Are You Self-Employed?
If you run your own business or have income from freelancing, you usually need to provide additional information about your business. Lenders may want to scrutinize your financials to ensure that your income continues indefinitely.
Significant equity A down payment of 20% or more is best. Some lenders refinance jumbo loans with less than that, but more equity means you’ll get better rates and an easier approval process. Calculate your equity after taking cash out (if you plan to do so). High credit scores A FICO score of 700 or higher is ideal, but you can certainly qualify with a lower score. A score in the high 600s might mean you pay a higher rate, and significant blemishes (like a recent foreclosure) make it less likely that you’ll get approved. Sufficient income Lenders need to verify that you can afford monthly payments. A debt-to-income ratio of 43% or less signals that you’re capable of handling the debt and other living expenses. Documented income Lenders want to see proof of income. W-2 forms are the easiest to work with, but not everybody is a W-2 wage earner. Plan to provide tax returns and other documentation for the past two years. Reserve assets You need significant reserves in bank accounts, investments, and other liquid assets. At a minimum, lenders like to see six to 12 months’ worth of reserves, allowing you to make payments if your income is interrupted. You also need to be able to explain any large deposits into your accounts during the past 60 days or so.
If your finances don’t fall neatly into the mold above, you may still be able to refinance a jumbo mortgage. However, expect to pay higher interest rates or make up for any perceived shortcomings in other areas. For example, if you have a foreclosure in your credit report from six years ago, then significant reserve assets and a particularly low debt-to-income ratio might help you qualify for a new loan. Ultimately, lenders set their own approval standards for refinancing jumbo loans. Those loans do not meet the criteria to go through Fannie Mae or Freddie Mac, so “conforming” loan requirements do not apply. If you face a higher interest rate, do some math (see below) before you refinance. Jumbo loan balances can generate meaningful interest costs, and a slight rate increase might not be worth it.
Why Should You Refinance?
Refinancing a jumbo loan can benefit you in several ways.
Save money: A slightly lower interest rate on a large loan can bring significant savings. Even a quarter-point drop can save several thousand dollars per year in interest charges and improved cash flow. Cash out: If you’ve built equity in your property through payments or price appreciation, you may be able to take cash out during refinancing. However, that strategy reduces your equity and puts you at risk if the property loses value. Plus, you restart the clock (and interest charges) with a brand-new loan. An alternative approach is to use a second mortgage to take cash out. Get a better loan: Refinancing can also open the door to a better loan. For example, if you have an adjustable-rate mortgage and you’re concerned about higher interest rates, you can refinance into a fixed-rate loan. Likewise, getting a shorter-term loan could provide an even lower interest rate, helping you minimize interest costs.
To determine how a refinance will work for you, run some numbers. Online calculators and templates make it easy to model your loan and understand interest charges. Be sure to include closing costs, keeping in mind that unique properties may require a more expensive appraisal.
Get the Best Deal
Before borrowing, take steps to ensure that you’re getting a good deal when refinancing your loan.
Check your credit: Review your credit reports—it’s free for all U.S. consumers—and ensure that no issues will delay your loan or lower your score. Fix any errors, and discuss your credit with your lender before you fill out an application. Shop around: Get quotes from several different lenders, and compare interest rates, closing costs, and other loan features. Try a variety of sources. For example, you can borrow from local mortgage brokers, online lenders, and local banks and credit unions. Optimize your loan: For the lowest rate possible, choose a shorter-term loan. Rates are often lower with shorter borrowing periods, so you can pay less each year—and pay for fewer years.
