What Is PITI?
The sum total of a mortgage payment is comprised of principal, interest, taxes, and insurance (PITI). The amount of principal paid, interest paid, property taxes, and homeowners insurance is broken down on a monthly basis to determine what the borrower’s monthly outlay would be.
How Is PITI Used in Real Estate?
PITI is best used to gauge how much house a potential buyer can afford. Ideally, a borrower’s total mortgage payment should be equal to or less than 28% of the borrower’s gross monthly income.
Some mortgage companies do not require borrowers to escrow their insurance and property tax payments. In this case, the homeowner will make those payments directly to the insurance company and tax assessor.
However, when determining the kind of payment the potential buyer can afford, those payments will be annualized on a monthly basis and included in the PITI estimate.
How to Calculate PITI
The formula for calculating PITI is relatively simple: Simply divide the sum total of annual principal, interest, property taxes and insurance payments by 12.
The resulting number should represent 28% or less of the borrowers monthly gross income. The ratio of PITI to monthly gross income is the front end ratio.
PITI Example
If a borrower’s gross monthly income is $10,000 and PITI is $2,500, the front end ratio when PITI is applied is 25%, which is acceptable to most lenders.
When using a back end ratio, or total debt payments to monthly gross income, borrowers aim for 36% or less. If the same borrower has a credit card payment of $200, and a car note of $300, the back end ratio would be an acceptable 30%: (2,500 + 200 + 300)/10,000 = 30%.
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