Texas Cash-Out Refinance a(6): Major DifferencesJune 29, 2022 by X2 Mortgage
Are you a Texas homeowner wanting to fund your home repairs and renovations, pay tuition, or consolidate debt? Do you think you have sufficient equity in your home? If you answered yes to these questions, you might have found a way to secure enough cash for your projects.
The Texas constitution, which was previously harsh on cash-out refinance, had since relaxed its limitations on homeowners' access to cash-out refinance in 2017 when the law was amended. And today, prospective borrowers can use the equity in their houses to cover major expenses.
However, the Texas cash-out refinance has specific conditions. In this post, we'll go over all you need to know about the "Texas Section 50 (a)(6) Loan," including the important revisions that were made to the Texas cash-out refinance guidelines in 2017. And how to apply for a Texas cash-out refinance loan.
What is a Cash-Out Refinance?
Cash-out refinance is a loan option that allows a homeowner to replace their current mortgage with a new, bigger mortgage while receiving the difference as cash at closing.
To be eligible for cash-out refinance, you must have enough equity in your property. In fact you need at a very minimum of more than 20% equity. Equity simply refers to the difference between the value of your property and the amount you owe on your mortgage.
For example, if your property is worth $200,000 and you owe $100,000 on your mortgage, you have $100,000 in equity. And if you decide to take a cash-out on your equity, you will have to apply for a $160,000 cash-out refinance loan, with $100,000 being the original mortgage debt and $60,000 as your cash back, leaving $40,000 in untapped equity (or a 20% leftover).
Thus, a cash-out refinancing allows a homeowner to use the equity in their house to pay for things such as schooling, home improvements, medical expenses, an emergency fund, or other investments.
How Does the Texas Cash-Out Refinance Works?
Before 2018, the Texas state laws prohibited cash-out refinances. However, the laws were revised in 2017 to meet Texas's growing real estate market. And as of today, the new Texas cash-out refinancing law is more flexible for Texas homeowners.
Section 50 (a)(6) of the Texas Constitution, in particular, permits any borrower to take out equity from their home to meet their financial objectives. However, the loan must be secured by a single-unit primary dwelling that serves as the borrower's homestead. And such a loan can only be for up to 80% of the property's worth.
To understand the Texas cash-out refinance loan more clearly, let us consider the changes made to the law in 2017.
Changes Made to Texas Cash-Out Refinance Guideline in Section 50 a(6)
1. Eligible property
A Texas homeowner can only get a cash-out to refinance loan on their primary residence. Under Texas law, Section 50(a)(6) states that a cash-out loan must be secured by a single-unit primary property that serves as the borrower's homestead. Loans backed by two- to four-unit residences, investment properties, or second homes are much harder to pull cash-out of in Texas. In some cases it is still doable, but would require speaking to a professional about your specific situation.
The following are the qualifying properties, often known as security properties:
A detached house,
A connected house,
A unit in a PUD development,
A unit in a condominium development, or
A manufacturer home (A manufacturer home is only eligible if it is categorized as real estate under Texas law and meets all unique Fannie Mae eligibility requirements for manufactured homes.)
The new law also removed the limitation on cash-out refinances for agricultural properties such as farms. So, agricultural properties can now qualify for Texas cash-out refinance loans.
2. Eligible mortgage
A cash-out refinance loan can only be secured on a conventional mortgage. The Texas law does not permit cash-out mortgages for government-backed loans such as FHA, VA, or USDA.
However, if you have a current government-backed mortgage and wish to get a cash-out, you can refinance your loan into a conventional one. The new loan would follow the underwriting guideline of a conventional loan.
Also, if you have a second lien, such as HELOC or Home Equity Loan, you must pay them back before you can get a cash-out.
3. Waiting period
Before applying for the Texas 50 (a) (6) cash-out refinance, your existing mortgage must have been in place for at least six months to qualify for a cash-out refinance loan. And if you have a foreclosure or bankruptcy on your credit report, you must wait four years before applying for a Texas cash-out refinance.
Also, Texas law prohibits a borrower from completing more than one cash-out refinance loan in a calendar year. As a result, a borrower must wait 12 months before applying for another after closing a cash-out refinancing loan.
4. Loan Size
You can only borrow up to 80% of the value of your property, and you must keep at least 20% of your home equity untouched.
In addition, the new Texas law repealed the 50% ceiling on additional advances under Home Equity Lines of Credit, or HELOCs. A borrower can now withdraw more funds from a home equity line if it is worth less than half of what is due.
5. Loan Term
The Texas Cash-Out Refinance Loan does not support 3- or 6-month adjustable-rate mortgages.
6. Maximum Closing Fee
According to Texas law, your lender's closing expenses on an (a (6) loan cannot exceed 2%. This does not include appraisal or title costs. Also, before signing and closing, the loan must be evaluated by an attorney.
7. Approved Lender
The Texas law also broadened the list of authorized lenders to include savings and loan organizations, bank subsidiaries, saving banks, credit unions, mortgage firms, and mortgage bankers conducting business in Texas.
What Are The Requirements To Qualify For A Texas (a)(6) Loan?
Although the state does not specify underwriting criteria for Texas cash-out refinances, lenders can design their underwriting regulations that comply with Fannie Mae and Freddie Mac's conventional loan laws.
The following are the primary requirements to get a Texas cash-out to refinance loan:
Equity: To qualify for a cash-out refinance loan in Texas, you must have more than 20% equity in your house.
