Cash-Out Refinance in Texas: 2023 Rules & Requirements Roger Odoardi Reviewed by: Jason Caruso Imagine you’ve got some significant expenses looming on the horizon, are looking to renovate your home to increase its value or want to pay off mounting credit card debt but don’t want to take on any additional loans. You’ll need a large sum of cash on hand to achieve these goals. If you’re a homeowner with sufficient equity in your property, one way to get the funds you need is through a cash-out refinance. Cash-out refinance is a home loan that pays off and replaces your current mortgage, while leaving you with a lump sum of cash that amounts to a percentage of the equity you have in your home. For example: Let’s say your home is valued at $500,000 and you still owe $300,000. That means you currently have $200,000 of equity in your property. With cash-out refinancing, you can effectively convert a percentage of that $200,000 in equity (most lenders place a cap at 80%) to cash by taking out a new loan for the $300,000 you still owe on your home plus the amount of cash you want to borrow. The process for getting a cash-out refinance is similar in most states. However, if you live in Texas, there are a few additional rules that you should be aware of as you’re considering whether this type of refinance is right for you. Cash-Out Refinance in Texas Today: Rules, Laws & Requirements Until recently, Texas law discouraged cash-out refinances (also referred to as Section 50(a)(6) loans). But with the passage of Texas Proposition 2 in 2017, these legal restrictions were significantly lessened. Today, while it is much easier for Texas homeowners to pursue this option, there are still some state-specific rules to keep in mind: Lenders cannot charge more than 2% of the loan amount in closing costs — excluding third-party expenses such as attorney and appraisal fees. You must have at least 20% equity in your home in order to qualify for cash-out refinancing, meaning that the new loan amount cannot exceed 80% of your home’s value. Any second mortgages or liens — in addition to your first mortgage — must be paid off using funds from the new loan. You cannot apply for cash-out refinancing within the first six months of owning your home, meaning that your mortgage must be more than six months old in order to qualify. In the event of a previous foreclosure, bankruptcy or short sale, waiting periods apply. You’ll need to wait seven years after a foreclosure and four years post bankruptcy or short sale in order to be eligible for a cash-out refinance. Cash-out refinances are not backed by the federal government, ruling this option out if you’re seeking financing through the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA). You become ineligible for a home equity loan or home equity line of credit (HELOC) once you have cash-out refinancing in place. Neither investment properties nor second homes are subject to these rules, as they only apply to your primary residence. In addition to these updates, recent changes to the Texas cash-out refinance rules have also made agricultural homesteads — or farms — eligible for cash-out loans. These types of properties were previously excluded from eligibility because of their agricultural exemptions. Rule changes have also established that Section 50(a)(6) loans may be refinanced to a rate and term mortgage without taking out any cash. As for other ways cash-out refinancing differs in Texas when compared to other states — here, second mortgages and home equity lines of credit are both considered to be cash-out refinances. This means that when considering either of these refinancing options, you’ll need to be aware of the combined amount (between your original and second mortgage or HELOC) you’ll be borrowing, as your second mortgage cannot push the total loan-to-value (LTV) ratio above the 80% cap. Additionally, borrowers are only permitted one cash-out refinance annually. Cash-Out Refinance Loans vs. Other Mortgage Options With cash-out refinancing, the main goal is to gain access to a large sum of cash without taking on additional debt. If these objectives align with your needs and comfort level, then pursuing this type of refinance may be the right path forward. However, in order to determine whether or not applying for cash-out financing truly is the best option for your situation, it’s helpful to take stock of and compare all your options before making a final decision. Some other types of mortgages to consider include: Home Equity Loan This type of home loan (commonly referred to as an HEL) is the most similar to cash-out refinancing, as it also involves borrowing money against the equity you’ve built in your property. However, unlike cash-out refinances, HELs are a type of second mortgage, meaning that you’ll take on an additional monthly payment on top of your original mortgage payment. Home Equity Line of Credit (HELOC) Another type of second mortgage, a HELOC also enables you to borrow against the equity you have in your home. However, the way in which you take out money is reminiscent of using a credit card. With a HELOC, you are approved for a certain amount and given a period of time during which you can withdraw money as needed — as long as you don’t exceed your limit. Once the draw period ends, repayment begins and you must repay the outstanding balance, plus interest. If you can’t make payments, you risk foreclosure as the loan is tied to your home. Rate and Term Also known as a no cash-out refinance, rate and term refinancing is an avenue that homeowners pursue when looking to change the interest rate or terms of their existing mortgage. Similar to a cash-out refinance, rate and term loans are not a second mortgage but replace original mortgages once secured. Typically, homeowners will consider this type of refinance when seeking a lower interest rate, hoping to get more favorable loan terms (either shorter or longer, depending on financial goals), switching loan types or eliminating mortgage insurance. Streamline If your existing mortgage is insured by the FHA, you may qualify for a streamline refinance. This type of refinancing enables you to replace