What Does PITI Mean?
PITI is an acronym that stands for “Principal, Interest, Taxes, and Insurance.” As you might already guess, PITI is related to home loans in a major way. These four letters stand for the four things that comprise most mortgage payments. Therefore, we will break this acronym down into four sections so that you can more fully understand what each one means.
When you get a mortgage, you are liable for more money than you actually borrowed. The amount borrowed is referred to as the principal. You could just as easily call it the main part of the debt, as it will probably make up the bulk thereof. This is also the most important part of the debt. Why? Because the debt cannot be discharged until the principal is paid.
However, the principal is only one slice of the cheese. You also have to pay interest on the loan and any applicable taxes. If you have mortgage insurance (and you should), that adds another requirement. By the time it’s all said and done, you could end up with a much bigger mortgage payment than expected.
When you are considering the possibility of getting a home loan, you should always ask your lender about the PITI. Otherwise, they may try to trick you by only quoting the principal and interest. As soon as you use this term, they will know that you are at least intelligent enough to do your homework.
Interest is the main way in which your lender benefits from handing out all this money. By sitting back and collecting interest, banks are able to use your loan as a long-term income source. While this might sound predatory, you also can’t expect to get something for free. In many cases, monthly mortgage payments consist mostly of interest payments. This means that you are not paying down the debt at all, but are merely running in place.
Interest rates will vary significantly, but you need to make sure that you are thoroughly familiar with the payment setup that any lender might present. Don’t let them dazzle you with buzzwords. Instead, ask plain and simple questions that are hard to dodge. One of the best ones is: “How much, in total, will I pay per month in interest?” You also need to know if the rate is fixed or variable. If given a choice, go with whichever option is favored by the market at that time.
Anytime a large financial transaction is made, Uncle Sam will surely want his slice of the cheese. Home loans are no exception, and taxes are the main way in which this slice is taken. It is hard to make general statements about property taxes because of the fact that they vary widely from place to place. This article might give you a good idea of where your area stands on this matter.
This is the only part that might be optional. As with most government-backed loans, most of the specific terms are set by the lender, which will normally be a financial institution of some type. However, membership in a homeowner’s association might take care of this issue for you. In most cases, a homeowner’s association will maintain a generalized insurance policy for all its members, and this will probably be adequate for most peoples’ needs. However, you may need to take out an additional policy if HOA coverage proves to be inadequate.
PITI In Relation to DTI (Debt-To-Income Ratio)
The PITI protocol is related to a matter that we discussed in a previous article. Simply put, the debt-to-income ratio is just a measure of your financial stability, obtained by deducting your liabilities from your profits. There is no need to go into the specifics again, but you do need to know that the idea of PITI is related to this part of the process.
When your lender attempts to determine your front-end DTI and your back-end DTI, your PITI scores will most likely be the basis of the evaluation. A low score in even one of these categories can drag your total down and cause you to be rejected for loans.
What Can I Do If My PITI Score Is Hindering My Ability To Get A Loan?
There are several things that you can do in this unfortunate situation. However, most of them are not easy. If that bothers you, try to remember this: If it were easy, everyone would do this!
In order to improve your overall score, you will need to focus on each area and figure out where you need to improve. When you are rejected for that big loan, don’t just get up and walk out. Not only is this unhelpful, but it’s also kind of rude. Instead, try to talk with your banker and ask them why you failed. It also couldn’t hurt to ask for some advice, but this advice may or may not be forthcoming.
With that in mind, let’s talk about some things you can do to improve your PITI status.
Increase Your Income
This may not be an easy thing to do, but it may be easier than you think. The simplest way to increase your income is to take on a second job. If you go this route, you should be aware of the fact that working two jobs is not easy. Very few people are able to do this for an extended amount of time, so don’t plan to do it long-term. If necessary, do that second job long enough to get your head above water, and then quit one or the other.
You could also look for “side work.” Side work is fairly easy to find on the internet, although you have to be careful of scammers (who are very plentiful these days). There are a lot of ways to work from home but make sure you avoid “pay to work” scams which promise you big paychecks in exchange for an immediate down payment. In most cases, they will simply take the money and run. Legitimate employers don’t need to lure employees with cheap tricks like this, so it’s always a clear red flag.
