If you’re a homeowner in Texas, you’ve probably heard that the Texas cash-out refinance rules are somewhat unique. If so, you’ve heard correctly!
The requirements for a cash out refinance in Texas are unusual compared to other states, but they’re actually pretty easy to understand. We’ll cover the most important things you need to know.
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What is a Texas Cash-Out Refinance?
A cash out refinance is a transaction in which you refinance your existing mortgage with a new larger mortgage. The old mortgage is paid off at closing and you receive the difference between the payoff amount and the new loan amount, minus any closing costs, as cash.
A cash out refinance enables you to convert home equity into cash that can be used for whatever you need, including home improvements, paying off other debt, or making a large purchase.
Cash out transactions usually involve paying off an existing mortgage, but you can borrow against your home’s equity even if your home is free and clear.
You also don’t need to refinance your existing mortgage to get cash out. You can leave your existing mortgage alone and borrow against your equity with a separate home equity line of credit (HELOC).
Cash-out mortgages are available in all states and have fairly consistent qualifying requirements from one state to the next. Texas is the exception to the rule; it’s the only state in the country with it’s own unique rules and requirements.
A Texas cash out refinance is also commonly known as a Texas home equity loan, Texas home equity cash-out refinance, or Texas 50(a)(6) loan, which is a reference to the section of the Texas constitution where the cash out refinance rules appear.
So, how does a cash out refinance in Texas work? What are the rules and requirements? There are numerous requirements, but only a handful of them are important for most homeowners.
The Texas 50(a)(6) guidelines and protections apply only to mortgages written on owner-occupied homes.
It’s possible to borrow against the equity of a second home or investment property, but such loans aren’t subject to the Texas 50(a)(6) requirements.
80% Combined Loan-to-Value Cap
The total combined loan-to-value, or CLTV, of the cash out loan plus any other existing mortgages on your home cannot exceed 80% of your home’s market value.
For example, if your home is free and clear and worth $200,000, the maximum you can borrow is 80% of $200,000, which equals $160,000.
For another example, let’s assume you owe $80,000 on an existing mortgage and your home is worth $200,000. You would be able to borrow up to another $80,000, whether by refinancing or taking out a HELOC.
Again, the total combined loan amounts cannot exceed 80% of your home’s value, whether you’re refinancing an existing loan or taking out a HELOC or home equity loan.
The 80% loan-to-value cap means you need to have significant equity in your home for a cash out refinance to make sense. If you already have a mortgage, your current loan balance needs to be low enough that you can get the cash you want while staying under the 80% loan-to-value cap.
The 80% loan-to-value maximum is standard for most cash out mortgages in other states as well. The exception is VA financing for veterans, which offers up to 100% loan-to-value cash out mortgages. VA cash out loans are not allowed in Texas.
2% Fee Cap
The fees and charges for a Texas cash out refinance cannot exceed 2% of the loan amount. Appraisals, property surveys, and certain title examination reports and title policies are not included in this fee cap.
The fee cap used to be 3% of the loan amount, but it was reduced to 2% with the passage of Senate Joint Resolution 60 (SJR 60) in 2017.
Minimum Credit Scores
Minimum credit scores for cash out mortgages can be as low as 620. Typically, FHA and VA (if you’re a veteran) would be the best options, but FHA and VA cash out mortgages aren’t available in Texas. Conventional financing is the only option.
Conventional financing technically allows scores as low as 620, but it’s a good bet you’ll need higher scores than that to qualify.
Low credit scores can result in some hefty closing costs on a conventional cash out mortgage because of Fannie Mae risk-based pricing. Most lenders will likely have difficulty staying under the 2% fee cap on cash out loans with low credit scores. This is why a cash-out refinance in Texas with bad credit is probably unworkable.
If you want to do a Texas cash out refinance, you’ll likely need credit scores in the high 600s or better.
A cash out refinance in Texas with bad credit is often unworkable because of risk-based pricing and the 2% fee cap.
The Once a 50(a)(6) Always a 50(a)(6) Rule
Senate Joint Resolution 60 (SJR 60) repealed the somewhat notorious “once a Texas home equity loan, always a Texas home equity loan” rule.
Prior to the change, the Texas cash out refinance rules worked like a one-way switch. Once you had a Texas home equity loan, every future mortgage on your home would be subject to the 50(a)(6) rules – even if you didn’t take any cash at closing.
Fortunately, SJR 60 softened this rule. Today, you can refinance a Texas home equity loan as a non-Texas home equity loan as long as the following conditions are met:
- The existing mortgage that will be refinanced must be at least 12 months old.
- No funds are advanced other than what it takes to pay off existing mortgages, closing costs, escrow reserves, property taxes due, court ordered divorce-related equity partitions, liens, and documented home improvements.
- The total combined loan-to-value of the new loan and all existing mortgages or liens cannot exceed 80% of the home’s value.
