Texas Cash-Out Refinance: DTI and LTV Rules Explained

Every homeowner in Texas eventually has this conversation with a lender who is not licensed in Texas: "What do you mean I can only pull out 80%? Everywhere else it is 85%!"

Texas cash-out refinances live under a specific section of the state constitution — Article XVI, Section 50(a)(6) — that governs homestead lending. It exists because Texas historically did not allow home equity loans at all. When the state finally permitted them in 1997, they were wrapped in some of the strictest consumer protection rules in the country.

Here is what those rules actually mean when you sit down at closing.

What Makes Texas Cash-Out Different

A cash-out refinance in most states lets you replace your current mortgage with a larger one and pocket the difference. In Texas, on a primary residence homestead, you are subject to five extra rules that do not apply anywhere else:

Investment properties and second homes in Texas do not fall under 50(a)(6). Only your primary residence (homestead) triggers these rules. This is worth remembering — a lot of misinformation online treats "Texas cash-out" as monolithic, but a cash-out refi on a rental follows normal conventional or DSCR guidelines.

The 80% LTV Rule

Your total loan amount after closing cannot exceed 80% of the appraised value of the home. Period. There is no first-time-borrower exception, no 90% program, no lender flexibility. This is a constitutional limit.

Example

Current appraised value	$450,000
Maximum loan amount (80%)	$360,000
Current mortgage balance to pay off	$220,000
Estimated closing costs rolled in	$8,000
Maximum cash to borrower	$132,000

Two things people miss:

• The appraisal is the critical number. If it comes in at $430,000 instead of $450,000, you just lost $16,000 of borrowable cash. Order the appraisal early and address any obvious property issues before it happens.
• The 80% cap applies to total financing including a second lien. If you have a HELOC in second position, its balance counts against the 80%.

The 12-Day Cooling-Off Period

Once you apply for a Texas cash-out refinance, you must wait at least 12 days before closing. The clock starts the day after the lender delivers the "Notice Concerning Extensions of Credit" disclosure.

You also cannot close within 1 business day of the final loan disclosure being provided. In practice this means every Texas cash-out has two waiting periods stacked: 12 days from application, plus the 3-business-day TRID period after the Closing Disclosure.

Fastest realistic closing timeline on a Texas cash-out: 18–22 days if the appraisal comes back clean and there are no title issues. Budget 30–35 days as a working assumption.

The 2% Fee Cap

Lender fees on a Texas cash-out refinance cannot exceed 2% of the loan amount. On a $360,000 loan, that is a $7,200 cap on lender-controlled fees. This does not include:

• Discount points (borrower's choice to buy down rate)
• Third-party fees the lender does not control (title, appraisal, credit report, survey, recording fees)
• Property taxes and insurance escrows

The 2% cap is the reason Texas cash-out closing costs typically look higher than the actual lender fees — third-party costs (especially title insurance in Texas, which is regulated by rate) can add another 1–2% on top.

DTI Limits by Program

Beyond the 50(a)(6) constitutional rules, your cash-out is still governed by the loan program's underwriting guidelines. DTI (Debt-to-Income) is where most cash-out refis actually get killed.

Program	Standard Max DTI	Notes
Conventional (Fannie/Freddie)	45% (up to 50% w/ compensating factors)	Best pricing on scores 740+
FHA	43% (up to 56% w/ AUS approval)	Cash-out max is 80% LTV to match Texas rule
VA	41% (residual income takes precedence)	90% LTV on VA cash-out in Texas — a special exception
Non-QM Bank Statement	50%	Higher rate premium, self-employed borrowers

Note the VA exception. VA cash-out refinances in Texas can go up to 90% LTV — not 80% — because federal VA law preempts state homestead law for eligible veteran borrowers. This is one of the most underused benefits I see with Texas veteran homeowners.

A Worked Example

Homeowner in Stone Oak, purchased for $340,000 in 2020. Now valued at $445,000. Existing mortgage balance $261,000 at 3.25%. Credit score 748. Household income $115,000. Existing monthly debts (car, credit cards) $520.

Appraised value	$445,000
Max loan (80%)	$356,000
Payoff existing mortgage	$261,000
Estimated closing costs (rolled in)	$7,500
Cash available to borrower	$87,500
New rate (conventional, 30-yr, 2026)	6.875%
New P&I payment	$2,338
Taxes + insurance	$1,020
Total new PITI	$3,358
Monthly income	$9,583
Housing DTI	35.0%
Total DTI (housing + other debts)	40.4%

This file passes at 40.4% DTI. The bigger question the homeowner needs to answer is whether to do the refi — trading a 3.25% rate for a 6.875% rate to access $87,500 costs them roughly $650 per month in extra interest. That is $7,800 per year, so the effective cost of that cash is about 8.9% annually if they never pay it back early.

The 50(a)(6) rules protect Texas homeowners from over-leverage. Rates do not.

The Once-a-Year Restriction

You can only complete one Texas cash-out refinance per rolling 12 months. If you close a cash-out in March, you cannot do another cash-out on the same home until March of the following year — but you can do a rate-and-term refinance in the meantime.

This matters when rates drop after a cash-out. A rate-and-term (also called a "50(f)(2)" refi in Texas parlance) converts the 50(a)(6) loan back to a normal conventional loan and lets you refinance again without restrictions in the future. Once the note is 12 months old, this conversion is fairly routine.

Common Mistakes

Not accounting for the appraisal risk

Many homeowners assume Zillow's value. Appraisers use signed comps within the last six months. Get a realistic value opinion from a local agent before applying.

Rolling in too many closing costs

Every dollar of closing costs you finance is a dollar of borrowable cash you lose (against the 80% cap) and a dollar you pay interest on for 30 years. Consider paying closing costs at the table when you have cash reserves.

Missing the VA cash-out exception

Every Texas veteran homeowner with a VA-eligible loan should compare a 90% VA cash-out against an 80% conventional cash-out. The extra 10% of equity access frequently outweighs the VA funding fee.

Ignoring the "sitting on the note" opportunity cost

If your existing rate is 3–4% and current rates are 7%+, cash-out is expensive money. HELOCs, second-lien HELOANs, or investment-property cash-out refis on separate properties may cost less over 5–10 years. Model the full cost, not just the payment.