Jumbo loans are mortgages used to purchase high-value homes that are too expensive for conforming mortgages. Conforming mortgages must be below $766,550 in most areas of the country. This is the 2024 loan limit set by the Federal Housing Finance Agency (FHFA) for mortgages to be purchased, guaranteed, or securitized, by the Government- Sponsored Entities (GSE) Fannie Mae and Freddie Mac. Lenders can and do issue jumbo loans that exceed this limit, but only to carefully vetted borrowers with a high income and great credit.
Like conforming mortgages, jumbo loans can be refinanced if buyers want to modify their interest rate, loan term, or interest structure (fixed vs. variable APR). Here’s what homeowners should know about refinancing their jumbo loan.
When is a good time for a jumbo loan refinance?
Most people refinance when market interest rates have dropped. This may help them reduce interest payments over time. However, market conditions are only half the story; a homeowner’s personal finances inform timing too. Jumbo loans have steep credit, income, debt-to-income ratio (DTI), and cash reserve requirements. Before taking on a jumbo loan refinance, it’s crucial for homeowners to assess whether they meet the criteria.
Credit score and credit history
Since jumbo loans can’t be bought, guaranteed, or securitized by Fannie Mae or Freddie Mac, they’re riskier for lenders. Lenders ramp up their eligibility requirements to combat this risk. This means borrowers require a higher credit score for a jumbo loan than for a conforming mortgage.
Homeowners should ensure they have a high credit score and no recent negative marks such as bankruptcies, foreclosures, or significant delinquencies. Negative marks can take at least seven years to fall off a credit report. If a homeowner has any, they might need to wait until their credit profile improves to be approved for a jumbo loan refinance. Borrowers should review their credit reports carefully and dispute any incorrect information before applying for a refinance.
Debt-to-income ratio
A borrower’s DTI is the sum of their monthly debt payments divided by their gross monthly income. This number gives lenders valuable information about a homeowner’s ability to manage monthly payments and repay the jumbo loan. A lower DTI indicates a lower risk for the lender. Maintaining a low DTI can significantly enhance the chances of approval for refinancing.
Homeowner’s cash savings
Jumbo loan lenders need proof that borrowers have the funds needed to manage mortgage payments even in difficult financial circumstances (think job loss). They may require applicants to provide bank statements indicating they have cash reserves to cover around 12 months of mortgage payments. This reserve provides a safety net and reassures the lender of the homeowner’s financial stability.
Documents needed
Because of the risk involved with a jumbo loan, lenders may request more documents and paperwork than they would for conforming mortgage applications. Additionally, jumbo loans are often manually underwritten, and application documents are manually reviewed. Borrowers should consider that lenders review applications very closely and any negative history in pay stubs or bank statements can affect approval.
Jumbo loan applications typically require documents such as:
- Tax returns from the past two years at a minimum.
- Paystubs from the past few years (the exact number may vary by lender).
- Self-employment records and business tax returns, if applicable.
- Recent bank statements that show the necessary cash reserves.
- Proof of income from other sources such as alimony, rental income, or bonuses.
- Documentation of assets (such as deposit and investment accounts or retirement funds).
Consider closing costs
Another important consideration for borrowers is the closing costs involved. A jumbo loan refinance usually has the same closing costs that a conforming mortgage does, but since the loan principal is higher, the fees are proportionately higher too. It’s a good idea for homeowners to factor closing costs into their overall cost-benefit analysis of a refinance.
How to refinance a jumbo mortgage
Once the homeowner is sure that they meet most or all of the criteria for refinancing a jumbo loan, they can begin the refinancing process. While similar to refinancing a regular mortgage, there are specific considerations unique to jumbo loans.
Compare rates and terms
Refinancing with a lower-interest mortgage may result in considerable savings over the life of the loan. Shopping around for the best rates and terms is an important first step for homeowners. Consider pre-approval and compare offers from multiple lenders – including the current lender – to find the most favorable terms. Interest rates can vary significantly between lenders, but applicants must also consider other costs, including fees and closing costs, which can drive up the total cost of the jumbo loan.
Gather necessary documentation
Gathering the required documentation in advance can help homeowners stay organized and on schedule. Lenders are usually happy to provide a list of the documents they require for a refinance, so there’s no guesswork involved. Homeowners can collate recent pay stubs, bank statements, tax returns, and any other financial documents required by the lender ahead of time to help reduce delays.
Complete home appraisal
Refinancing requires a new home appraisal. As with a conforming mortgage, an appraisal determines the current market value of the home, which helps the lender to assess the loan-to-value (LTV) ratio. For jumbo loans, the appraisal process might be more detailed and thorough due to the higher loan amounts involved. In cases when the loan is $1.5 million or more, lenders may require two appraisals
Underwriting review and approval
The manual underwriting and review process for jumbo loan applications is usually more comprehensive and time-consuming than for a conforming mortgage. Lenders meticulously review all provided documentation, the homeowner’s credit score, and financial history to spot any potential discrepancies or issues. They may ask for additional documentation if need be. This detailed review may increase the loan processing time. Homeowners should be prepared to provide any additional information or paperwork.
Schedule a closing date
Once the lender approves the refinance application, homeowners can schedule a closing date. Homeowners should be prepared to pay any closing fees at this time. It’s essential to review all the closing documents carefully and ensure that all terms are understood before signing.
While it’s technically possible to refinance a jumbo loan at any time, homeowners can benefit from considering a few factors to determine when the best time is for them.
The benefits: Typically, most people refinance when they can get a better rate or terms. Keeping up with refinance rates helps owners take advantage of low rates with a well-timed refinance. Some homeowners may refinance to cash out their home equity or switch from fixed to adjustable rates or vice versa.
The costs involved: Refinancing a jumbo loan means paying closing costs and presenting cash reserves. Owners must ensure they have the funds on hand for a refinance.
Personal financial circumstances: Homeowners must ensure that they have a clean bill of financial health before applying to refinance their jumbo loan. Negative marks on a credit report, a low credit score, unstable income, or insufficient cash reserves may lead to rejection.
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