Texas cash-out refinance guide: 2021 Rules and requirements

Erik J. Martin
The Mortgage Reports contributor

Does Texas allow cash-out refinancing?

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

Texas cash-out refi rules are a little different than in other states, but 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 equity levels rising nationwide, many Texans will easily meet those requirements.

Check your Texas cash-out refi eligibility (Oct 17th, 2021)

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The Texas cash-out refinance loan explained

A Texas cash-out refinance is also called a Section 50(a)(6) loan. With this loan, you refinance your current mortgage while also tapping into your home’s equity. This tapped equity converts into cash paid to you at closing.

Texas does not regulate how you can spend your cashed out equity. You could:

  • Consolidate credit card or personal loan debt
  • Pay for home improvements or renovations
  • Make a down payment on new real estate

It’s up to you, but it’s best to spend the money on long-term needs instead of short-term expenses like a car or a vacation. This is true because you could still be paying back the money, with interest, 30 years from now.

Are cash-out refinance rules different in Texas?

The Lone Star State has a reputation for making cash-out refinance loans harder to close. Before 2018, state law discouraged cash-out refis. But state 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 percent 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:

  • Limited closing costs — Closing costs charged by your lender cannot exceed 2% of your loan amount. This does not apply to third-party closing costs like attorney fees, appraisal fees, and title insurance fees. It applies only to fees charged by your lender such as loan origination and processing fees
  • 80% Maximum LTV — Your new loan amount cannot exceed 80 percent of your home’s value. That means you must leave 20 percent 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
  • 6 Month waiting period — You’re eligible for a cash-out refinance in Texas only when you’ve had your existing mortgage loan 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

Prior to 2018, Texas had strict 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.

Check your Texas cash-out refinance eligibility (Oct 17th, 2021)

What credit score is needed for a Texas cash-out refinance?

Most cash-out refinance lenders in Texas will require:

  • A credit score of at least 620
  • A debt-to-income ratio (DTI) of 45% or less

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 or a super high DTI. Lenders have to stay within Fannie Mae and Freddie Mac’s regulations for conventional loans.

But mortgage lenders do have some leeway. If your credit score isn’t great but you have a low DTI, for example, a lender might make an exception and approve you.

This is why it’s so important to shop around between different lenders. Current law in Texas has made shopping around a little easier for cash-out refinance customers.

The state now allows savings and loan associations, credit unions, bank subsidiaries, mortgage companies, and mortgage bankers to offer cash-out refinance loans. So you can shop around with a wide range of lenders to find the best rate and terms on your cash-out loan.

Other Texas cash-out refi guidelines

Some other Texas cash-out refinance rules have not changed, according to Ziev.

One is that 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.

If your current mortgage is an FHA, VA, or USDA loan and you want cash back, you’d likely have to use a conventional cash-out refinance loan. The minimum credit score for this loan program is at least 620 but can vary by lender.

If all you want is a lower interest rate — not cash back — you could use a Streamline Refinance program offered by the VA, FHA, or USDA.

In addition, you can’t take out a home equity loan or HELOC (second lien) if you already have a Texas cash-out loan in place.

Lastly, 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.

How soon can I replace my Texas cash-out refi?

A cash-out refinance tends to charge higher interest rates than a no-cash-out loan, because lenders take on a bigger risk when you extract cash value from your home.

For years, Texas homeowners who completed a cash-out refinance loan were required to keep the same loan, with its higher refinance rates, until it was fully paid off.

This is no longer true, thanks to new state laws that took effect Jan. 1, 2018. Texas borrowers can now refinance a year after closing on their cash-out refinance loan.

“Now, you can refi with a conventional loan at a potentially lower interest rate,” Ziev said.

Getting a lower rate can reduce your monthly payments or make room in your budget for a shorter loan term. A shorter term requires higher monthly mortgage payments but less mortgage interest over the life of the loan.

