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. Qualifying Ratios

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

    A review of the borrower’s credit history, employment history, ...
  5. Housing Expense Ratio

    A ratio comparing housing expenses to before-tax income that ...
  6. No-Cost Mortgage

    A mortgage refinancing situation in which the lender pays the ...
Related Articles
  1. Personal Finance

    How to Use a Mortgage Calculator to Save Time and Money

    Calculate your monthly mortgage payment using the Investopedia's free calculator.
  2. 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.
  3. Personal Finance

    How Much Mortgage Can You Afford?

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

    5 Reasons To Save For A Big Mortgage Down Payment

    You may be anxious to buy a home, but taking time to save a large down payment has numerous advantages.
  7. Personal Finance

    The Best Mortgage Deal (May Not Be What You Think)

    Don't judge a mortgage solely by payment amount. Here's what insiders know about choosing the most advantageous mortgage offer.
  8. Personal Finance

    Finding the Best Mortgage Rates in 2017

    As home-buying technology has progressed, the process of finding the best mortgages rates can all be done online. Here's how:
  9. 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.
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. 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 >>
  3. 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 >>
  4. 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 >>
Hot Definitions
  1. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  2. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  3. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  4. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  5. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  6. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
Trading Center