% lacking in view of any other debts (credit cards, car payments etc. ). This ratio is at times referred to as the "front end ratio". When you take into contemplation other monthly debt, a ratio of 36-40% is measured acceptable. This is referred to as the "back end ratio".

Now for the formulas:

The front-end ratio is calculated easily by in-between PITI by the gross monthly income. Back end ratio is calculated by isolating 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 earnings so we break up $50,000. 00 by 12 and we get $4,166. 66. If we know that Fred can in one piece find the money for 28% of this assume we multiply $4,166. 66 X . 28 to get $1,166. 66. That's it! Now we know how much Fred can come up with the money for to pay per month for PITI.

At this point we have half of the in rank we need to agree on 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 in a row to clarify PITI:

1) Sales Price (Our illustration is 100,000. 00)

From the sales price we deduct the down payment to clarify how much Fred needs to borrow. This conclusion brings us to an added term you might run across. Loan to Value Ratio or LTV. Eg: Sale price $100,000 and down payment of 5% = LTV allotment of 95%. Said an added way, the loan is 95% of the value of the property.

2) Advance amount (principal + interest).

The advance quantity is in general the sales price less the down payment. There are three factors in formative how much the P&I (principal & interest) portion of the payment will be. You need to know 1) loan amount; 2) advantage rate; 3) Term of the loan in years. With these three information you can find a mortgage payment calculator just about everywhere on the internet to determine the credit payment, but consider you still need to add in the monthly portion of once a year acreage taxes and the monthly portion of hazard assurance (property insurance). For our example, with 5% down Fred would need to make use of $95,000. 00. We will use an activity rate of 6% and a term of 30 years.

3) Yearly taxes (Our illustration is $2,400. 00)/12=$200. 00 per month

Divide the twelve-monthly taxes by 12 to come up with the monthly portion of the assets taxes.

4) Once a year hazard indemnity (Our case in point is $600. 00)/12=$50. 00 per month

Divide the once a year hazard indemnity by 12 to come up with the monthly portion of the chattels insurance.

Now, let's put it all together. A finance of $95,000 at 6% for 30 years would churn out a monthly P&I payment of $569. 57 per month. This assume was fashioned by our payment calculator. Add in taxes of $200. 00 per month and add in assurance of $50. 00 per month and the PITI basic to buy our house equals $819. 57.

Putting it all together

From our calculations above we know that our buyer Fred can allow PITI up to $1,166. 66 per month. We know that the PITI desired to acquisition our house is $819. 57. With this in order we now know that Fred DOES lessen to acquire our house!

Of course, there are other necessities to become certified for a loan as well as a good acclaim 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 commerce for over 20 years. He has come into contact with in real estate investing as well as active real estate as a dealer for quite a few years. He is at present Head of Fifty States Realty, www. fiftystatesfsbo. com a inhabitant "for sale by owner" website.


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