PITI and Debt-to-Income Ratios
When calculating figured relative to mortgage payments, it is important to understand the relevance of PITI and Debt-to-Income ratios. Both lenders and borrowers need accurate figures on hand in order to come to a fair arrangement for the purchase of a home. Knowing how these numbers are derived can make the process much clearer.
PITI
PITI is an acronym for principal, interest, taxes and insurance. All of these things are combined to come up with the appropriate monthly payment amount for a mortgage loan. Each amount need evaluation for an equal period of time in order to come up with the correct figure. Add monthly segments, or combine the yearly cost and divide by 12 to reach the monthly payment figure.
Debt-to-Income ratio
The Debt-to-Income ratio is used to determine your ability to repay the loan. It is significant in the decision of lenders as to whether you qualify for a loan at all, and it matters in the amount of the loan that is available to you. The complete calculation involves a front ratio and a back ratio. The front ratio is a proposed mortgage payment divided by gross monthly income. The back ratio is total monthly obligations divided by gross income.
Factors in calculation
The front ratio is fairly straightforward, but the back ratio is a little more complicated, as some things are included in monthly obligation and income computations, and some are not. Obligations include mortgage payments, installment accounts with more than ten months remaining, revolving and credit card accounts, co-signed loans and child support, but do not incorporate utilities, communication services, auto insurance or child care. Gross income cannot include overtime or bonuses, unless they are consistently earned over two years. The standard is also two years for commission-based and self-employment income, where the bottom line after deductions on tax returns is used. Child support received is included, but only if it is proven that it is paid on time for at least one year and continues for at least three.
The mortgage process is overwhelming at first, but the effort of working through it is certainly worthwhile. Finding the right combination of factors and buying your own home is a rewarding experience. Making sure the calculations are accurate ensures that you are able to maintain ownership and keep your investment worthwhile.