One of the biggest issues for a For Sale By Owner sellers is how to determine if a potential buyer has the ability to buy the home for sale or not. This condition is known as pre-qualifying a buyer.
Initially, pre-qualifying a buyer may look like a complicated procedure and a complex dilemma but in reality, it is very simple process, which involves crunching a few numbers in some basic mathematic equations.
It is significant for you to know the meaning of some terms that are involved in this procedure.
PITI
The first term, you need to know about is the acronym PITI. PITI stands for Principle, Interest, Taxes, and Insurance. Total cost, monthly, of the mortgage payment including principle and interest as well as the monthly cost of property taxes and homeowners insurance is represented by this.
Ratio
Ratio is second term that you should know about. Most of the banks use this numbers for determining monthly gross income of a buyer and their affordability to spend on PITI. In general, the used ratio is 25%.
Front-End Ratio and Back-End Ratio
Without considering any other debts such as car payments or credit cards, this ratio is determined. Sometimes, this ratio is referred to as the front-end ratio. A ratio of 36% is acceptable, if other monthly debts are taken into consideration. This is called the back end ratio.
Calculations
The calculations are as follows:
- When PITI is divided by the gross monthly income, we get the front-end ratio.
- When PITI combined with the debt, is divided by the gross monthly income, we get back-end ratio.
- In order to determine PITI we need four things. The sales price, the mortgage amount, annual taxes, and annual hazard insurance.
- In order to determine how much is needed from your bank we need to subtract the down payment from the sales price.
- The mortgage amount is generally the down payment subtracted from the sales price. You need to use mortgage calculator and input the loan amount, the interest rate, and the term of the loan in years for determining the principle and interest portion of the payment.
There several mortgage calculator websites and they can be found without much difficulty.
- For determine the monthly property tax payment the annual taxes are divided by 12. For determining the monthly property insurance payment the annual hazard insurance must be divided by 12.
It may seem daunting initially with all of these terms and figures, but when you put them into practice, things become easier and more self-explanatory. This is the most complex portion of pre-qualifying your buyer. Standard credit check and job history check are the other requirements.
Generally for getting the best terms for a mortgage and to get the lowest interest rate possible, good credit rating as well as at least two years of consecutive employment is required.
It is not a difficult task to pre-qualify a buyer. You can figure it out with a simple conversation where figures are discussed. The process for pre-qualifying a buyer is simpler then it sounds with a small amount of due diligence and a profitable transaction can be completed.
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