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.
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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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
When exploring options beyond a Texas cash-out refinance, it’s beneficial to consider several alternatives that can also meet your financial needs.
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.
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.
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 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.
Yes, homeowners in the state of Texas who have built enough home equity can get a cash-out refinance loan. The Texas constitution has eased its regulations on this type of loan, making them even easier to use.
What is a Texas 50(a)(6) loan?A Texas 50(a)(6) loan is essentially a Texas cash-out refinance option, governed by Section 50 of Article XVI of the Texas constitution. Often, lenders will refer to Texas cash-out refinances as A6 loans, highlighting their unique status in the state’s real estate and mortgage regulations.
Can you do an FHA cash-out refinance in Texas?No, you cannot do an FHA cash-out refinance in Texas. Texas laws prohibit cash-out refinances of government-backed loans, including those insured by the FHA. This restriction is part of Texas’s unique regulations under Section 50(a)(6) of the Texas Constitution.
Can I do a VA cash-out refinance in Texas?No, you cannot do a VA cash-out refinance in Texas. Texas regulations do not allow cash-out refinances on VA loans, in line with the state’s specific laws governing home equity lending.
What is the maximum cash-out refinance amount in Texas?The amount you can borrow through a cash-out refinance in Texas is capped at your county’s conforming loan limits, and you’re limited to borrowing up to 80% of your home’s value. This is known as the loan-to-value ratio (LTV). For example, on a $500,000 home, you might be eligible for a $400,000 loan under a Texas cash-out refinance. If your existing mortgage balance is $300,000, you could potentially receive $100,000 in cash.
How much equity do you need for a cash-out refinance?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, similar to the down payment requirement for a conventional mortgage. For instance, on a home valued at $400,000, a Texas cash-out refinance would allow you to borrow up to $320,000 (80% of the home value), with the remaining 20% ($80,000) preserved. The amount of cash you can receive depends on your existing mortgage balance.
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 refinancing. In practice, you couldn’t likely get Texas 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.
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!