Verify your refinance eligibility (Oct 17th, 2021)

Benefits of a cash-out refinance loan

A cash-out refi provides two solutions within one loan:

  • A new mortgage to replace your existing home loan, offering a chance to pay less interest, lower payments, or both
  • A lump sum of cash, borrowed against your home equity, that you can use as needed

If you need only one of these two solutions, you might consider a different loan product:

  • What if I just want to access home equity? If you just need a cash loan backed by your home’s equity, you could keep your existing mortgage in place and get a home equity loan or a home equity line of credit instead
  • What if I just want a lower rate? Some borrowers want to leave their equity alone but get a lower interest rate or replace an adjustable-rate loan with a fixed-rate loan. In this case, a rate-and-term refinance can do the job. If you have an FHA, USDA, or VA loan, a Streamline Refinance could help you get a new mortgage while saving on time and closing costs

But if you need to access home equity while also lowering your interest rate, a cash-out refinance can make that happen.

Note that in Texas, your lender may refer to this loan as a 50(a)(6) loan, or simply an A6 loan.

Texas cash-out refinance FAQ

Does Texas allow cash-out refinancing?

Yes, homeowners in Texas who have built enough home equity can get a cash-out refinance loan. The Texas constitution has eased its regulations on these loans, making them even easier to use.  

What is a Texas 50(a)(6) loan?

A Texas 50(a)(6) loan is another term for a cash-out refinance loan. The loans are regulated in Section 50 of Article XVI of the Texas constitution. Some lenders may refer to cash-out refinances as A6 loans.

What is considered a cash-out refinance in Texas?

In Texas, a cash-out refinance loan pays off all other liens on your property, including your primary mortgage and any second mortgage loans or lines of credit you may have. The loan can be large enough to generate cash back, along with paying off all existing liens, if you have enough equity to back the loan. By law, the new mortgage must leave at least 20 percent of your home equity untapped.  

What is the maximum cash-out refinance amount in Texas?

Typically, your new cash-out refinance loan amount cannot exceed conforming loan limits. These vary by county. You’d need a non-conforming, jumbo loan to borrow more than your county’s maximum loan size. Also, you can only borrow only up to 80 percent of your home’s value. Your lender will probably refer to this percentage as your loan-to-value ratio or LTV. On a $500,000 home, you could borrow $400,000. If you owed $300,000 on your existing mortgage, your cash-back portion would come out to $100,000.

Is an appraisal required on a Texas cash-out refinance?

Yes, cash-out refinance loans require a new appraisal to find your home’s current market value.

Can you cash-out refinance an FHA loan in Texas?

Yes, you can use a Texas 50(a)(6) loan to replace your existing FHA-insured loan, assuming you meet the guidelines of your lender and the state law. FHA loans help home buyers get competitive mortgage rates even if they have average credit scores. But they also require ongoing mortgage insurance premiums which many homeowners refinance to get rid of.

How much equity do you need for a cash-out refinance?

You’ll need more than 20 percent equity in your home to benefit from a cash-out refinance loan in Texas. That’s because you’ll have to leave at least 20 percent of your home’s equity untouched. As an example: If the value of your home is $400,000, you could borrow only $320,000, which is 80 percent of the property value. The remaining $80,000, or 20 percent, would have to remain untouched. If you owed $320,000 on your current mortgage, you wouldn’t have enough equity to get cash back. If you owed $280,000, you could get up to $40,000 cash back.

How many times can you use a cash-out refinance in Texas?

The Texas Constitution does not limit the number of cash-out refinance loans you can get on one home. But it does require you to wait at least a year between cash-out refis. In practice, you couldn’t likely get cash-out refinance loans every year anyway. You’d need to wait long enough for your equity to build back up before you could benefit from a second cash-out refinance. That could take years, unless property values are rising dramatically in your area.

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 3-4 lenders to make sure you’re getting a good rate.

Verify your new rate (Oct 17th, 2021)