your current FHA home loan with a new one. The process for applying is more straightforward than other refinance options and doesn’t require an appraisal, income verification or full credit inquiry. Benefits of Cash-Out Refinance in Texas Still not sure if a cash-out refinance is right for you? Some benefits to consider include: Cash-out refinancing can replace your original mortgage with a loan that has a potentially lower interest rate, lower monthly payment or both. There are no strings attached to the cash you receive — it can be used for any purpose. Cash-out refinance loans are not second mortgages. Getting approved for cash-out refinancing restarts the clock on your mortgage. When considering these benefits, it’s also important to keep your own financial goals and comfort levels in mind. While this list of pros may offer reasons to pursue a cash-out refinance for those with certain aspirations, for others they may justify considering other options. Cash-Out Refinance Tips You’ve weighed your options and determined that a cash-out loan is the refinancing option that makes the most sense for you — now what? As you get ready to apply for your loan, the following four tips will help you stay organized, confident and prepared. Allow plenty of time to shop for lenders before you submit an application. Not all financial institutions will offer the same terms and rates, so it’s a good idea to explore your options — from national banks to local credit unions — to find the most favorable offers. Check your credit score (and make any necessary improvements) prior to applying. In Texas, you must have a credit score of at least 620 and a debt-to-income ratio of 43% or less in order to qualify for a cash-out loan. If you have less than desirable credit, there are ways you can boost your score, including paying your bills on time and reducing the number of open credit accounts you have. Have all the necessary documents on hand before you apply. There’s nothing more stressful than scrambling to find misplaced documents the day before your loan appointment. Give yourself enough time to round up all the documentation your loan officer requires to process your application. In Texas, this includes tax returns, bank statements, pay stubs and proof of income. Be prepared for detailed questions about your financial history. Lenders will want to be sure that you can repay your loan before approving your application, so it’s important to have answers to their questions about your finances. Above all, it’s crucial to remain honest in your answers — falsifying information on a loan application is considered fraud and can result in loss of the loan, trouble securing financing in the future or imprisonment. Texas Cash-Out Refinance FAQs Q: What is cash-out refinancing? A: Cash-out refinancing is a type of mortgage that homeowners get to replace their original mortgages and access a lump sum of money at the same time. The cash is taken from the equity that a borrower has built in their home and must be paid back along with the balance of the loan. Q: Does Texas allow cash-out refinance? A: Yes. However, cash-out refinances work differently than they do in other states. In Texas, these types of home loans are subject to a stricter set of rules, though they have been relaxed in recent years. Q: How does cash-out refinance work in Texas? A: State-specific rules surrounding cash-out refinancing: Limit the amount that lenders can charge in closing costs to 2% Establish that homeowners must have at least 20% equity in their homes in order to qualify Require that all second mortgages or liens must be paid off Dictate that a mortgage must be at least six months old to be eligible Exclude FHA and VA loans from eligibility Set a waiting period for those who have experienced foreclosure, bankruptcy or short sale Render homeowners ineligible for a HEL or HELOC once cash-out financing is in place Do not apply to investment properties and second homes Q: What makes cash-out refinancing different in Texas? A: In Texas, both second mortgages and HELOCs count as cash-out refinance loans. Additionally, borrowers are only permitted one cash-out refinance annually. Q: Do I qualify for a Texas cash-out refinance loan? A: Eligibility requirements include a credit score of at least 620, a debt-to-income ratio of 43% or less and at least 20% of equity in your property. Q: Are there restrictions on the use of the cash I get back from a cash-out loan? A: No, you can use the cash however you’d like. Many homeowners choose to use the money for home improvement projects, paying off credit card debts or to take care of any significant, upcoming expenses (such as college tuition or a down payment on an investment property). Ready to Get Started? At Blue Water Mortgage, our experienced team has the knowledge and ability to help you navigate the refinancing process. We utilize a transparent approach to assess your current financial status, understand your goals and identify the right refinancing option for your unique needs. As independent mortgage brokers, we have the advantage of working with multiple different lenders to shop around and find you the most competitive rates. You will benefit from our expertise and advocacy on your behalf, as well as our thorough understanding of the refinancing process. Plus, you’ll have peace of mind knowing that we are available 24/7 via phone to address any concerns or questions you might have. To speak with one of our mortgage specialists today, contact us here. We are excited to start a conversation about how we can offer a solution to meet your goals! Or, download a copy of our free eBook, 105 Mortgage FAQs: A Guide for First Time Buyers & Experienced Investors, to get the answers to all your mortgage questions. Roger Odoardi Roger is an owner and licensed Loan Officer at Blue Water Mortgage. He graduated from the University of New Hampshire’s Whittemore School of Business and has been a leader in the mortgage industry for over 20 years. Roger has personally originated over 2500 residential loans and is considered to be in the top 1% of NH Loan Officers by leading national lender United Wholesale Mortgage.