Why Is It Hard to Get a Cash-Out Refi in Texas?

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As a homeowner in Texas, you’re probably always seeking ways to enhance your home, whether to increase its functionality or give it a more modern feel. However, unless you have significant savings, you’re likely looking for ways to finance the renovations. 

One popular option is to do a cash-out refinance. This allows you to refinance your mortgage, pulling equity out of the home to use for the renovation costs.

Unfortunately, living in Texas, you might find out quickly that a cash-out refi isn’t as easy as in other states. 

How Does a Texas Cash Out Refinance Work?

A Texas cash-out refi, also known as a Section 50(a)(6) loan, is a powerful tool. These loans replace your current mortgage, allowing you to access the built-up equity in your home. 

A Section 50(a)(6) loan is similar to any other cash-out refi. The new loan will be for an amount greater than your current loan balance, and the difference between the two loans is given to you as a lump-sum cash payment.

This cash can then be used to pay for home renovations, pay off high-interest debt, or even invest in other properties.

How Texas Cash-Out Refi Rules Differ From Other States

Before 2017, Texas discouraged people from using a cash-out refi. However, in 2017, they introduced Texas Proposition 2, making it easy for homeowners to access their home’s equity.

But even though it’s easier for Texans to complete a cash-out refi, there are some rules you must understand and follow.

  • Your new loan can’t exceed 80% of your home value. This means you need to keep at least 20% of your home’s equity in the home. For example, if your home is worth $400,000, you could borrow as much as $320,000. However, if you currently owe $270,000 on your mortgage, you could take out $50,000.
  • Closing costs are limited to 2% of your loan amount. This is the maximum your lender can charge for their lender fees. These include origination and processing fees. However, this doesn’t include third-party fees like appraisal, attorney, mortgage insurance, and more.
  • You can’t apply for a cash-out refi within six months of purchasing your home. Not only must you wait at least six months after purchasing the home to apply for a cash-out refi, but you can’t apply if you’ve had a cash-out refi on another home within the past 12 months.
  • The funds must be used to pay off all second mortgages or liens. If you have a second mortgage or lien on the home, you must use the funds to pay these off first.
  • You’re ineligible for a home equity loan or a home equity line of credit (HELOC). If you use a cash-out refi, you cannot apply for a home equity loan or a HELOC.
  • There is a waiting period if you’ve had a bankruptcy, foreclosure, or short sale. If you’ve had a foreclosure, there is a seven-year waiting period before you’re eligible for a cash-out refi. The waiting period shrinks to four years for anyone with a bankruptcy or short sale.
  • Cash-out refi loans are not available through the federal government. If you’re looking for a federally backed loan, you won’t be able to receive a cash-out refi.
  • These rules only apply to your primary home. The rules do not apply when seeking a cash-out refi on a second home or an investment property.

Texas Cash Out Refinance Requirements

If you’re planning to do cash-out refi in Texas, you’ll need to meet certain qualifications:

Credit Score

Like when you applied for your first mortgage, lenders require a minimum credit score before they’re willing to lend money. For a cash-out refi, the minimum credit score needed is 620. However, some lenders have been known to require as high as 660. 

One thing to note is that the state of Texas doesn’t require certain credit scores. Lenders establish these requirements and can choose to be as flexible as they like.

Debt-to-Income Ratio

Debt-to-Income ratio (DTI) is another big factor when lenders consider a mortgage application. They want to see that your monthly debt payments don’t make up a significant percentage of your income.

In Texas, lenders will require you to have a DTI that’s 43% or below. If you have a low DTI, it will translate into potentially a lower interest rate on your loan.

If you’re unsure how to calculate your DTI, add up each of your monthly debt payments and divide this by your total income before taxes are removed.

Home Appraisal

The final requirement is ensuring enough equity in your home to complete a cash-out refi. To do this, lenders are required to complete an appraisal on your home.

This appraisal will analyze your home compared to others in the area to determine a reasonable value. This value will then determine how much equity you’ll have access to.

Pros and Cons of a Cash-Out Refi in Texas

Before you move forward with a cash-out refi, weighing the pros and cons is important.

Pros

  • Lower rates and monthly payments: It’s possible to replace your original loan with a new loan that has a lower interest rate and monthly payment
  • Access equity: If you qualify for a cash-out refi in Texas, you’ll have access to your home’s equity. 
  • There are no restrictions on how you use the equity: Many people will use the equity in their homes to complete home improvement projects or pay down high-interest debt. However, there are no restrictions on how the money is used.

Cons

  • Fees: When you complete a cash-out refi, you will be required to pay both lender and third-party fees.
  • You might end up with a higher interest rate: Depending on economic conditions, rates may have risen since you received your original mortgage. This will cause you to consider if access to cash is worth a potentially higher interest rate.

Alternatives to a Texas Cash-Out Refi

Before going through with a cash-out refi, it’s important also to consider some of the alternatives available.

Home Equity Loans

Home equity loans are very similar to cash-out refi because they provide access to your home’s equity. However, home equity loans are considered second mortgages, which means you’ll be taking on a second monthly mortgage payment.

Home Equity Line of Credit (HELOC)

Another alternative to a cash-out refi is a home equity line of credit. However, unlike a cash-out refi and home equity loan, you won’t receive a lump sum equity payment.

Instead, you will have access to a line of credit that you can draw on at any time. 

Rate-and-Term Refinance

You can use a rate-and-term refinance if you don’t need to access cash. This is a great option if interest rates have declined because you can refinance into a new mortgage with a lower interest rate.

Rate-and-Term Refinancing is great for someone looking to reduce their monthly mortgage payments, adjust the loan term on their loan, or eliminate mortgage insurance.

The Bottom Line

Cash-out refi loans are a popular way for homeowners to access the equity in their homes. However, if you live in Texas, you’ll need to understand the special requirements before applying.

Sean Bryant

Sean Bryant is a Denver-based freelance writer specializing in personal finance, credit cards, and real estate. With more than 15 years of writing experience, his work has appeared in many of the industry’s top publications including Time and Investopedia . He holds a Bachelor of Arts degree in economics.

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