It’s possible to modify or refinance a jumbo mortgage, but there are some significant differences from those of a conforming loan. That’s because jumbo loans aren’t guaranteed by Fannie Mae or Freddie Mac, posing more risk to lenders on the original loan and when you need to change the terms of your agreement with your lender.
A modification means adjusting the terms of your existing loan, while a refinance means you’re completely replacing one loan with another. Loan modification programs usually require at least three missed payments before you can apply, and you should contact your lender at the first sign of struggle to discuss your options.
However, if you want to refinance, acting before you fall behind on your payments is essential.
Loan modification terms can be adjusted to more favorable payment plans, although qualifying may be challenging with several requirements you must meet. A modification restructures your payments and helps you get back on track to avoid losing your home.
To qualify for a modification, you’ll need to have suffered a financial hardship, such as a family illness or unemployment, resulting in a loss of income.
The government’s Home Affordable Modification Program (HAMP) is the most popular conforming loan modification program. HAMP is the best-known loan modification program, but you will not qualify for a HAMP modification if your loan was not guaranteed initially by Fannie Mae or Freddie Mac, which has established limits for conforming loans.
In 2023, the conforming loan limit was $715,000 for a single-unit house in most of the U.S., while the limit was $970,800 in more expensive areas of the U.S., such as in major housing markets like Alaska and Hawaii. Any loan over these amounts is considered non-conforming, and different rules apply for modifications and refinancing.
Depending on your situation, it’s best to discuss your options with several lenders to determine what works optimally for you. Most borrowers get a loan modification through private loan modification arrangements negotiated with their lender.
A private loan modification through your lender is a possibility because foreclosures are costly for them. If you’re in genuine financial distress and unable to keep up with your mortgage payments, it’s usually in their interest to work something out with you.
Getting a mortgage loan modification typically will do at least some damage to your credit since you’re not fully meeting the debt obligation. For that reason alone, it’s usually best to first try to refinance the mortgage to reduce your monthly payments.
Refinancing doesn’t hurt your credit and may even provide better terms than a loan modification can. However, if you’re going to refinance, you must do so before you get into serious financial difficulty, or you won’t qualify.
The Basics of Jumbo Loan Modifications
The best loan modifications lower monthly mortgage payments, making it easier to keep up. This is typically done by either lowering your interest rate, extending your loan term, or combining both. In some cases, the interest rate reduction is temporary, allowing time for your finances to recover before your payments go back up again.
However, not all private loan modifications reduce your mortgage payments. Lenders often agree to restructure your mortgage to allow you to make up for a period of missed payments at a later date, in which case you may end up paying more each month.
A lender may also agree to tack on the missed payments, along with penalties and additional interest, onto the back end of the loan. Your payments stay the same, but you don’t make up any deficits until the mortgage is nearly paid off. Sometimes, a lender may agree to waive penalties altogether to help bring you back on a regular payment schedule.
Modifications are much more preferable for lenders than foreclosures due to the added costs the lender will incur, so your lender has an added motivation to work with you.
However, if they decide your debt load is manageable on your current income or if you still have savings or investments you can tap, they’ll likely be reluctant to grant you a modification.
Some banks may be reluctant to grant a mortgage loan modification of any kind until the borrower is clearly in financial distress and starts missing payments.
Considering the Refinancing Option
There are no rules that dictate how long you must wait to refinance after getting your jumbo loan. Factors other than time weigh more prominently.
Refinancing a jumbo loan can offer several benefits, including:
- A lower interest rate. When mortgage rates trend lower, you can refinance to take advantage of those market changes to save considerable money over the life of the loan.
- Change your interest structure. You may be better suited to switching from a fixed-rate loan to an adjustable-rate loan (ARM). An ARM provides a lower introductory rate, but a fixed rate will give you a fixed and predictable monthly outlay.
- Longer loan term. Lengthening your loan term can make the payments smaller. But extending the term means you’ll pay more in interest over the life of the loan.
- Shorter loan term. If you can handle a higher loan payment over a shorter time frame, perhaps going from a 30-year loan to a 15-year loan, you can own your home sooner and pay less interest over time.
- Accessing home equity. You can access a portion of the value of your home that has already built up over time with a jumbo cash-out refinance. You can use these funds for any purpose, perhaps for home improvements, college expenses, or medical bills. Not all lenders offer these types of loans, but those who do want to see 20% or more equity in your home.
Refinance Qualification Requirements
To qualify for a jumbo loan refinance, your credit score must be at least 680 (preferably higher) for a 30-year fixed rate loan and 700-740 or higher for an ARM or 15-year fixed rate loan. Investment or rental properties may require a 720-760 score to qualify.
Lenders will also look at your debt-to-income ratio (DTI). DTI shows how much of your monthly income goes to pay recurring bills, such as your mortgage payment, minimum payments on credit cards, and student, auto, and personal loans.
The higher your DTI, the less likely you are to qualify for a loan. Specific requirements vary by lender, but you must have a DTI of no more than 36-45% in most cases. In addition, lenders will also look at your payment history to ensure you haven’t missed or been late on these obligations.
Lenders also like to see a certain amount of home equity, including higher amounts for cash-out refinances, because a jumbo refinance depends on your current home value. Most lenders require you to have a certain loan-to-value ratio (LTV) that measures the appraised value of a home against the amount you want to borrow.
Lenders must also know how much cash reserves you have stashed away. An ample amount tells the lender you’ll meet your loan refinance obligation if you fall into a short-term financial hardship.
This amount also varies by lender and the terms of your loan, but a good rule of thumb is six months to a full year of reserves, depending on the size of your loan.
Other Things to Consider
Expect to pay higher closing costs with a jumbo loan refinance simply because you’re borrowing a larger amount, and closing costs are based on a percentage of the loan. Typically, this amounts to 3-6% of the loan amount.
On a $1 million loan, that translates into $30,000 to $60,000 in upfront costs. Sometimes, you can roll this into your loan, but you’ll increase your principal amount and may face a higher interest rate.
Jumbo loan refinances also undergo manual underwriting, meaning approval can take longer than a conventional mortgage.
Because larger dollar amounts are involved, lenders rely on financial experts instead of underwriting software to look at your financial documents to assess whether you qualify.