Q: I currently have a first mortgage at 5 percent and a second mortgage at 6.99 percent. I have good-to-excellent credit and have been paying the mortgage for over 10 years. Our bank is using net income and telling me new federal regulations won't let them go below a 45 percent debit ratio. They are using our income tax to establish income. We are prudent and take as many deductions as allowed. In reality, our gross income is over 90,000 with only $2,900/month in expenses. The bank is using everything to keep us from refinancing. Do we have any legal remedies to present to the bank?
A: You should make a few calls and try another bank.
There is a rule in place to help define what is considered to be a "qualified mortgage" (QM) and a "non-qualified" mortgage. Among other features, a QM can't have a "back end" debt to income (DTI) ratio -- that's your mortgage and all your other debts put together -- of anything higher than 43 percent (you had said “below” in your question).
Non-qualified mortgages pose risks
Without saying so, it would appear that this bank won't write a non-QM mortgage. Writing a non-QM mortgage means the bank takes on certain legal risks and more thanks to the 2010 Dodd-Frank law. As a result, there are many lenders who won't write non-QMs.
That said, the proper calculation of your debt load should take into account your monthly gross "pre-tax" income, and compare that against all your required obligations (this includes taxes, insurance, credit cards, other loans, and anything that is a required commitment against that income). The percentage of all those obligations can't be more than 43 percent of the monthly gross income.
Your lender could be wrong
By our reckoning, and if your annual income is $90,000 (and you can document this figure with appropriate paperwork), this would be a monthly gross income of $7,500. If the $2,900 is a complete total of your required obligations, this would be about 39 percent of your monthly gross income, and so you should pass the 43 percent test for a QM.
However, if your tax filings (W2, 1099, annual returns) don't bear out the $90,000 due to deductions and is less than the $90,000, the back-end DTI ratio would be higher. To be fair, the lender can only count the income that can be documented in the calculation – it is part of the new “Ability To Repay” rules.
It’s time to contact other mortgage lenders
You can check with the lender again, but you may find a better response (or at least more clear communication) with another lender.