Also known as the Principal, Interest, Taxes, and Insurance, PITI in real estate is usually included in a mortgage payment. It is commonly summed up and quoted on a monthly payment scheme, based on the borrower’s monthly gross income.
A PITI is a determinant for both the buyer and the lender in terms of the property’s affordability. It will also help the lender study the status of the prospective buyer whether he or she will be a good risk for a home loan or not.
Underwriting a PITI Mortgage
PITI is used for computing a homebuyer’s front-end and back-end ratios, which are used to make an approval for a mortgage loan. Most lenders use a 28% or less front-end ratio against the buyer’s gross monthly income.
Specifically, a back-end ratio compares PITI (including other monthly obligations) to the buyer’s gross monthly income. Lenders prefer a 36% or less back-end ratio.
PITI isn’t only used for determining a buyer’s capability for a home mortgage loan, but it is also used to calculate a reservation to secure a mortgage loan if ever the borrower fails to pay because of a temporary income loss. Usually, lenders quote a PITI of two months as a reserve requirement, which postulates a buyer to put in a depository account prior to a mortgage approval.
Not all lenders require property taxes and insurance premiums to be included in the mortgage, though. Some require homebuyers to pay taxes directly to the state real property tax department and insurance premiums to an individual insurance company.