Talk to Many Different Lenders
As we said earlier, every lender will tend to impose a different set of lending terms. When we consider this situation, we can look at it positively or negatively. On the negative end, we could choose to focus on the uncertainty and confusion that often results from doing things in this manner. However, we can also choose to look at it from a positive angle. From this perspective, we can say that the variability of terms gives us more ability to shop around and find a set of terms that are acceptable.
Avoid Unnecessary Borrowing
This is a good rule for life that you should follow anyway, regardless of your credit score or your ability to get a loan. The dangerous part about borrowing money is the fact that it feels like free money. Of course, you will quickly be relieved of that delusion when the bill arrives, but it might be too late to change course by then.
The more you borrow, the more your credit score and PITI status will go down. However, there is one exception. If your credit score is at least decent, you might be able to borrow a small amount from a lender. When we say “small amount,” we mean that you should make it as small as possible. Why? Because you are never going to use it! Borrow the money and then put it in a safe place like a bank account. Don’t touch a single penny. Shortly before the loan term is up, repay everything in a single lump sum. This can be a good way to improve your credit, but it may not be an option for those with substandard credit.
Find Ways To Improve Your Credit Score
We have already given you one method of raising your credit score, so let’s discuss some other tricks. If used properly, these little tricks can do a lot to help you qualify for that all-important home loan.
For one thing, always make sure that you pay your bills on time. When you call up the electric company or the water company and ask for an extension on your bill, or if you fail to pay, your credit score will be affected. Utility companies really should make their customers more aware of this fact, but they often do not.
It’s a no-brainer when you think about it. The surest indicator of future behavior is past behavior. As such, a person who doesn’t pay their utility bills on time is much less likely to pay their mortgage payment on time. Lenders will surely look at your payment history with various utility companies, so don’t underestimate this factor.
Lenders will also look at your credit utilization ratio, and this will also affect their decision. “Credit utilization ratio” is just a fancy way of describing the percentage of your total credit that you normally use. So, let’s say you have a $35,000 line of credit. If you have never taken out more than $100 at one time, you have only been using 1/350th of your total credit. That will surely look good to the lender. In other words, don’t use your credit just because it’s available.
You can also get a small boost to your credit by leaving your old credit card accounts open. As long as these accounts are not accruing any debt, there is really no reason to close them. More to the point, it may lower your credit score if you close out those old cards. Remember, they want to know the percentage of your credit that you actually use. Thus, unused credit (like an old credit card) is a net positive and will increase your score.
As a final note, you should take a close and careful look at your credit report so that you can dispute any inaccuracies that may exist. Credit report inaccuracies are not uncommon, but nothing will be done until you formally dispute the faulty record.
PITI In Relation To Seasoned Assets
Money that has been held in an account and left untouched is referred to as “seasoned assets.” Money or other wealth must be left untouched for at least two months before it can be regarded as “seasoned.”
This is an important factor for borrowers to consider, as the PITI figure will be used to figure out if you have met the reserve requirement. Some lenders insist that a borrower must pay the initial costs of the loan (down payment and closing costs, in most instances) while maintaining an equal amount in reserve. In other words, the amount that you pay to get this loan should not be more than half of your total cash reserves. Many lenders require this kind of thing so that they can have a little more surety of getting paid.
In this article, we are dealing with some relatively advanced financial concepts. However, we trust that all of you will be intelligent and well-read enough to understand all of this. As a borrower, you really need to be as familiar as possible with the PITI system. If not, you will be at the mercy of others, and that is never a good place to be.
If nothing else, the concept of PITI is useful just because it allows us to combine multiple considerations. It is much easier to deal with these four things together than it is to handle each one separately. We hope that this article has been equally useful to you and that you walk away with a greater understanding of the subject. If we have succeeded in helping to enlighten you, please show your appreciation by filling out the contact form below so that you can learn even more from our team of trusted experts.