PITI
Encyclopedia
In relation to a mortgage
, PITI is an acronym for a mortgage payment that is the sum of monthly principal, interest, taxes, and insurance. That is, PITI is the sum of the monthly loan service (principal and interest
) plus the monthly property tax
payment, homeowners insurance
premium, and, when applicable, mortgage insurance
premium and homeowners association
fee. For mortgagers whose property tax payments and homeowners insurance premiums are escrow
ed as part of their monthly housing payment, PITI therefore is the monthly "bottom line" of what they call their "mortgage payment" (although actually, in more precise terms, it is a combined mortgage,-tax,-and-insurance payment).
, making the borrower a safer bet for the lender.
For example, if a mortgage lender requires 2 months worth of PITI to qualify for a specific loan, and the PITI payment for the loan equals $1500/month, the borrower must document or 'state' (depending on Mortgage Loan Documentation requirements) $1500 x 2(months) = $3000 in seasoned assets.
PITI must come directly from one of the borrower's seasoned asset accounts that can be verified. Acceptable verifiable accounts include VODs (Verification of Deposit), checking accounts, savings accounts, 401k and other retirement plans, and stocks.
Each bank or lender's asset and reserve requirements will vary. Before the 2007 subprime mortgage financial crisis, typical reserve requirements were 2 months PITI for owner-occupied properties, 3–4 months for second home and vacation properties, and 6 months for investment properties. Low-payment programs such as negative amortization
usually required 3–4 months of assets for an owner occupied home because of the relative risk of such a loan.
. The two DTIs that lenders are most interested in are:
The specific maximum values that a lender will allow for each of those DTIs depend on country, region, and era. In general, the maximum DTI limits have risen over the years as lenders have learned empirically how much credit they can safely extend to borrowers while keeping defaults below certain levels.
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
, PITI is an acronym for a mortgage payment that is the sum of monthly principal, interest, taxes, and insurance. That is, PITI is the sum of the monthly loan service (principal and interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
) plus the monthly property tax
Property tax
A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
payment, homeowners insurance
Home insurance
Home insurance, also commonly called hazard insurance or homeowner's insurance , is the type of property insurance that covers private homes...
premium, and, when applicable, mortgage insurance
Mortgage insurance
Mortgage insurance is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer...
premium and homeowners association
Homeowners association
A homeowner association is a corporation formed by a real estate developer for the purpose of marketing, managing, and selling of homes and lots in a residential subdivision...
fee. For mortgagers whose property tax payments and homeowners insurance premiums are escrow
Escrow
An escrow is:* an arrangement made under contractual provisions between transacting parties, whereby an independent trusted third party receives and disburses money and/or documents for the transacting parties, with the timing of such disbursement by the third party dependent on the fulfillment of...
ed as part of their monthly housing payment, PITI therefore is the monthly "bottom line" of what they call their "mortgage payment" (although actually, in more precise terms, it is a combined mortgage,-tax,-and-insurance payment).
Reserves
Lending institutions often use a multiple of the PITI payment amount as the minimum amount of seasoned assets a borrower must document ("state") as a reserve when qualifying for a mortgage. The reserve shows that the borrower could continue to pay his/her monthly payment for several months even if his/her income was temporarily interrupted. This reduces the risk of defaultDefault (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
, making the borrower a safer bet for the lender.
For example, if a mortgage lender requires 2 months worth of PITI to qualify for a specific loan, and the PITI payment for the loan equals $1500/month, the borrower must document or 'state' (depending on Mortgage Loan Documentation requirements) $1500 x 2(months) = $3000 in seasoned assets.
PITI must come directly from one of the borrower's seasoned asset accounts that can be verified. Acceptable verifiable accounts include VODs (Verification of Deposit), checking accounts, savings accounts, 401k and other retirement plans, and stocks.
Each bank or lender's asset and reserve requirements will vary. Before the 2007 subprime mortgage financial crisis, typical reserve requirements were 2 months PITI for owner-occupied properties, 3–4 months for second home and vacation properties, and 6 months for investment properties. Low-payment programs such as negative amortization
Negative amortization
In finance, negative amortization, also known as NegAm, deferred interest or graduated payment mortgage, occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan increases...
usually required 3–4 months of assets for an owner occupied home because of the relative risk of such a loan.
Debt-to-income ratios (DTIs)
Another way in which lenders try to minimize the risk of default is by requiring that PITI not be more than a certain maximum percentage of the borrower's monthly gross income—that is, they specify maximum debt-to-income ratios (DTIs)Debt-to-income ratio
A debt-to-income ratio is the percentage of a consumer's monthly gross income that goes toward paying debts. A debt-to-income ratio (often abbreviated DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts. A debt-to-income ratio (often abbreviated DTI) is the...
. The two DTIs that lenders are most interested in are:
- the ratio of PITI to monthly gross income; and
- the ratio of all debt service (PITI + payments for credit cards, car loans, student loans, etc.) to monthly gross income.
The specific maximum values that a lender will allow for each of those DTIs depend on country, region, and era. In general, the maximum DTI limits have risen over the years as lenders have learned empirically how much credit they can safely extend to borrowers while keeping defaults below certain levels.