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Real Estate Information |
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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: A Potential Mamdani Mayorship Strikes Fear in the Real Estate Industry The New York Times There’s one elite group propping up the Manhattan real estate market right now — everyone else is sitting on their hands New York Post Triangle homes sitting on the market longer, why a real estate agent says it’s about perspective WRAL.com Wellness Real Estate Set to Top $1 Trillion | Florida Realtors 4 real estate investors shared with us an overlooked advantage to buying property - Business Insider Detroit sues blockchain real estate firm that owns rentals with hundreds of violations Detroit Free Press Detroit sues cryptocurrency-based real estate firm to correct hundreds of property violations The Detroit News Senate Passes Tax Bill With Major Wins for Real Estate National Association of REALTORS® Meet HBJ’s 2025 real estate power players Hartford Business Journal Detroit Evening Report: Detroit suing blockchain-based real estate firm for neglecting hundreds of properties WDET 101.9 FM Inked: Long Island commercial real estate deals roundup Long Island Business News Opinion: Anticipated tax changes impacting real estate industry Springfield Business Journal Shlichus Isn’t Real Estate Anash.org LOCAL REAL ESTATE TODAY 7.3.25 KQEN News Radio George Pierson, Realtor, Home 1st Real Estate JTV Jackson Real estate market still good for sellers Addison Independent CEO Roundtable: Residential Real Estate Springfield Business Journal Would lower interest rates help NH’s real estate market? NH Business Review ‘Unfiltered’: Social media that pays — and the channels to skip Real Estate News by RealEstateNews.com Real estate secondaries has plenty of room to grow, but pricing can be a challenge Secondaries Investor Real estate firm acquires Cecil residential properties for $14.6M Maryland Daily Record 'Keep it moving': HGTV cancels TV show hosted by Georgia couple after 4 seasons Savannah Morning News Dawson County weekly real estate transactions, July 3 Central Nebraska Today Chicago Teachers seeking MWDBE private real estate managers Pensions & Investments REAL ESTATE | Harley-Davidson in West Bend, WI sold Washington County Insider Real Estate Transactions: July 4, 2025 Greenfield Recorder Three reasons why there’s value in owning real estate as part of your collision business Repairer Driven News 7 Morning Digest: Detroit sues crypto real estate company, community ice cream truck & more WXYZ Channel 7 News of public record: Muskingum County real estate transfers Zanesville Times Recorder Compass ‘has not and will not adhere’ to Clear Cooperation Real Estate News by RealEstateNews.com Real Estate Minute – 07-03-2025 Texomashomepage.com Texas Senate Bill 17 Restricts Foreign Ownership of Real Property in the State The National Law Review Texas Teachers assigns $950 million to real estate, private equity Pensions & Investments Real Estate Transfers: July 3, 2025 The Suffolk Times GPIF is shifting from the predictable to the tactical in real estate Private Equity Real Estate | PERE It turns out some real estate people like Zohran Mamdani The Real Deal Is Your Money Safe in the Bank in 2025? Norada Real Estate Investments Homes for Sale in New York and Connecticut The New York Times Hyatt Announces Agreement to Sell Playa’s Owned Real Estate Portfolio to Tortuga for $2.0 Billion Hyatt Newsroom Was operator of San Antonio apartment complexes running a Ponzi scheme? San Antonio Express-News The dreaded Zillow ban is finally here. Here's what you can do Business Insider Top residential real estate sales for June 16-20 in Sarasota, Siesta Key, Palmer Ranch, Osprey, Nokomis Your Observer Homes for Sale in Manhattan and the Bronx The New York Times Egypt Sherrod Shares Heartbreaking News About HGTV's 'Married to Real Estate' Country Living Magazine Zillow ban lawsuit shakes real estate: What sellers need to know Fingerlakes1.com More than 350 Quintana Roo real estate agents certified to provide buyers with verified ownership in real time Riviera Maya News Where Does Bruno Mars Live? Examining the Singer’s Real Estate Portfolio Architectural Digest ARTIS REAL ESTATE INVESTMENT TRUST ANNOUNCES TIMING OF RELEASE OF Q2-25 RESULTS AND CONFERENCE CALL Yahoo ALTA Applauds Congress for Passing Tax Package Preserving Key Real Estate and Housing Provisions StreetInsider Zohran Mamdani’s Ideas on Commercial Real Estate Come Into Focus Commercial Observer |
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