Cash-Out Refinance in Texas | Rules & Waiting Period 2024

Does Texas allow cash-out refinancing?

If you have enough home equity, it’s absolutely possible to get a cash-out refinance in Texas.

Although Texas cash-out refinance rules are a little different than in other states, they’re no longer as strict as they used to be.

As long as you have decent credit and more than 20% home equity, you should be able to refinance your mortgage and pull cash out from your home. And with high equity levels nationwide, many Texans will easily meet those requirements.

In this article (Skip to...)

• Texas rules
• Eligibility requirements
• Texas cash-out process
• How soon can I refinance?
• Alternatives
• FAQ

How does a Texas cash-out refinance work?

Cash-out refinancing in Texas works somewhat differently from other states due to specific regulations and guidelines set by the Texas state government. We explore these rules in more detail below.

A Texas cash-out refinance is also called a Section 50(a)(6) loan, or simply an “A6 loan.” It replaces your existing mortgage with a new, larger loan, allowing you to access a portion of your home’s equity as cash.

Much like any cash-out refinance, you borrow more than you currently owe on your mortgage, and the difference between the old loan balance and the new loan amount is provided to you as a lump sum. This can impact your monthly payments, as the new loan amount will be higher than your previous mortgage balance.

You can use the funds for whatever you like, but typically they’re used for purposes such as home improvements, debt consolidation, or other financial needs.

Texas cash-out refinance rules and guidelines

Prior to 2018, Texas state law discouraged cash-out refis. But Texas lawmakers have eased these regulations in recent years.

“Any homeowner is eligible for this Texas cash-out refinancing loan. You simply need to have earned more than 20% equity in your home,” says Herb Ziev, a Certified Mortgage Planning Specialist in Texas.

There are still a few Texas-specific cash-out refi rules to know about, though:

• Closing costs cannot exceed 2% of your loan amount. This does not apply to third-party closing costs like attorney fees, appraisal fees, title insurance fees, and mortgage insurance premiums. It applies only to fees charged by your lender such as loan origination and processing fees
• Your new loan amount cannot exceed 80% of your home’s value. That means you must leave 20% equity untouched when cashing out. For example, if the value of your home is $200,000, you could borrow up to $160,000. If you owed $120,000 on your existing mortgage, you could borrow up to $40,000 cash back
• All liens (second mortgages) must be paid off. If you already have a home equity loan or home equity line of credit (HELOC), your new cash-out refi will have to pay off these loans as well as your primary mortgage. This could reduce the amount of equity you’re able to withdraw
• You’ll need to wait six months to refi after initially buying the home. You’re eligible for a cash-out refinance in Texas only when you’ve had your existing mortgage loan for at least six months. Also, you can’t get a new cash-out refi unless it’s been a year since your last one
• Waiting times after foreclosure, bankruptcy, or short sale. You’ll have to wait seven years after a foreclosure, four years after a bankruptcy, and four years after a short sale before you can qualify for a Texas 50(a)(6) cash-out refinance
• There are no cash-out mortgages backed by the federal government. That means there’s no FHA cash-out refinance or VA cash-out refinance allowed in Texas
• You can’t take out a home equity loan or HELOC (second lien) if you already have a Texas cash-out loan in place
• Texas cash-out refinance loan rules apply only to your primary residence. In other words, investment properties and second homes are not bound by these rules

Prior to 2018, Texas had even stricter limitations on cash-out refinance loans for agricultural property. Current laws have eased this restriction, too.

Mary Dinkins, regional vice president with Cornerstone Home Lending in Dallas, says any primary residence qualifies so long as it doesn’t exceed 10 acres. “Rural properties can be considered up to 100 acres,” she adds.

Eligibility: Texas cash-out refinance requirements

To qualify for a cash-out refinance in Texas, you’ll need to meet certain requirements set by lenders. These include criteria for your credit score, debt-to-income ratio, and home equity.

Minimum credit score needed

While requirements will vary, most cash-out refinance lenders in Texas will require a credit score of at least 620. However, we have seen some lenders require scores as high as 660.

The state does not set these underwriting rules. Instead, private mortgage lenders can decide whether you’d qualify for a new mortgage loan based on your credit profile.

That’s not to say a bank has the freedom to approve you even if you have a bad credit score. Lenders still have to stay within Fannie Mae and Freddie Mac’s regulations for conventional loans. But mortgage lenders do have some leeway.

Example: If your credit score is 610 but you have a low debt-to-income ratio (DTI) of 30% and a stable employment history, a lender might make an exception and approve you. This is why it’s so important to shop around between different lenders.

Debt-to-income ratio requirements

In addition to credit score, most cash-out refinance lenders in Texas will require a debt-to-income ratio (DTI) of 43% or less.

Your DTI compares your monthly debt payments to your gross monthly income. It’s a way for lenders to assess your ability to repay the loan.

To calculate your DTI, add up all your monthly debt payments (such as mortgage, car loans, student loans, credit card minimums) and divide by your gross monthly income (your income before taxes and deductions).

Example: If your monthly debt payments total $2,000 and your gross monthly income is $5,000, your DTI would be 40% ($2,000 / $5,000 = 0.40).

Home appraisal process

As part of the Texas cash-out refinance process, your lender will require a home appraisal. An appraisal is an assessment of your home’s current market value. The appraiser will visit your property, analyze recent sales of similar homes in your area, and provide an estimated value for your home.

The appraisal is important because it determines how much equity you have in your home, and thus how much cash you can take out in the refinance.

Example: In Texas, you can typically borrow up to 80% of your home’s value in a cash-out refinance. So if your home is appraised at $300,000, you could potentially borrow up to $240,000 ($300,000 x 0.80).

