Question:

What are the PITI formulas used by lenders to asses qualification and what are the factors that can vary their results?

Answer:

There are two formulas involving PITI that lenders generally use to assess qualification for a typical mortgage. These are:

1. The 28% formula:

This formula calculates the percentage of your income used for mortgage payments. It is:

PITI / Gross monthly income

What lenders want for qualification is that this percentage should be less than or equal to 28%

2. The 36% Formula

This formula calculates the percentage of your income used for mortgage payments. It is:

(PITI + Other monthly debts) / Gross monthly income

What lenders want for qualification is that this percentage should be less than or equal to 36%

Factors that Affect PITI Formula Results

As you can see from the formula when PITI and/or monthly income change, so do the results. To change the results in the borrower's favor we have to either increase income or decrease PITI. We all wish that our income would increase don't we? But that is something you cannot change overnight. So to vary formula results you must change PITI (Principal, Interest, Taxes, and Insurance).

If you have applied for a mortgage and have gotten a quote then "P" Principal is locked. You could negotiate "I" Interest but it is generally very difficult to get lenders to reduce the interest rate, without giving something else up.

"T" Taxes depend on local laws and tax rates can very even within states. If there are 2 or 3 houses that have caught your eye within different districts, it might be worthwhile to check out the tax rates on property on each of them. That might help you reduce your home-buying cost.

So now we are left with "I" insurance. This is where you get a bit of room to play. Insurance prices vary greatly in a market and if you are willing to shop around, you can find yourself some good deals. Also, down payment of less than 20% requires an extra insurance, called Private Mortgage Insurance (PMI), which costs about 0.5%-0.6% of the total mortgage amount, so you might want to avoid a low down payment on your mortgage.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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