Cash Flow Is Your Buyer’s Ability To Pay And Your Ability To Finance

The buyer’s available cash flow is an excellent indicator of the buyer's “ability to pay” for the mortgage. This is very important because it determines whether you can finance the transaction or not.

We’ve introduced the significance of the down payment and the credit-report. Now we focus on the buyer’s ability to pay his or her bills.

Total Income and Net Worth

An accurately completed credit-report should provide the information needed to quickly determine if your prospective buyer could afford to buy your house. You will want to focus first on your buyer’s total income and net worth.

Total income may be impacted by various payout alternatives for the buyer. A good example is a professional sales representative may be paid on a draw and commission. Be sure to capture all of the information concerning your buyer’s total income.

If the purchase is to be by a couple, be sure to gather the financial information for each individual to properly reflect the total income available.

The net worth of the buyer is a more true representation of their financial resourcefulness. Generally speaking, the higher your buyer’s net worth, the bigger the loan they can qualify for. Additional benefits include lower down payment requirements and a lower interest rate on the mortgage.

The buyer’s cash flow based on normal monthly expenses is an indication of what to expect based on normal conditions. We all know that “life happens” every day. All kinds of unexpected things develop in our lives all the time.

Emergency funds, savings accounts, CD’s, money market accounts, mutual funds, an investment portfolio, etc., are all great for the evaluation of your buyer’s “resourcefulness”. Your buyer’s ability to pay will be greatly improved with any one of the investments mentioned. More than one is a bonus.

Debt-to-Income Ratio

Conventional lenders use guidelines called Debt-to-Income ratios to determine the maximum loan a borrower will qualify for. The “ DTI” is simply the percentage of your monthly gross income (before taxes), which is used to pay monthly debts.

A generally accepted ratio is 33/38. The first number, 33, represents the “front ratio”. It includes the percentage of monthly gross income that is used to pay your housing costs including:

Principal

Interest

Taxes

Insurance

Any extraordinary housing expenses like association fees, etc.

The second number, 38, represents everything listed above plus consumer debt. Consumer debt includes:

Car Payments

Credit Card Debt

Installment Loans

Insider Tip
The intent of the guidelines is to make sure your buyer needs the smallest amount possible of their income, or cash flow, to pay you for the mortgage you are planning to finance. The guidelines are flexible and subject to change depending on the situation.

Remember, by choosing to “Cash-Now-Seller-Finance” your property, you are the “bank”. That means you are also in charge of the major decisions concerning the buyer and the structure of the deal.

We provide counsel and guidance to help you decide which alternative will be most beneficial for you and your buyer. For your concenience here is a Debt Ratio Calculator which will give you a good idea of the DTI ratio of your prospective buyer.

NO BANKS NEEDED WHEN YOU SELL OR BUY!!

Your buyer’s cash flow, or ability to pay, will be greatly influenced by their job stability.