When you think of the word jumbo, what comes to mind?
Now use the word in context to your mortgage and a jumbo loan suddenly identifies as a product of perception. Rational thought goes out the window with limited information, and your brain ultimately runs away with endless theories on what a jumbo mortgage is, and why you don’t want one.
Before we put the cart before the horse, let’s take a look at what a jumbo mortgage is, why you might have one, and the complexities of a cash-out refinance if you do.
What is a Jumbo Mortgage?
A jumbo mortgage can be known by other names, such as a ‘nonconforming loan’ or a ‘complex mortgage.’ According to Oxford Academic’s Review of Finance, such mortgages became a popular borrowing instrument at the turn of the century but vanished during the economic downturn and housing crisis of 2008.
Today, the literature tells us that jumbo loans are primarily used by households with higher income levels and credit scores — but they’re not just for the well-off. Sometimes, the loan is classified as such simply because of where you live.
A jumbo mortgage is a mortgage that exceeds conforming loan limits set by the Federal Housing Finance Agency (FHFA). Such a limit caps the value on loans that are backed by a government-sponsored program such as Freddie Mac, Fannie Mae, or the FHA.
For 2020, the maximum conforming loan limit for one-unit properties was raised to $510,400 (an increase from $484,350 in 2019). But a loan just $1 more than the limit for your county can make your mortgage a jumbo mortgage.
Unfortunately, you can’t change the limits because they’re tied to local median home values. But you can research the limit for each county on the FHFA website.
How Do You Qualify For a Jumbo Mortgage?
According to Zillow, conforming loans are meant to offer stability and affordability to the mortgage market. Non-conforming loans can be looked at in the same way, provided that they’re paid on time and the buyer doesn’t default on the property.
To that end, approval for a jumbo loan means you’ll be scrutinized the same way you would for any other loan. Your eligibility will depend on your employment status, income, assets (including cash reserves and current property value), credit score, and outstanding debts.
According to U.S. News & World Report, anyone applying for a jumbo mortgage will be scrutinized by a manual underwriting process, which means it will be more difficult than qualifying for a conforming loan. That’s because the lender sees your mortgage as a bigger risk than most, and the underwriting process assures they’re doing their own due diligence to mitigate financial risk.
Experts say your credit score will hold more weight when applying for a jumbo loan, as well as cash reserves. Each lender can also set its own criteria on debt-to-income ratio, down payment, and more.
What It Takes To Cash Out Refi a Jumbo Loan
When you elect to refinance a jumbo loan, it’s a whole new ballgame when it comes to tough application requirements. When you elect to cash out on that refinance, you’re asking for yet another pricing adjustment that will drive the terms of that jumbo mortgage even higher.
According to Rocket Mortgage, it can be difficult to find a lender willing to refinance a jumbo loan. Asking to pull equity out of your home can give those same lenders additional pause, depending on the circumstances.
Are you using the cash out to address a life event that has created a pressing need, such as a medical emergency? Are you paying off student loans or extracting cash out money for home improvements (thereby investing in your property)? Or are you are taking that cash and flaunting your newfound wealth by going on vacation or buying a fancy car?
Sharp mortgage professionals might help you structure that cash-out refinance and obtain the funds. But sharp lenders will be going through your financial history with a fine-tooth comb, so you’ll want to understand everything they’re looking for and be able to answer any questions asked.
To qualify for a cash-out refinance you might:
- Need at least 20% equity in your home. Even if you’re unsure about a cash-out refi, it’s a good idea to know exactly how much equity you have in your property, which is the difference between your principal amount left to pay and the appraised value. According to the folks at SmartAsset, it will be easier to find a lender willing to let you refinance if you have a good deal of equity in your home.
- Need a credit score of at least 700 or higher. To qualify for a jumbo loan refinance, most people need a credit score of at least 700. Some lenders even require a score of 760 or higher.
- Need reserves that go above and beyond. That includes whatever money is in your bank accounts and what’s tied up in investments, along with other liquid assets. At a minimum for a jumbo loan, a lender might ask you to prove you have at least 6-to-12 months of a way to make payments on your mortgage if your income is interrupted.
- Need a second appraisal. Lenders may want two appraisals, according to NerdWallet — especially if the mortgage exceeds $1 million.
Additional Requirements to Cash Out on a Jumbo Loan
Across the board, finance experts agree that a bankruptcy or foreclosure visible on your credit report will likely prevent you from refinancing a jumbo loan. If you have such an item listed, you’ll likely need to wait 7 to 10 years before you refinance a jumbo loan.
If you’ve been approved for a cash-out refinance on a jumbo loan, the folks at Rocket Mortgage say you should expect to pay higher closing costs because of the higher principal balance. It could be 2-3% of your loan, or it could be more. It’s possible you can find a lender willing to roll in the closing costs, but you’ll either be dinged with a higher interest rate and/or a higher payment, adding in the fees plus interest paid over the life of the loan.
Keep in mind that a cash-out refinance can be beneficial if you need the money. If you have a large amount of debt you need to consolidate, mortgage interest rates are typically a lot lower than other types of debt. That means you can possibly save thousands of dollars consolidating that debt into a home loan, even if the lender limits the amount of money you can take.
A cash-out refi on a jumbo mortgage will take longer to close than a typical loan, but patience can win out. Before borrowing, you should take steps to ensure that you’re getting a good deal by shopping around and comparing interest rates, closing costs, and other loan features.
As you go, remember that jumbo mortgages are available to homebuyers with a wide range of profiles. If the timing is right to refinance, you’ll find a lender who can make it work.
- Review of Finance, Volume 22, Issue 6, October 2018; Oxford Academic. Accessed at https://academic.oup.com/rof/article/22/6/1975/5001716
- FHFA Announces Maximum Conforming Loan Limits for 2020, Federal Housing Finance Agency. Accessed at https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Maximum-Conforming-Loan-Limits-for-2020.aspx
- Jumbo Loans for Beginners, U.S. News & World Report. Accessed at https://loans.usnews.com/jumbo-loans-for-beginners
- What Are Jumbo Loans? Zillow. Accessed at https://www.zillow.com/mortgage-learning/what-are-jumbo-loans/
- How to Refinance a Jumbo Loan, Rocket Mortgage. Accessed at https://www.rocketmortgage.com/learn/refinance-jumbo-loan
- Top 5 Tips For Refinancing Your Jumbo Loan, SmartAsset. Accessed at https://smartasset.com/mortgage/tips-for-refinancing-your-jumbo-loan
- What It Takes To Refinance a Jumbo Loan, NerdWallet. Accessed at https://www.nerdwallet.com/blog/mortgages/refinance-a-jumbo-loan/