While underwriting a loan file, what does the formula PITI divided by income determine?

In the context of underwriting a loan file, the formula involving PITI (Principal, Interest, Taxes, and Insurance) divided by income is designed to calculate the housing expense ratio. This ratio reflects the portion of an individual's monthly income that is allocated towards housing costs.

The housing expense ratio is a critical metric used by lenders to assess a borrower's ability to manage monthly home payments alongside their income. A lower ratio is often favorable to lenders, indicating that the borrower will likely have sufficient income left over for other expenses and living costs after paying their housing expenses.

Understanding this ratio is essential, as it helps lenders determine the risk associated with lending to a particular borrower. A typical acceptable housing expense ratio may vary depending on lender guidelines, but it generally hovers around 28% to 31% of the borrower’s gross monthly income.

In contrast, the loan-to-value ratio focuses on the amount of the loan compared to the appraised value of the property and does not incorporate the income aspect. The stable monthly income ratio and total debt-to-income ratio involve different calculations that include all debts and not solely housing expenses.

Thus, using PITI divided by income specifically establishes the housing expense ratio, making it a vital tool in evaluating a borrower's