Principal, interest, taxes, insurance (PITI) is the sum of a mortgage payment that includes the principal amount, loan interest, property tax, and homeowner's property and private mortgage insurance premiums.
Breaking Down Principal, Interest, Taxes, Insurance (PITI)
PITI is typically quoted on a monthly basis and is 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.
PITI and Mortgage Underwriting
Because PITI represents the total monthly mortgage payment, it helps both the buyer and the lender determine the affordability of an individual mortgage. A lender will look at PITI to determine if a buyer is a good risk for a home loan. Buyers may study at PITI to decide if they can afford to purchase a particular home.
The front-end ratio compares PITI to gross monthly income. Most lenders prefer a front-end ratio of 28% or less. For example, the front-end ratio of a PITI totaling $1,500 to a gross monthly income of $6,000 is 25%, which is acceptable to most lenders.
The back-end ratio compares PITI and other monthly debt obligations to gross monthly income. Most lenders prefer a back-end ratio of 36% or less. Suppose the borrower above has a $400 car payment and a $100 credit card payment; the back-end ratio would be 33% (PITI: $1,500 + $400 +$100/$6,000= 33%), which is acceptable to most lenders.
Some lenders also use PITI to calculate reserve requirements. Lenders require reserves to secure mortgage payments in the event a borrower temporarily suffers an income loss. Often, lenders quote reserve requirements as a multiple of PITI. Two months of PITI represents a typical reserve requirement. If subjected to this requirement, the borrower from the above example would need $3,000 in a depository account to be approved for a mortgage.
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.
Even if not escrowed, most lenders still consider the amounts of property taxes and insurance premiums when calculating front-end and back-end ratios. Moreover, additional mortgage-related monthly obligations, such as homeowner's association (HOA) fees, may be included in PITI for the calculation of debt ratios.