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If You are going to set Your Home Purchase Budget, Take a Look at PITI



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By : marco benavides    99 or more times read
One of the most important things that you can do if you are going to buy your home is to take a look at PITI when you set your purchase budget. If you have applied for a mortgage loan or purchased a home before, you probably know what PITI is. However, in case you do not know or have forgotten what it is, PITI is simply the first letters of the words principal, interest, taxes and insurance. Therefore, the acronym is used and it is pronounced just like the word pity. View it as an equation if that would make it easier: monthly mortgage payments + tax payments + insurance payments = PITI.

Why is your PITI a good thing to know if you are looking for a home? If you have a good idea of what your principal, interest, tax and insurance payments are likely to be, then you also have a good idea of the measuring stick that is going to be used to see if you qualify for a mortgage loan.

For example, if you are going to try to qualify for a $360,000.00 loan and the interest is 6.5% over 30 years, with property taxes at 1.25% and mortgage insurance at 0.5%, then your payments are going to be around $2,950.00. In order for the lender to assess your risk rate and try to qualify you for the loan, it is going use some multiple of your PITI in the assessment. Before the subprime mortgage crisis, lenders were using as little as two months worth of PITI to make the assessment. As the crisis deepened, lenders became much more restrictive and they began using much more demanding criteria.

For the sake of calculation, we are going to say that your lender is going to require three months worth of PITI. You do not need to call your physicist friend to do the calculations for you. All you have to do is multiply 3 x $2950.00 = $8,850.00 and you have the total that the bank is going to ask you to document in seasoned assets (stocks, checking and/or savings accounts, 401k or some other retirement plan, etc.) as a reserve in order to reduce the risk of you defaulting on your loan. This is done so there is safety net just in case you have a temporary income interruption. The lender is simply trying to make sure that you will be able to keep up with your monthly payments. It is expensive and time consuming for a lender to step in a try to foreclose on your home.

If you know your PITI or perhaps have a good idea of what your PITI is going to be, then you can plan accordingly. You can start setting your home purchase budget if you have not already done so. Also, knowing your PITI will also give you peace of mind because you would know what you can afford if there were some sort of interruption to your source income and you had to rely on other means to make your mortgage payments.
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