Texas cash-out refinance guide: 2022 Rules and requirements

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.

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How does the Texas cash-out refinance loan work?

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?

Texas 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% 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
• 6 Month waiting period: 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

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.

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

While requirements will vary, most cash-out refinance lenders in Texas will require:

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.

Other Texas cash-out refi guidelines

Some other Texas cash-out refinance rules have not changed in recent years. For instance:

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

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 on Jan. 1, 2018. Texas borrowers can now refinance one 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.

Benefits of a cash-out refinance loan

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

1. A new mortgage to replace your existing home loan, offering a chance to pay less interest, lower payments, or both
2. 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

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.