For many first-time homebuyers, the process of securing favorable interest rates and paying the 20 percent down payment can be a daunting proposition. Whether you have great financial history or are trying to recover from previous missteps, an additional "helping hand" with respect to mortgage lending is always valuable. The Federal Housing Administration works with private lenders to provide a variety of federally-backed mortgage lending opportunities to qualified borrowers who may otherwise not be eligible for the best conventional lending opportunities. Using a few simple formulas, you can calculate the maximum principal, interest, tax and insurance, or PITI, payment attached to your FHA loan.
TL;DR (Too Long; Didn't Read)
Using a simple mortgage calculator and FHA loan guidelines, you can quickly determine what the max PITI payment for your loan will be. These calculations are integral to long-term financial planning.
The Basics of FHA Loans
It is a common misconception that an FHA loan is a form of lending originating in the federal government. While the FHA does back the mortgages they advertise to lenders, they do not provide cash directly to borrowers. Instead, they collaborate with private lenders and insure the loans that are offered to qualified borrowers.
FHA Loan Requirements and Benefits
FHA loans typically include borrowing requirements that are far less stringent than those attached to conventional loans. For example, the credit score requirements are reduced, and the size of the down payment required to secure an FHA loan is also noticeably smaller. Whereas a conventional loan will expect borrowers to pay as close to 20 percent of the sale price as possible, FHA Loans can be obtained for as little as 3.5 percent down.
In exchange for these lenient terms, however, borrowers accepted into the FHA program will be required to pay an upfront mortgage insurance premium equivalent to 1.75 percent of the loan amount, as well as mortgage insurance premiums on a monthly basis (often between 0.45 percent to 1.05 percent of the original loan amount).
Using a PITI Calculator With FHA
When the FHA evaluates your loan application, they will make an assessment as to the maximum PITI that they will endorse. A sum over this amount will represent an unacceptable level of risk. Generally speaking, PITI calculations are directly linked to an evaluation of the overall price of the home.
The FHA website allows users to search by county and discover the maximum FHA-endorsed mortgage amount for their particular area. For example, a quick search for FHA limits in Washington, D.C., will reveal that the current mortgage limit for a one-family home in this area is $726,525. Working backward, this figure allows you to determine the size of your monthly PITI payment that would be attached to a home with this sale price.
PITI Calculation Example
As an example, consider the following. An individual has taken out a 30-year fixed-rate mortgage on a home with a sale price of $300,000. The annual percentage rate attached to the mortgage is 3.3 percent, and area property taxes are 1.5 percent of the appraised value of the property. The first step toward determining the monthly PITI paid on the property is to look at the amortization calculator provided by the lender. This will allow you to quickly determine the total sum of principal and interest that will be paid on a monthly basis.
At this point, take the appraised value of the property and multiply it by the decimal-formatted property tax percentage value. To format a percent into a decimal value, simply divide it by 100. So, a property tax rate of 1.5 percent would convert to .015. Therefore, a home worth $300,000 would generate $4,500 in property taxes on an annual basis. You can divide this by 12 to assess exactly how much property tax will be paid on a monthly basis.
As a final step, add the total monthly home insurance premium you are paying to the sums derived previously. You should now have your total monthly PITI. Potential homebuyers who need additional assistance mastering these concepts should consult directly with a financial adviser or mortgage representative at the bank they plan on securing their loan through.
- If you and your spouse are applying jointly for the loan, combine both of your incomes and liabilities before applying the percentages in Steps 1 and 2.
- Other factors can determine your final maximum PITI, such as the property taxes for the home you want to purchase and your monthly mortgage insurance premium. Your mortgage lender will discuss your final maximum amount with you.
Ryan Cockerham is a nationally recognized author specializing in all things innovation, business and creativity. His work has served the business, nonprofit and political community.