How to Calculate the Maximum PITI for an FHA Loan
The Federal Housing Administration insures affordable mortgages for borrowers of modest means or with credit challenges. Created in 1934 during the Great Depression, FHA remains relevant in difficult economic times, such as the recession that began in 2007. FHA lenders consider the maximum housing payment a borrower can reasonably afford when underwriting loans. It includes loan principal, interest, taxes and insurance (PITI). Underwriting is the process by which lenders analyze borrower credit, cash assets, collateral and capacity to repay. The PITI must remain within their capacity to pay each month based on gross income and other important debt payments.
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Things You'll Need
- Income documentation (income taxes, paystubs, etc.)
- Mortgage calculator
- Current revolving debt and loan payment information
Instructions
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1
Add the gross incomes of all borrowers who will be obligated on the loan--that is, the primary borrower and any coborrowers. FHA underwriters determine gross effective income by reviewing the borrowers’ past two years’ worth of income taxes and year-to-date earnings on current paystubs. They also calculate documented commissions, bonuses or tips averaged over a two-year period, when applicable.
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2
Multiply the total gross monthly income as determined by Step 1, by .31. FHA limits a borrower's housing payment to 31 percent of their effective income, also known as a 31 percent debt-to-income ratio (DTI).
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3
Determine the total of the principal payment, interest payment, real estate property taxes, mortgage insurance and hazard insurance payments based on a hypothetical home price and interest. Use an amortization mortgage calculator provided online or a handheld version. The total PITI may not exceed the figure determined in Step 2.
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4
Reduce any factors of the PITI if your figure in Step 3 exceeds that of Step 2. The simplest way of reducing your overall PITI to within the maximum allowed is to decrease the price of the home, increase the down payment amount, or decrease the interest rate by shopping for a better rate or buying it down with the lender (paying discount points).
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Tips & Warnings
Self-employment income, part-time and seasonal employment is also counted as effective income if documented and stable for at least two years, according to FHA underwriting guidelines outlined in Handbook 4155.1.
Consult an FHA-approved lender to determine the current down payment requirement for borrowers with your credit score and the monthly mortgage insurance premium rate. As of 2011, FHA required 3.5 percent down for borrowers with 580 credit scores and above, and 10 percent for those with credit between 500 and 579. The mortgage insurance premium is a percentage of the sales price that is generally financed into the loan rather than paid up-front. Subtract the down payment amount from the sales price of a home, and add back the mortgage insurance premium. Your payments are based on this balance.
Consult an FHA lender for current interest rates based on your credit profile. FHA rates are typically competitive with conventional, non-government backed mortgage rates.
Consult the county tax assessor's office in the area you plan to buy to determine the real property tax basis to which you will be subject. Multiply this figure by the sales price and divide the sum by 12, as you must make monthly payments on the taxes to the lender by way of an escrow impound account.
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