PITI
PITI stands for principal, interest, taxes, and insurance, the four parts of a typical monthly mortgage payment. Principal pays down the loan balance, interest is the cost of borrowing, taxes are property taxes collected for the county, and insurance covers hazard and, when required, mortgage insurance. Lenders use PITI to measure affordability.
PITI sits at the center of the financing and qualification material on the national exam. It is tested by asking what each letter covers and by asking you to compute a maximum housing payment from gross income using a front-end or back-end ratio.
What the acronym covers
PITI stands for principal, interest, taxes, and insurance. Those four items make up the monthly payment a lender collects on most mortgages, and together they are the number lenders use to judge whether a borrower can afford a home. The first two letters go to the lender and the last two usually flow through an escrow account to third parties, but the borrower sees one combined payment.
Breaking down the four parts
| Part | Who receives it | What it does |
|---|---|---|
| Principal | Lender | Reduces the outstanding loan balance |
| Interest | Lender | Pays the cost of borrowing on the current balance |
| Taxes | County via escrow | Funds annual property tax bills |
| Insurance | Insurer via escrow | Funds hazard coverage and PMI or other mortgage insurance |
Principal and interest together are often called P and I. Taxes and insurance are collected in monthly installments and held in escrow, then paid to the county and the insurer when the bills come due. Escrow is why the monthly figure can shift even on a fixed-rate loan: the tax or insurance estimate can change, and the servicer adjusts the escrow portion to cover it.
How lenders use PITI to qualify a borrower
Lenders test affordability with two ratios, both built on PITI and both applied to gross monthly income:
- Housing expense ratio (front-end). The borrower's PITI as a percentage of gross monthly income, commonly capped around 28%.
- Total debt ratio (back-end). PITI plus all other monthly debt payments, commonly capped around 36%.
The front-end test asks only "can the borrower carry the house?" The back-end test asks "can the borrower carry the house plus everything else?" A borrower can pass the first and fail the second. Because the income ratio focuses on earning power, it is the tool lenders use to size the loan the applicant can safely repay.
A worked example
Samantha earns a gross monthly income of $6,000. If her lender applies a front-end ratio of 28%, her maximum housing expense is $6,000 x 0.28 = $1,680 per month. That $1,680 is the ceiling for PITI combined, not just principal and interest. Now suppose she also pays $400 a month toward a car loan and a student loan. Her back-end ratio of 36% allows $6,000 x 0.36 = $2,160 for all debt, which leaves only $2,160 - $400 = $1,760 for housing. The lower of the two tests governs, so her qualifying PITI still lands near $1,680.
How it appears on the exam
Expect two question types. One asks what each letter of PITI represents or which costs belong inside it. The other gives you gross income and a ratio and asks for the maximum housing payment, which is a multiplication problem once you convert annual pay to monthly. Read carefully for whether the question is testing the housing ratio or the total debt ratio, since that single word decides which percentage you use.
Memory trick
PITI
The four pieces of a monthly payment spell themselves: P-I-T-I.
- P
Principal: the portion that reduces the outstanding loan balance each month
- I
Interest: the lender's charge on the declining balance, always paid in arrears
- T
Taxes: property taxes collected monthly and held in escrow for the county
- I
Insurance: hazard coverage plus mortgage insurance when the lender requires it
Screenshot this: PITI is how you'll remember piti on exam day.
How the exam tricks you on this
The number-one trap is confusing the front-end ratio with the back-end ratio. The front-end (housing expense) ratio applies only to PITI, so it uses the smaller percentage, commonly 28%. The back-end (total debt) ratio includes PITI plus all other monthly debt payments, so it uses the larger percentage, commonly 36%. If a question mentions car loans, student loans, or credit cards, you are in back-end territory.
Two more patterns to watch for:
- Annual income must be divided by 12 first. Qualification ratios run on monthly figures. Given a $72,000 salary, the monthly gross is $72,000 / 12 = $6,000, and 28% of that is a $1,680 housing allowance. Skipping the conversion is the single most common arithmetic error on these questions.
- PITI does not include everything the buyer writes a check for. Association dues, utilities, and maintenance are real costs but are not part of PITI. Don't add them when the question asks for the PITI-based housing payment.
Try real exam questions on piti
These come straight from our question bank: answer to see the explanation instantly.
A loan applicant has an annual gross income of $72,000. How much will a lender allow the applicant to pay for monthly housing expense to qualify for a loan if the lender uses an income ratio of 28%?
Tip: press 1–4 to answer, Enter for the next question.
Related terms
Loan-to-Value Ratio
The loan-to-value ratio (LTV) is the loan amount divided by the property value, expressed as a percentage. It shows how much of the property the lender is financing and how much the borrower covers in cash. A $320,000 loan on a $400,000 home is an 80% LTV, with a 20% down payment.
Read definitionAmortization
Amortization is the process of paying off a mortgage through scheduled periodic payments. Each payment covers interest on the current balance plus a portion of principal, and over the term the principal share grows while the interest share shrinks. A fully amortizing loan reaches a zero balance at the end of its term.
Read definitionEscrow
Escrow is a neutral third-party arrangement that holds money and documents on behalf of a buyer and seller until every condition of the sale contract has been met. The escrow agent has no stake in the transaction: they simply follow the escrow instructions both parties signed, releasing funds and title only when every condition clears.
Read definitionAssessed Value vs. Appraised Value
Appraised value is an appraiser's opinion of a property's market value. Assessed value is the figure the local tax authority places on the property for the tax roll, and taxable value is that assessed value after exemptions. The tax bill is each taxing district's rate multiplied by the taxable value.
Read definition
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