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

As a homeowner in Texas, you’re probably always looking for ways to improve your home — whether to increase its functionality or give it a more modern feel. Unless you have significant savings set aside, you’re likely looking for ways to finance those renovations.

One popular option is a cash-out refinance, which lets you refinance your mortgage and pull equity out of your home to cover renovation costs. But if you live in Texas, you’ll quickly find that a cash-out refi comes with some unique rules that don’t apply 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, replaces your current mortgage and allows you to access the built-up equity in your home. The new loan is for an amount greater than your existing balance, and the difference is paid to you as a lump sum at closing.

That cash can then be used for home renovations, paying off high-interest debt, or other financial needs.

How Texas Cash-Out Refi Rules Differ From Other States

Before 2017, Texas made it difficult for homeowners to use a cash-out refinance. That changed with Texas Proposition 2, which made it easier to access home equity. Even so, there are important rules you need to understand before moving forward:

• Your new loan can’t exceed 80% of your home’s value. You must keep at least 20% equity in the home. For example, if your home is worth $400,000, you could borrow up to $320,000. If you currently owe $270,000, that means you could take out up to $50,000 in cash.
• Closing costs are capped at 2% of your loan amount. This limit applies to lender fees such as origination and processing fees, but does not include third-party fees like appraisal, attorney, or mortgage insurance costs.
• You must wait at least six months after purchasing your home. You also cannot 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 existing second mortgages or liens. Any second mortgage or lien on the property must be paid off with the proceeds before you receive any remaining cash.
• You cannot take out a home equity loan or HELOC while the cash-out refi is in place. Until you fully pay off or refinance out of your cash-out refi, you won’t be able to take on an additional loan against your home equity.
• Waiting periods apply after bankruptcy, foreclosure, or short sale. A foreclosure triggers a seven-year waiting period. Bankruptcy or short sale carries a four-year waiting period.
• Texas Section 50(a)(6) cash-out refis are conventional loans only. Federally backed options like a VA cash-out or FHA cash-out are not available under Texas state regulation.
• These rules only apply to your primary residence. If you’re seeking a cash-out refi on a second home or investment property, the Section 50(a)(6) restrictions do not apply.

Texas Cash-Out Refinance Requirements

In addition to the state-specific rules above, you’ll need to meet standard lender qualification requirements:

Credit Score

Lenders set their own credit score minimums for cash-out refinances. Texas state law does not mandate a specific credit score, but most lenders require at least 660. A stronger credit score will generally help you qualify for a better rate.

Debt-to-Income Ratio

Debt-to-income ratio (DTI) is another key factor lenders evaluate. In Texas, most lenders require a DTI of 43% or below. A lower DTI can improve your chances of approval and help you secure a better rate.

To calculate your DTI, add up all of your monthly debt payments and divide by your gross monthly income (before taxes).

Home Appraisal

Lenders are required to complete an appraisal to confirm your home’s current value. The appraisal compares your home to similar properties in the area and determines how much equity you have available to borrow against.

Pros and Cons of a Cash-Out Refi in Texas

Pros

• Potentially lower rate and payment: If rates have dropped since you got your original mortgage, a cash-out refi could reduce both your interest rate and monthly payment.
• Access to home equity: A cash-out refi lets you tap into the equity you’ve built up in your home.
• No restrictions on how you use the funds: Whether you want to renovate, pay down debt, or cover other expenses, there are no rules on how the cash must be used.

Cons

• Closing costs and fees: You’ll be responsible for both lender fees and third-party fees as part of the refinance process.
• Possible higher interest rate: If rates have risen since you got your original mortgage, you’ll need to weigh whether accessing cash is worth paying a higher rate going forward.

Alternatives to a Texas Cash-Out Refi

A cash-out refi isn’t the only way to access your home’s equity. Here are a few alternatives worth considering:

Home Equity Loans

Home equity loans also give you access to your home’s equity in a lump sum, similar to a cash-out refi. The key difference is that a home equity loan is a second mortgage — you keep your existing loan and take on an additional monthly payment.

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) gives you revolving access to your equity rather than a one-time lump sum. You can draw from it as needed, making it a flexible option for ongoing expenses like a phased renovation.

Rate-and-Term Refinance

If you don’t need to access cash, a rate-and-term refinance may be a better fit. It lets you refinance into a new loan with a lower rate, shorter or longer term, or both — without taking on additional debt. It’s a good option for reducing your monthly mortgage payment, adjusting your payoff timeline, or eliminating mortgage insurance.

The Bottom Line

A cash-out refinance can be a powerful way for Texas homeowners to put their equity to work — but it comes with rules and restrictions you won’t find in most other states. Understanding those requirements upfront will help you decide if it’s the right move for your situation.

Ready to explore your options? Start your home equity application with Refi.com today and find out how much equity you could access.