- The lender provides the applicant with certain required disclosures within three business days of application and at least twelve days before closing.
It may not be immediately obvious why it’s potentially good to refinance a 50(a)(6) loan into a non-50(a)(6) loan. Cash out mortgages are considered riskier by lenders, so there’s usually a premium charged in the rate for the privilege of taking equity out of your home. By softening the rules, the Texas state legislature made it possible for homeowners in Texas to refinance their 50(a)(6) loans into so-called “rate & term” refinance loans, which tend to have lower interest rates.
Texas Cash-Out Refinance Rules For HELOCs
A HELOC, or home equity line of credit, is a revolving line of credit secured by the equity in your home. It allows you to borrow against your home equity on a revolving basis, meaning you can borrow repeatedly over time up to a certain credit limit.
HELOCs also have their own unique requirements under section 50(a)(6) of the Texas constitution:
- Requesting advances: You must borrow at least $4,000 when you request an advance from your HELOC. You are prohibited from using a credit card, debit card, or similar device, or a preprinted check that you did not solicit, to obtain advances from the HELOC.
- Fees: The lender can only charge and collect any applicable fees when the HELOC is established. Lenders cannot charge fees in connection with any advance.
- Maximum HCLTV: The maximum credit line, when combined with all other loans on your home, cannot exceed 80 percent of your home’s value on the date the line of credit is established. In other words, the HCLTV must be no more than 80% of your home’s value.
- If your loan exceeds 80% CLTV: If your HELOC principal balance exceeds 80% LTV/CLTV (based on the value at the time the HELOC was opened), then you will be unable to request further advances until the balance falls below 80% LTV/CLTV. Remember, you can only request advances of at least $4,000, so your balance would need to be at least $4,000 less than the 80% LTV/CLTV limit to request funds.
- Modification of terms: The lender is not allowed to unilaterally modify the terms of the HELOC.
If you’d like to check today’s Texas HELOC interest rates, you can find them here.
What we’ve covered so far is most of what the average homeowner will need to know about Texas cash out refinance loans. However, there are some additional requirements worth mentioning:
- Only one Texas 50(a)(6) loan at a time: If your existing mortgage is already a Texas home equity loan, then you won’t be able to cash out more equity using a HELOC. You’ll need to pay off the existing loan as part of the cash out refinance transaction. You can only have one Texas cash out refinance loan at a time.
- Twelve-month seasoning: If you’re refinancing an existing Texas 50(a)(6) loan with a new loan, the existing loan must be “seasoned” at least twelve months unless you have a bona fide financial emergency.
- No government-backed cash out loans: FHA and VA cash out mortgages are not available in Texas.
- No negative amortization: Monthly payments must cover at least the accrued interest. Note that these rules don’t apply to reverse mortgages, which are also a type of cash out mortgage. Reverse mortgages are technically negative amortization loans, but they have their own unique requirements and protections.
- Non-recourse: Unless fraud was committed to obtain the cash out mortgage, the lender cannot come after your personal assets for the shortage if you can’t sell your home for enough to pay off the entire loan balance.
- Each title owner and their spouses (if applicable) must agree to the loan: This applies even if you’re separated, but not legally divorced from your spouse.
- Judicial foreclosure: If you fail to make your payments, the lender can only pursue foreclosure with a court order. Most foreclosures in Texas are non-judicial, so this is an additional layer of protection for homeowners that has been built into the Texas cash-out refinance guidelines.
- No payment acceleration: Your lender cannot accelerate your repayment if the value of your home falls.
- Open-ended credit restrictions: The loan cannot be an open-ended revolving account unless it’s a home equity line of credit.
- Closings: Texas cash out refinance transactions can only close at the office of the lender, a title company, or an attorney. The loan cannot close sooner than 12 days after you submit your loan application. Additionally, the loan cannot close without your consent before one business day after you receive a copy of your loan application (if not previously provided) and a final itemized disclosure of the actual fees, points, interest, costs, and charges that will be applied at closing.
- Licensed lenders only: Only a legally authorized lender can offer 50(a)(6) loans. In other words, a friend or family member can’t offer a private personal loan that would be considered a 50(a)(6) loan.
- No prepayment penalties: Prepayment penalties are pretty rare these days, but the Texas cash out rules explicitly prohibit them.
Current Mortgage Interest Rates
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Does Texas allow cash-out refinance?
Yes, Texas allows cash out refinancing up to 80% of your home’s value.
What is the maximum LTV allowed on a cash-out refinance in Texas?
The maximum allowed loan-to-value on a Texas cash out refinance is 80%.
What is the 2% rule in Texas?
The 2% rule applies to cash out refinances in Texas. The fees and charges for the loan cannot exceed 2% of the loan amount, with the exception of appraisals, surveys, and certain title insurance and examinations charges.