PITI is an acronym for the four components of a mortgage payment: Principal, Interest, Taxes, and Insurance. When evaluating a homebuyer’s maximum mortgage loan eligibility, lenders consider these four components. Mortgage lenders generally prefer that the monthly mortgage payment be no higher than around 28-30% of the buyer’s gross income.
For example, if a homebuyer’s PITI is $1,500 per month, a mortgage lender would like to see their monthly income at around $5,000.
What does PITI mean?
When borrowing from a financial institution, repayments are generally made in two parts: the principle and the interest. However, mortgage payments often include additional fees for insurance and property taxes. These payments are bundled together into one payment, called PITI.
If a mortgage is taken out for $300,000, then the loan’s principal is $300,000.
A portion of each monthly mortgage payment goes toward paying the principal. Early on in a mortgage, loans are structured so that the proportion of principal paid is lower than interest; however, this typically changes over time.
Mortgage lenders and financial institutions make money by charging interest.
A larger proportion of a mortgage payment is typically applied to interest in the early stages of a loan.
- For example, if a $300,000 mortgage over 30 years has a monthly payment of $1,400 for principal and interest, 60% of the first payment may go toward interest, while less than 1% of the last payment may go toward interest.
Real estate taxes (property taxes) are generally levied by city and county governments.
While property taxes are calculated per annum, they can be included as part of a homebuyer’s mortgage payment and held in escrow by the lender, then paid to the appropriate authority when due.
Payment for two types of insurance can be added to a monthly mortgage:
- Homeowner’s insurance.
- Mortgage insurance.
Homeowners insurance is usually required by a mortgage lender, which covers both the home and its contents against fire, theft, and other losses. Also, mortgage insurance is required with many types of home loans if the borrower has a down payment of less than 20%.
Like property taxes, these premiums can be collected by the mortgage lenders and held in escrow until the payment is due.
How to Forecast PITI
When buying a home, it takes work to forecast the PITI of a mortgage, but here are the basics. When you get with your mortgage broker to apply for a mortgage preapproval, you will learn more about your PITI.
Principal and Interest
While mortgage rates change daily, a rough calculation of PITI can be obtained using an online mortgage calculator.
Principle and interest can be calculated by plugging the current mortgage rate into the online mortgage calculator with your other information.
Finding the property tax is a little trickier because it depends on the local tax rate and the home’s value. Property tax rates can be found online.
A rough estimate of the homeowner’s insurance premium is about 0.25% of the home’s price. However, homebuyers should check with an insurance agent for a more accurate estimate.
Mortgage insurance is applicable based on the type of loan and the down payment. You can learn about these options when you meet with your mortgage broker to be preapproved for a mortgage.
How Lenders Use PITI When Reviewing Mortgage Applications
When deciding whether a homebuyer qualifies for a mortgage loan, lenders calculate the mortgage-to-income ratio, also known as the front-end ratio. This is calculated by dividing the monthly mortgage payment by the borrower’s monthly income, which needs to be around 28% or lower to qualify.
Another calculation by lenders when evaluating mortgage candidacy is the debt-to-income ratio, also known as the back-end ratio. This compares all monthly debt payments to monthly income. Typically, lenders like to see this ratio no higher than 36-43% to qualify a homebuyer for a loan.
Why PITI is Useful for Homebuyers
Knowing your forecasted PITI gives you a more realistic idea of the total monthly mortgage payment, rather than just principal and interest. Therefore, knowing your PITI helps formulate your overall household budget before buying a home.
Marimark Mortgage is based in Tampa, Florida, and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in mortgages for first-time homebuyers, conventional home mortgages, FHA, VA, USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.