Credit Score: To qualify for cash-out refinance, you must have a credit score of at least 620.
Debt-to-Income Ratio: A DTI ratio of 41% or less is required.
Proof of Income: A year's worth of W2s or two years' worth of tax returns is sufficient to show your steady income as a full-time employee or business owner.
How to Apply For a Texas Cash-Out Refinance
For qualified homeowners, the Texas cash-out refinance process is relatively easy. Below is a step-by-step guide to obtaining a cash-out refinancing loan in Texas:
1. Find a lender
To get started on your cash-out refinance loan, you may need to shop around for the best lender on the market. And luckily for you, at X2 Mortgage we do all the shopping for you to ensure the lowest possible rate and best underwriting process.
2. Provide Supporting Documents
The following are the most typical documents required by a Texas lender for cash-out refinance:
Identification such as a Driver’s License
Current pay stubs
- 2 years’ Tax Returns
2 years W2 or 1099s
Mortgage Statement showing your current loan balance
- Homeowners Insurance Policy
A Recent Property tax bill.
3. Get a Home Appraisal
A new home appraisal is done to determine the current market value of your home.
4. Review Your Documents
Once the value of your home has been determined, the loan underwriter will evaluate your documentation and authorize your loan. Following that, you will be issued a letter of disclosure outlining the details of the new loan for you to sign.
5. Sign the Closing Documents: 4- 12 Day Letter
The Texas law requires that a homeowner sign a letter outlining the cash-out refinance procedure and terms. And regardless of how quick the loan process is, the law mandates a 12-day waiting time between the original application and loan completion.
6. 3-Day Right of Rescission
Texas law requires a 3-day rescission period during which you may cancel the loan without penalty.
7. Get Your Cash Out
Once you have signed all closing paperwork and paid the applicable closing costs, your lender will make your cash-out available. Remember that the closing fees for a Texas cash-out refinance cannot exceed 2% of the loan amount and must cover the total loan amount, including the original loan and the cash-out.
Pros and Cons of Texas Cash-Out Refinance
A cash-out refinance can provide you with quick cash when you need it.
This refinance loan allows you to use your home equity to pay for major needs such as kitchen and bathroom upgrades, college funding, medical bills, and other investments.
You can also use the funds to pay off higher-interest debt, such as credit card debt, to improve your credit score.
A cash-out refinancing loan might help you get a lower interest rate and cut monthly payments.
- If you use your cash-out money for home upgrades, you may qualify for mortgage interest tax deductions.
- After refinancing into a Texas a(6), all future refinances on that property that you do will have to be classified as a Texas a(6) loan and be subject to pricing of that loan program.
When you take a cash-out to refinance a loan, you lower the equity you've built in your home and increase your debt.
Depending on the current market rate, your new mortgage rate may be higher, thereby increasing your loan payments.
If the value of your house decreases after a cash-out refinance, you may find it more difficult to meet your mortgage payment.
You risk losing your house if you fall behind on your mortgage payments.
- You pay closing costs on the total loan amount. So, for example, if you refinance $150,000 to receive $50,000 cash back, you will pay a closing cost on the entire $150,000, which is about $3,000, or 2% of the loan amount.
Alternatives to Texas Cash-Out Refinance
There are other ways for Texas homeowners to access the equity in their homes. Besides a cash-out refinance loan, here are some other choices you could consider, depending on your unique situation.
1. Home Equity Loan
The home equity loan, like the cash-out refinance, allows a homeowner to borrow money against the equity in their property. But while a cash-out refinance replaces the current mortgage with a new loan, a home equity loan is a "second mortgage" that is provided based on the house's value. It has its own loan term and runs alongside the original loan.
A home equity loan is a better alternative if you have a decent rate and term on your initial mortgage or are almost done with your mortgage payment. In this case, you do not need to modify the initial loan term to obtain adequate money for your financial demands. You also get to pay simply the closing charges on your new mortgage.
2. Home Equity Line Of Credit (HELOC)
A HELOC is similar to a home equity loan and a cash-out refinance, allowing a homeowner to access funds from their home equity. However, unlike a home equity loan or cash-out refinance, which provides a lump sum of money at closing, a HELOC is a revolving line of credit that allows a homeowner to withdraw funds as needed over time.
HELOCs have several advantages, including flexible withdrawal and variable loan rates depending on the amount withdrawn.
3. Reverse Mortgage
If you are a Texas homeowner over the age of 62, a reverse mortgage may be the best alternative for funding your retirement goals, such as vacations, automobile purchases, and health care.
A reverse mortgage, like other equity loans, allows a homeowner to borrow money against the equity in their property. Only this time, you won't have to pay back the loan monthly.
The loaned funds are only repaid when the homeowner dies or sells the property. However, before taking out a reverse mortgage loan, you should consult with a HUD-approved counselor.
4. Personal Loan
You can also take a personal loan to cover necessary costs without hurting the equity in your property. This contributes to the security of the equity you have on your property. However, personal loans come with higher interest rates.
As you have seen, the Texas cash-out refinance a (6) loan is an excellent way to obtain cash based on the equity in your home. The Texas law has also assured that, while you enjoy your home equity, you are protected from being foreclosed on by aggressive lenders.
But, remember that the equity in your house is a valuable asset to maintain. So, if you decide to get a cash-out to refinance loan, you must use the funds wisely, particularly for long-term financial objectives, as you may be paying the debt for the next 20 to 30 years.