What does PITI mean for your payments?

Buying your first home is an exciting milestone, but it can come with its fair share of jargon. One term you may encounter is PITI. It might sound like alphabet soup, but PITI — principal, interest, taxes and insurance — is the backbone of your mortgage payments. 

Whether you’re a first-time buyer or looking to refresh your knowledge, understanding PITI is key to managing your finances effectively and achieving your homeownership goals. Let’s take a look at how PITI can impact loan eligibility.  

How PITI Is Calculated

To calculate PITI, lenders add up the total monthly costs of the property’s principal, interest, taxes and insurance. This amount is then used to evaluate your debt-to-income ratio and determine if you can afford to keep your bills current. If the lender finds your income is insufficient, you may not be qualified for the loan.

PITI doesn’t take every expense into consideration. You’ll still need to cover costs associated with closing (e.g., appraisal, inspection), repairs and home maintenance. You’ll also be responsible for any fees required by the local homeowners association, if applicable. 

How Debt-to-Income Ratios Are Assessed

Front-end ratios are calculated by dividing your monthly PITI by your monthly gross income. If your PITI is $2,000 and your income is $8,000, for example, your front-end ratio would be 25%. This falls below the maximum 28% front-end ratio that most lenders require.

Back-end ratios also take additional monthly expenses like auto payments into account. To calculate it, additional expenses are added to your PITI before dividing by your gross monthly income. 

Using our earlier example: $2,000 PITI plus $1,000 additional expenses equals $3,000. Divide this by your $8,000 monthly income and you get a back-end DTI ratio of 37.5%. Lenders typically prefer a ratio of less than 36% (though some do go higher).

Any questions? Feel free to reach out.