Qualifying the Buyer: Taxes, PMI, and a Seller Concession
Purchase price $360,000. The buyer puts 10% down and takes a 30-year fixed loan at 6.5%; the payment factor is $6.32 per $1,000 of loan. Gross monthly income is $8,400. Monthly debts: car $420, student loan $180, credit card minimum $65. South Carolina property tax: the property is assessed at a 6% ratio with a 280-mill total rate. Hazard insurance is $1,800 per year, HOA dues are $45 per month, and private mortgage insurance runs 0.5% of the loan amount per year because the loan is above 80% LTV. The buyer asks the agent whether they qualify, and the seller offers a 3% concession.
1. Compute the total monthly housing payment and both qualifying ratios.
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Loan amount: $360,000 x 90% = $324,000.
- Principal and interest: 324 x $6.32 = $2,047.68
- Property tax: $360,000 x 6% = $21,600 assessed; 280 mills = $0.280 per $1,000? No - mills are per $1,000 of assessed value, so $21,600 x 0.280 = $6,048/yr = $504/mo
- Insurance: $1,800 / 12 = $150/mo
- HOA: $45/mo
- PMI: $324,000 x 0.5% = $1,620/yr = $135/mo
Total housing = $2,881.68
- Front-end: 2,881.68 / 8,400 = 34.3%
- Back-end: (2,881.68 + 420 + 180 + 65) / 8,400 = 3,546.68 / 8,400 = 42.2%
Note how much of the payment is not principal and interest: taxes, PMI, insurance, and HOA total $834/mo, about 29% of the housing payment. Buyers who budget only on a mortgage calculator get surprised here.
2. Does the buyer qualify, and what single change does the most good?
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Verdict: not on a textbook 28/36, but not dead either.
- Conventional 28/36 is a guideline, not a wall. Automated underwriting routinely approves to 45-50% back-end with compensating factors (reserves, low payment shock, strong credit, verified stable income). At 34.3/42.2 an AUS approve/eligible is plausible, but it is not a certainty and should not be promised.
- FHA 31/43: the back-end of 42.2% fits inside 43%. The 34.3% front-end exceeds 31%, but FHA allows the front-end ratio to be waived when the back-end is at or under 43% and the AUS returns an approve/eligible. This file is closer to FHA than conventional.
Highest-leverage single change: get to 80% LTV. Paying the loan down to $288,000 (20% down = $72,000, or about $36,000 more cash than planned) drops P&I to $1,820.16 and eliminates the $135 PMI. New housing: 1,820.16 + 504 + 150 + 45 = $2,519.16, front-end 30.0%, back-end 37.9% - inside FHA guidelines on both ends.
Cheaper alternatives to price: pay off the $420 car loan (back-end falls to 37.2%, front-end unchanged), or negotiate price down. Each $1,000 of price reduction only saves about $7.46/mo, so price alone is a weak lever; PMI and down payment are the strong ones.
3. The seller offers a 3% concession of $10,800. What can it legally pay for, and how should the agent structure it?
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A seller concession is not down payment money.
- It may be applied to buyer closing costs, prepaid interest, prepaid taxes and insurance, and other allowable closing costs - not to the down payment, not to the buyer's cash reserves, and not to pay off debt for qualifying purposes.
- Limits: conventional financing caps concessions by LTV - 3% when the loan is above 90% LTV (this file at 90%), 6% at 75-90%, 9% below 75%. So $10,800 is exactly at the 3% ceiling here. FHA permits up to 6%.
- Structure it in the contract: name the dollar cap, state that unused amounts are not credited to the buyer at closing, and confirm with the lender in writing that the concession is acceptable and how it is disclosed on the closing disclosure. Interest-rate buydowns have their own rules.
- Do not let the concession be used to inflate the price artificially to 'cover' it without appraiser support - the appraisal must still support the contract price.
Correct advice: use the $10,800 to preserve the buyer's cash for reserves and inspection surprises, not as a substitute for the down payment.