If you have an active jumbo loan, then you might also be asking yourself this same question. But given the rarity of jumbo mortgages in the market, it is even harder to find information on a jumbo mortgage refinance. To help make things easier, we will be going through the basics of exactly that topic.
The jumbo refinancing requirements
Jumbo loans are different from other mortgages since they carry higher risks to lenders, they have higher standards for qualification. The standards of jumbo loans might be high but they are still in line with the requirements from the Federal Housing Finance Agency (FHFA). Lenders are required to only approve mortgages after making completely sure that a borrower can afford to take on the mortgage, this can only be done by making sure the borrower has the kind of financial background that can take on the mortgage.
Since jumbo loans are approved for amounts that exceed the limits of conventional loans, by extension their requirements are much higher. For other mortgage plans, the requirements for refinancing are usually similar to their original mortgages but this is another area where jumbo loans are different. Unlike other refinances, the requirements for a jumbo loan refinance are higher than the original jumbo loan.
Credit Score: Credit scores are one of the first considerations that lenders take into account to gauge whether a borrower should be extended a loan. For jumbo loans, the credit score requirements are usually comparable to conventional mortgages so a lender might ask for a credit score of 620. But there is no comparison with a jumbo refinance. Since even the jumbo refinance amount will be high, lenders will ask for a credit score that could range from a high of 760 to a low of 680.
Debt to Income Ratio: The DTI requirement for jumbo loans could be comparable to that of conventional loans. This means you could qualify even if your DTI is high as 46%, or 50% in some cases. But things change when it comes to a jumbo refinance. To qualify for a jumbo refinance you will need a much lower DTI, a lender might be flexible, but usually, they require a DTI of 36% to qualify.
Cash Reserves: The cash reserve requirement is one of the requirements that is the same as the original jumbo loan. You will be required to show a bank balance holding 12 to 18 months of the jumbo refinance payments already in the account. The amount of course will likely be higher than it was for the original jumbo loan.
Documents required for refinancing
The documentation requirements for a jumbo refinance will be the same as it is for all mortgage plans. It is wise to start preparing the documentation in advance.
– Two years of your annual tax return forms
– Two years of your W2 forms
– If you have a job then you need to present 30 of your latest pay stubs
– Bank statements going back, the latest 60 days
– Paperwork for all your assets and investments
Jumbo refinance considerations
Closing costs: All loans have closing costs. When you refinance your mortgage, you replace your existing loan with a new one. This means you are essentially applying for a new mortgage, accordingly, you will have to go through the mortgage process again and closing costs of the process will be applicable. Since the process for jumbo loans involves additional steps, the costs of a jumbo loan and jumbo refinance will also be higher than it is for other mortgage plans. Only consider applying for a jumbo refinance if you are confident that the savings from the new loan will be enough to offset the payments made for the closing costs.
Longer processing time: Since you already went through the jumbo mortgage process, you are likely aware that it involved manual underwriting. For other mortgage plans, the underwritings are standardized according to the guidelines of the respective mortgage plans but loans that are flexible and customizable require manual underwriting to fit the situation. Underwriting for jumbo loans and jumbo refinance have a long processing time not just because the writing is done manually but also because the underwriting is more strict and thorough. Jumbo mortgage processes require zero margin for error when reviewing financial documentation due to the very high risks involved.
Advantages of jumbo refinancing
Higher mortgage financing: When you refinance a jumbo loan, the potential for the amount is almost limitless in theory. Since jumbo loan amounts don’t subscribe to any guidelines the amount could be anything as long as it exceeds the limits of conventional mortgages. This kind of setup would allow a borrower to even include other costs into their mortgages, such as a combination of repair and renovation.
Consolidated loans: Another benefit of the limitless potential in jumbo refinances is that almost every kind of debt could be rolled into the refinanced mortgage, no matter how high. In practice of course the lenders have their limits of how much they are willing to offer. But it would still be possible to consolidate a large number of debts into a jumbo refinance.
Improved interest rates: Qualifying for a jumbo refinance means that you would likely have a very high credit score (preferably higher than 700) and a low DTI (preferably 36% or lower). This being the case you are likely to get some of the best possible deals on the interest rates. Lenders often offer the lowest interest rates to those borrowers who have a stellar credit score and DTI.
Shorten or lengthen term: If you have already paid off most of your jumbo loan, this means a significant number of years have passed. Over time the income goes up, which in this context means you will be able to afford higher payments. If this is the case for you, then you could refinance your jumbo loan to a shorter term. This would reduce your interest rates and your total loan amount. As a bonus, you’ll also pay off your loan faster.
Disadvantages of jumbo refinancing
Possible higher interest: Since there are very few lenders that offer jumbo loans, there will be even fewer still that offer to refinance for them. This means that there is less competition for lenders to worry about. Due to this reason, lenders get to set whatever interest rate that they would find more profitable for them and this rate might be higher than the interest rates of conventional mortgages.
Difficult process: It is realistic to keep in mind that the jumbo refinances process will take time for completion due to the checks and balances. But due to the increased risks with a jumbo refinance the underwriting process might involve you having to provide additional documents just to ensure there are no gaps in your finances for error. Such delays might make the process harder to deal with.
Jumbo refinance limits: There are no actual limits for a jumbo refinance but lenders will have their limits on what they can offer you. For this reason, it will be better to shop around to get an estimate of what rates and amounts lenders are offering before starting the process.