What is 'Principal, Interest, Taxes, Insurance - PITI'

Principal, Interest, Taxes, Insurance (PITI) refers to the components of a mortgage payment. Principal is the money used to pay down the balance of the loan; interest is the charge paid to the lender for the privilege of borrowing the money; taxes refer to the property taxes paid as a homeowner; and insurance refers to both property insurance and private mortgage insurance.

BREAKING DOWN 'Principal, Interest, Taxes, Insurance - PITI'

PITI is typically quoted on a monthly basis and compared to a borrower's monthly gross income for computing the individual's front-end and back-end ratios, which are used to approve mortgage loans. Generally, mortgage lenders prefer PITI to be equal to or less than 28% of a borrower's gross monthly income.

How PITI Influences Mortgage Underwriting

Because PITI represents the total monthly obligation a homeowner carries on his mortgage payment, it serves as a useful figure to plug into several formulas used to determine if a borrower can reasonably afford a given mortgage.

The front-end ratio compares PITI to gross monthly income. This is the ratio that most lenders prefer to equal 28% or less. If borrower's PITI equals $1,500 and gross monthly income equals $6,000, the front-end ratio, then, is 25%. This is an acceptable level to most lenders.

The back-end ratio compares the total of PITI and other monthly debt obligations to gross monthly income. Most lenders prefer to see a back-end ratio of 36% or less. If the above borrower making $6,000 per month has a $400 car payment and $100 minimum credit card payment in addition to PITI of $1,500, the borrower's back-end ratio is 33%.

Some lenders also use PITI to calculate reserve requirements. Lenders require reserves so that if a borrower temporarily suffers an income loss, money still exists to make the mortgage payment. Often, lenders quote reserve requirements as a multiple of PITI. Two months of PITI represents a typical reserve requirement. Therefore, the above borrower, if subjected to this requirement, would need $3,000 of seasoned funds in a depository account to be approved for a mortgage.

Additional Considerations

Not all mortgage payments include taxes and insurance. Some lenders do not require borrowers to escrow these payments as part of their monthly mortgage payment. In these scenarios, the homeowner pays insurance premiums directly to the insurance company and property taxes directly to the tax assessor. The homeowner's mortgage payment, then, consists of only principal and interest.

Most lenders, however, still consider the amounts of these payments, even if they are not escrowed, when calculating front-end and back-end ratios. Moreover, additional mortgage-related monthly obligations, such as homeowner's association (HOA) fees, may be lumped with PITI for the calculation of debt ratios.

RELATED TERMS
  1. Back-End Ratio

    A ratio that indicates what portion of a person's monthly income ...
  2. Front-End Ratio

    A ratio that indicates what portion of an individual's income ...
  3. Total Housing Expense

    The sum of a homeowner's monthly mortgage principal and interest ...
  4. Qualifying Ratios

    A set of ratios that are used by lenders to approve borrowers ...
  5. Reverse Mortgage Financial Assessment

    A review of the borrower’s credit history, employment history, ...
  6. Lender-Paid Private Mortgage Insurance

    Private mortgage insurance that a mortgage lender pays on behalf ...
Related Articles
  1. Personal Finance

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  2. Personal Finance

    How to Use a Mortgage Calculator to Save Time and Money

    Calculate your monthly mortgage payment using the Investopedia's free calculator.
  3. Personal Finance

    Best 3 Mortgage Calculator Websites with PMI

    Learn more about all of the factors behind PMI, and discover the three best websites that provide a mortgage calculator that includes PMI.
  4. Investing

    Understanding The Mortgage Payment Structure

    While a mortgage’s size and term set the baseline, the interest, taxes and insurance all influence the amount of the monthly payment.
  5. Personal Finance

    How Much Mortgage Can You Afford?

    Here's how to determine what you should be borrowing to finance your home.
  6. Personal Finance

    How Regulations Protect Reverse Mortgage Borrowers

    They're complex animals, which is why there are government guidelines in place to protect borrowers.
  7. Personal Finance

    How Do Mortgage Lenders Get Paid and Make Money?

    When homebuyers educate themselves on how mortgage lenders get paid and make money, they are more likely to save thousands of dollars on their mortgages.
  8. Personal Finance

    Guidelines for FHA Reverse Mortgages

    FHA guidelines protect borrowers from major mistakes, prevent lenders from taking advantage of borrowers and encourage lenders to offer reverse mortgages.
  9. Personal Finance

    Mortgage Options for Underwater Homeowners

    Find out what options are available when your mortgage is greater than the value of your home.
RELATED FAQS
  1. When Is Mortgage Insurance Typically Required?

    Learn about the situations in which borrowers may be required to buy private mortgage insurance, and discover who this insurance ... Read Answer >>
  2. Why does the loan-to-value ratio matter?

    Learn how the loan-to-value (LTV) ratio is calculated, and why this metric is important to lenders when evaluating a home ... Read Answer >>
  3. What is the debt ratio for an FHA loan?

    Borrowing through the Federal Housing Administration requires individuals to provide proof of income as well as information ... Read Answer >>
  4. What’s the difference between a mortgage lender and a mortgage servicer?

    Buying a home is an exciting and confusing process. Once the loan is secured, it's important to know who gets the payment: ... Read Answer >>
  5. What is PMI, and does everyone need to pay it?

    Also known as "Primary Mortgage Insurance," PMI is the lenders (banks) protection in the event that you default on your primary ... Read Answer >>
Hot Definitions
  1. Leverage

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. ...
  2. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  3. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  4. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  5. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  6. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
Trading Center