December 17th, 2017 8:38 AM by Jackie A. Graves, President
When you’re shopping for a house and considering a
mortgage loan, establishing what you can afford for house payments can be a
lengthy process. You have to run calculations, get updated payment scenarios
from your mortgage company, and determine whether or not you can qualify.
With all these moving
parts, we hope it comes as a relief to hear there’s a simpler way to calculate
a home payment. This simple solution will be a huge help in a competitive
market that doesn’t allow for extended number crunching.
Terms to Know
Before we get into the nitty-gritty, it will be helpful
to know these two key terms when using our easy house
1. House Payment or PITI
PITI is an initialism
used to reference the four factors that influence your monthly house payment:
Principle is the amount borrowed, specifically how much of your loan
you’re scheduled to pay off each month.
Interest is how much it costs to use your loan, and your monthly
payment is based on your interest rates.
Taxes refer to the property taxes rolled into your monthly house payment
and are sometimes called an escrow or impound account.
2. Debt-to-Income Ratio (DTI)
Important for determining
how easily you’ll be able to pay off your debts, the DTI is the percentage of
your total monthly debt against your monthly income. In math terms, it looks
(PITI + monthly
liabilities) ÷ monthly income = DTI
Most lenders prefer your DTI stays at or under 45%,
so it’s important to consider your other monthly liabilities alongside your
PITI when getting a mortgage.
The Basic House Payment Calculations Most
Lenders Won’t Share
Now that you’re familiar
with PITI and DTI, you’re ready for this simple truth: for each $100,000 you
borrow, expect a monthly mortgage payment, or PITI, of $725.
It’s true! In most cases,
your principal, interest, property taxes, and home insurance for $100,000 will
come out to about $725 each month. Here’s a handy table for reference:
You can easily add half
of $725 (that’s $362.50) if you’re trying to calculate for an extra $50,000. Or
you can divide the loan amount by $100,000 and multiply the result by $725 to
get the estimated PITI for your loan.
The Ins and Outs of Calculating PITI
Let’s look at an example.
Say you want to buy a $350,000 home. You want to know whether the payment is
affordable and whether you’ll meet your lender’s debt ratio thresholds.
Pretend you already have
a 20% down payment ready, which is $70,000 for a $350,000 home. So in total,
you’ll be borrowing $280,000. Divide that by $100,000 and you get 2.8. Using
this information, the basic house payment formula will look like this:
$725 x 2.8 = $2,030
To spell it out, we know
that when you borrow $100,000, your PITI will be about $725 per month. When we
divide $280,000 by $100,000, we get 2.8. Similarly to how multiplying $100,000
by 2.8 will result in the full loan amount, multiplying $725 by 2.8 will give
us the total PITI amount. So the total PITI would be $2,030 per month.
The Ins and Outs of Calculating DTI
Once you’ve calculated
the PITI, make sure you’ve got a debt-to-income ratio a lender will approve of.
Remember, the highest DTI most lenders will allow is 45%. Continuing with our
example and using an income of $4,750, here’s how to find the DTI for a $2,030
PITI if you have no other monthly liabilities:
$2,030 ÷ $4,750 = 42.74%
As you can see, you
simply divide the PITI by your income. In this case, the result is 42.74%,
which is low enough to possibly qualify for a loan.
The Application of Monthly Liabilities
Remember to include any other monthly liabilities you
have when you calculate your DTI. Let’s see if you can still reasonably afford the house with
hypothetical monthly liabilities.
Pretend you have a car
lease payment of $300 a month and credit card payments of $80 a month. This
changes our previous DTI formula like so:
($2,030 + $300 + $80) ÷
$4,750 = 50.74%
With those debts, you
would have a 50.74% DTI, which means you likely wouldn’t qualify for that large
of a loan. That’s a rather different situation, so don’t forget to include your
monthly liabilities when calculating DTI.
Personalizing Your DTI
Your monthly income and
expenses may be very different from our hypothetical scenario. Try plugging in
your PITI with the formula below to get your personal DTI, and make sure it’s
Remember, even if your
DTI is below 45%, you need to consider your lifestyle and other living costs
when deciding on a home. Are you willing to be house poor for a large mortgage,
or will you be just as happy with less home and more spending money each month?
The choice is up to you!
Factors Beyond the Formula
Our formulas for PITI and
DTI are best for a solid estimation, but they’re not exact for every unique
situation. Here are some other factors that will affect your monthly house
Private mortgage insurance (PMI) comes
into play when you have a down payment under 20%. PMI helps lenders offset the
risk of you defaulting on the mortgage.
Large down payments, on
the other hand, will positively influence your borrowing power.
Assets and reserves need
to be disclosed to most lenders, and you’ll need two months or more of PITI in
the bank to meet their requirements.
Credit scores can influence
interest rates, and if your score is below 620, you may not qualify for a home
loan. Every month, check your credit scores for free on Credit.com to
see where you stand.
By Scott Sheldon – To view the original
article click here