In relation to a mortgage, PITI (pronounced like the word "pity") 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 escrowed 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 mortage,-tax,-and-insurance payment).
PITI's role in qualifying borrowers for mortgages
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 default, 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 subprime mortgage financial crisis has resulted in tightened qualifying criteria. The reserves mentioned above may be lower than what the latest underwriting guidelines call for. In some cases lenders have swung from one extreme to another—from being recklessly permissive to being extremely demanding. The move to rational, predictable guidelines may take a year or two.
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). 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.
