Cash-Out Refinance in Texas | Rules & Waiting Period 2023 (2024)

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.

In this article (Skip to...)

• Requirements
• Minimum credit score
• Texas cash-out process
• How soon can I refinance?
• Cash-out refi benefits
• FAQ

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.

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.

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.

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 disbursem*nt, 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:

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.

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.