Keep in mind that you’ll also need to pay for the appraisal as part of your closing costs. Appraisal fees in Texas typically range from $300 to $500.

5 steps to qualify and apply for a cash-out refinance in Texas

While the steps involved can vary from one Texas lender to the next, here’s what you can often expect when applying for a cash-out refinance in Texas.

1. Check your credit score and improve if needed

Check your credit score before applying for any loans. There are free and low-cost services available online. If you haven’t done so in the last 12 months, you can also request a free copy from the three major credit reporting agencies.

2. Get a home appraisal to determine equity

Depending on the lender, you may be required to pay for a home appraisal to confirm the property’s value, which could cost you a few hundred dollars. Don’t forget to let your lender and the home appraiser know about any repairs or improvements you’ve made to the house since you bought it.

3. Lock in your lowest interest rate

You might prefer to lock in the mortgage rate quote as soon as possible. This protects you during the closing process, which could take up to 45 days to finish. However, if interest rates drop during that time, you may end up paying a higher rate than necessary. Additionally, some lenders may charge a fee for locking in your interest rate.

4. Review and sign Texas’ 12-day disclosure letter

In order to get a cash-out refinance in Texas, homeowners have to sign a letter that explains how the process works. Even though cash-out loans may take less time to finish, the law requires that there be a 12-day wait between the application and the loan closing.

5. Complete underwriting and close the loan

The loan will proceed to the closing stage once all required documentation and verifications have been completed. The closing agent will coordinate the signing of final documents, funds disbursement, and recording of the new mortgage with the county recorder’s office. This procedure can take several days to several weeks.

How soon can you refinance again after a Texas cash-out refinance?

In Texas, there is a specific waiting period before you can replace your cash-out refinance with another refinance transaction. According to Texas law, you must wait at least 12 months from the closing date of your cash-out refinance before you can refinance your mortgage again, whether it’s another cash-out refinance or a rate-and-term refinance.

It’s important to note that even if you are refinancing without taking cash out after completing a cash-out refinance, the transaction will still be considered a cash-out refinance due to the “once a Texas cash-out, always a Texas cash-out” rule. This means that the 80% loan-to-value (LTV) limitation will apply to any future refinancing, regardless of whether you take additional cash out or not.

Pros and cons: Texas cash-out refinance

When considering a cash-out refinance in the state of Texas, it’s important to weigh both the advantages and drawbacks to determine if this financial decision aligns with your needs as a home buyer and your current mortgage situation.

Benefits of a Texas cash-out refinance

1. Tap home equity: Texas cash-out refinance allows homeowners to access the equity built up in their homes, providing a lump sum of cash that can be used for various purposes.

2. Mortgage refinance: This option replaces the current mortgage with a new one, potentially at a lower interest rate or better terms, which can reduce monthly mortgage payments.

3. Debt consolidation: Homeowners can use the cash from the refinance to pay off high-interest debts, like credit cards or student loans, consolidating them into a single, lower-interest loan.

Disadvantages of a cash-out refinance in Texas

1. Risk of foreclosure: Since Texas cash-out refinance uses the home as collateral, failure to make mortgage payments can risk foreclosure.

2. Closing costs and fees: This process involves closing costs and fees, which can be significant and add to the total loan amount.

3. Loan application process: Any mortgage refinance will require another loan application, and a Texas cash-out refinance can be complex, requiring thorough documentation and interactions with a loan officer.

4. Potential for higher interest rates: Depending on the market and the borrower’s credit score, the interest rate for a Texas cash-out refinance might be higher than the current mortgage.

Texas cash-out refinance alternatives

When exploring options beyond a Texas cash-out refinance, it’s beneficial to consider several alternatives that can also meet your financial needs.

Rate-and-term refinance

A rate-and-term refinance is an alternative to Texas cash-out refinancing, focusing on adjusting the mortgage rate and loan term of your current mortgage. It’s an ideal choice for homeowners looking to secure a lower interest rate or change the loan duration without extracting cash from their home equity.

Streamline Refinance for FHA, USDA, or VA Loans

If you currently have an FHA, USDA, or VA loan, considering a Streamline Refinance might be beneficial. This refinancing option can help you obtain a new mortgage with potentially lower interest rates, while saving on time and closing costs. It’s designed for simplicity and efficiency, often requiring less paperwork and fewer upfront costs compared to traditional refinancing.

Home Equity Line of Credit (HELOC)

A home equity line of credit is another option, offering flexibility and access to funds up to a certain limit based on your home equity. Unlike the lump sum of a cash-out refinance, a HELOC provides a revolving credit line, usually at a lower interest rate. This makes it a useful choice for ongoing expenses or projects where total costs might vary.

Home equity loans

Home equity loans are a straightforward alternative to Texas cash-out refinance loans. They offer a fixed lump sum, based on your home’s equity, while keeping your original mortgage intact.

Home equity loans typically come with fixed interest rates and a set repayment schedule, making them a suitable option for homeowners who need a specific amount of money for large expenses but wish to retain their current mortgage terms.

FAQ: Texas cash-out refinance

Check your Texas cash-out refinance eligibility

Not everyone will qualify for a cash-out refinance in Texas, but for those who do, it can be a great program.

Check your eligibility with Texas-approved lenders, and be sure to shop around with at least three or four lenders to make sure you’re getting a good rate. Always verify that your lender is licensed through the Nationwide Multistate Licensing System (NMLS) before proceeding with your application.

Ready to unlock your home equity? Start comparing Texas cash-out refinance quotes from multiple lenders now. It’s fast, easy, and free!