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 refi 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.Check your Texas cash-out refinance eligibility. Start here
In this article (Skip to...)
- Minimum credit score
- Texas cash-out process
- How soon can I refinance?
- Cash-out refi benefits
How does the Texas cash-out refinance loan 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 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.Check your Texas cash-out refinance eligibility. Start here
Much like any cash-out refi, 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. You can use the funds for whatever you like, but typically they are used for purposes such as home improvements, debt consolidation, or other financial needs.
Texas cash-out refinance rules
Prior to 2018, 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.Check your Texas cash-out refinance eligibility. Start here
There are still a few Texas-specific cash-out refi rules to know about, though:
- 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
- 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.
What credit score is needed for a Texas cash-out refinance?
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
- A debt-to-income ratio (DTI) of 43% 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 still 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.
Verify your cash-out refinance eligibility. Start here
Texas cash-out refinance process
While the steps involved can vary from one Texas lender to the next, here’s what you can often expect.
1. Check your credit
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. Home appraisal
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 your rate
You might prefer to lock in the interest 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. Sign a 12-day 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. Underwriting and closing 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 I replace my Texas cash-out refi?
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.
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.
Texas cash-out refinance FAQ
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.
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.
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% of your home equity untapped.
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 up to 80% 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.
Yes, cash-out refinance loans require a new appraisal to find your home’s current market value.
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.
You’ll need more than 20% 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% 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% of the property value. The remaining $80,000, or 20%, 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.
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 three or four lenders to make sure you’re getting a good rate.Time to make a move? Let us find the right mortgage for you