Often times when I meet with homeowners in Brooklyn looking to sell their home I am asked the question, how do you know if a buyer is qualified? Or how do you qualify a buyer? The purpose of this blog entry is to answer these questions.

 

            The easiest way to pre-qualify a buyer is to simply ask “Are you buying all cash?” If the answer is yes, they are good to go! If you really wanted to dot the “I’s” and cross the “T’s” you can ask for proof of funds in the form of bank statements or an attorney letter attesting to this fact. If the purchaser states that they are not buying all cash, in other words they will need a mortgage, we have to dig a little deeper.

 

            If the purchaser states that they will be getting a mortgage, the next question becomes “how much are you planning on putting down (down payment)? If the purchaser is putting down 20% or more, that is good because an 80% loan to value ratio is easier to get and qualify for, plus there is no need for private mortgage insurance (see my previous blog entry… http://www.homegain.com/blogs/mitchellsfeldman-507663/Real-Estate-Terminology-for-Buyers-and-Sellers-in-Brooklyn-or-anywhere-else-Part-3?post_id=3289). The fact of the matter is that some buyers can still get a mortgage with a down payment as low as 3%, if their income, assets and credit are good enough. However, a down payment of 20% or more makes for a strong buyer.
 

            Once you know the down payment amount of your purchaser, the next step is to find out what they do for a living and how much their income is, and by income we mean how much they reported to the IRS on their last two tax returns. In the past I would speak to a buyer and they state that they make $200,000 dollars a year, but they are in an all cash business so they are not showing that much on their tax returns. Of course that is tax evasion, but we won’t get into that. In the old days (a year or two ago) these types of buyers would go for a “stated” or “no income” type mortgage. That means that the bank didn’t care about your income because you (the buyer) would be required to put at least 20% down and then the bank would bang you over the head with a higher interest rate (on the average it would be 1% or more than prevailing rates). The reason a buyer would do willing to pay the higher rate is due to the fact that a) it is the only way they could get a mortgage and b) they could still afford the payments, so it made sense. Mortgage programs like this were also known as “subprime” and are what got the mortgage and banking industry into the trouble they are in today. Needless to say these programs no longer exist!

 

            In any case, once you know the income you can get an idea as to how much the purchaser can borrow. The bank will look at the purchaser’s income and form a ratio based on how much the loan would cost on a monthly basis. This is called the front end ratio and typically the bank would want the purchaser’s monthly living expense to be no more than 30% of their reported income. By living expense we are talking about the cost of the mortgage (principle & interest paid monthly on the loan, aka PI), monthly real estate taxes and homeowner’s insurance costs (aka TI). This is also known as PITI, it is a PITI that after you buy the house you will be making these payments each and every month (excuse my humor)! So the way you figure out how much a consumer can borrow would be to take the annual income of the purchaser, divide by 12 to get the monthly income amount… then multiply that number by .30. This is because the bank does not want a consumer to spend more than about a third of their income on PITI. Now follow me here… you then take that result and subtract the tentative monthly insurance and real estate tax expenses… the number you are now left with represents the maximum mortgage payment the buyer would qualify for. Now the question becomes… how much can this buyer borrow to stay at or below that number. In order to figure that out you have to estimate the interest rate the purchaser will receive (I would estimate 5% on a 30 year fixed in today’s market) and then use the factor associated with that rate from an amortization table (whew, I have to catch my breath!). At 5% on a 30 year fixed, that factor would be 5.37 which means you pay $5.37 per thousand that you borrow. So…you then divide the remainder by the factor (5.37) and multiply by 1,000 to find out the maximum loan amount the purchaser will qualify for.

 

            Take a look at this example to shed more light on the subject:

            As per this example, a bank will be willing to lend this potential buyer up to $623,836.00. This is based on a true “conventional” mortgage, but a qualified buyer (really good credit scores, down payment amount, etc.) may have programs available to them where this ratio (30%) can be as high as 50%! Also keep in mind that if the purchaser has other debt, credit cards, auto or student loans, this can lower the amount they can borrow. Once we determine how much the purchaser can borrow, you then add their down payment to that number to get the maximum purchase price!

 

            I know this sounds difficult and it is. This is why most homeowners hire a professional realtor to help them sell, we take care of all of this for you!!

 

            If you have questions or would like to learn more about how to purchase or sell a home in Brooklyn, please contact me. Feel free to add a comment to this blog as your input is greatly appreciated.

Mitchell S. Feldman
Associate Broker
Madison Estates & Properties, Inc.
Office: (718) 645-1665   Cell: (917) 805-0783
Email: MFeldman@MadisonEstates.com or MitchellSFeldman@aol.com
Web Sites: www.MitchellFeldman.com and www.MadisonEstates.com