VA Cash-Out Refinance in Texas: Rules, LTV and Fees

How a VA cash-out refinance works (Type I vs. Type II)

VA uses one loan program for two different jobs, and lenders label them Type I and Type II. The labels come from how the new loan amount compares with the payoff of the loan being refinanced, which is how 38 CFR 36.4306 sorts the rules.

Both types require a new appraisal ordered by the lender, a Certificate of Eligibility and full credit and income underwriting. Both also require the lender to give you a net tangible benefit test, explained in the next section.

VA cash-out refinance requirements: COE, seasoning, credit and residual income

The VA cash-out refinance requirements come from three places: the VA’s eligibility rules, the refinance regulation at 38 CFR 36.4306 and the lender’s own underwriting standards.

Eligibility and occupancy

According to VA’s cash-out refinance page, you must qualify for a Certificate of Eligibility (COE), meet VA and lender standards for credit and income, and live in the home you are refinancing. Unlike an IRRRL, a cash-out refinance requires current occupancy. If your COE carries a cash-out refinance condition, it can be used only on the property it names.

Seasoning

When the loan being refinanced is a VA loan, the new loan cannot be guaranteed until the later of 210 days after the first payment due date and the date you have made six consecutive monthly payments (38 U.S.C. 3709(c)). Refinancing a non-VA loan into VA does not trigger the VA seasoning rule, but Texas has its own timing rules if the existing loan is a home equity loan.

Net tangible benefit

Every VA refinance must leave you better off in at least one defined way. Under 38 CFR 36.4306(a)(3), the new loan must do one or more of the following: eliminate mortgage insurance, shorten the term, lower the rate, lower the payment, raise your residual income, refinance an interim construction loan, keep the new loan at or below 90% of value, or move you from an adjustable rate to a fixed rate. The lender must also show you a side-by-side comparison of payoff, loan type, rate, term, total payments and LTV, plus an estimate of the home equity being removed. You receive it within 3 business days of application and again at closing, and you sign that you received it both times.

Credit, DTI and residual income

VA sets no minimum credit score. Lenders set their own, and most fall between 580 and 620 for a cash-out refinance. Income is tested two ways under 38 CFR 36.4340: a debt-to-income benchmark of 41% and a residual income test that measures what is left each month after housing, debts and taxes. For a family of four in Texas or Oklahoma with a loan of $80,000 or more, the residual income guideline is $1,003 a month; in Colorado it is $1,117. Our guide to VA loan DTI limits and residual income walks through the full calculation.

The Texas twist: 50(a)(6) caps cash-out at 80% LTV on a homestead

National lender pages often say VA lets you take cash out up to 100% of your home’s value. That is true under federal rules and in states like Oklahoma and Colorado. It is not true for a Texas homestead.

Any loan secured by a Texas homestead that puts new cash in your hands, or pays off debts not secured by the home, is an “extension of credit” under Article XVI, Section 50(a)(6) of the Texas Constitution. Paragraph (B) limits the new loan, added to every other lien on the home, to 80% of fair market value on the date the loan is made. The constitution does not exempt VA-guaranteed loans, so a VA cash-out refinance in Texas follows the same 80% ceiling as a conventional cash-out.

Because VA guarantees loans up to 100% and Texas allows only 80%, the lower limit controls. In practice, the VA funding fee, if it is financed, is part of the principal amount and must also fit under the 80% line.

Other 50(a)(6) rules that shape a Texas VA cash-out

• 2% fee cap. Fees to originate, evaluate, record, insure or service the loan cannot exceed 2% of the principal, excluding interest, bona fide discount points, a third-party appraisal, a survey, the state base title premium and certain title exam fees (Section 50(a)(6)(E); 7 TAC §153.5).
• One at a time, once a year. A 50(a)(6) loan cannot close within one year of another 50(a)(6) loan on the same home, and it must be the only home equity debt on the property.
• Non-recourse and judicial foreclosure. The lender cannot pursue you personally for a deficiency (except for actual fraud) and can foreclose only with a court order.
• Homestead only. The loan cannot be secured by any other real or personal property.
• Spousal consent. Every owner and every owner’s spouse must consent in writing, even a spouse who is not on the loan.

The funding fee raises a practical question. The Texas Finance Commission’s interpretations treat premiums you must pay “to insure an equity loan” as fees subject to the 2% cap (7 TAC §153.5(11)). A 3.3% VA funding fee is larger than the entire 2% allowance, so how a lender classifies it determines whether a non-exempt veteran can use a Texas VA cash-out at all. Ask any lender to explain its treatment in writing before you pay for an appraisal. Veterans who are exempt from the funding fee avoid the question entirely.

Worked example: San Antonio homestead

A disabled veteran in Bexar County, exempt from the funding fee, owns a home that appraises at $400,000. The current mortgage balance is $240,000 at 3.5%, with principal and interest of about $1,257 a month.

Taxes and insurance are unchanged by the refinance. At an assumed 2.0% effective property tax rate ($667 a month, before any disabled-veteran exemption) and $250 a month for homeowners insurance, the Texas payment would be about $2,887. The rate shown is an example, not a quote. The bigger lesson is the trade-off: this veteran would give up a 3.5% rate on $240,000 to raise $71,000, adding roughly $713 a month in principal and interest. A Texas HELOC or home equity loan could raise similar cash while keeping the 3.5% first mortgage. Run both in our refinance calculator before you decide.

VA funding fee on a cash-out refinance (and who is exempt)

VA’s funding fee chart sets the cash-out refinance fee by usage only. Down payment or equity does not lower it.

On a $300,000 cash-out loan, the fee is $6,450 at first use and $9,900 after first use. Most veterans refinancing have already used the benefit once, so 3.3% is the common case. You do not pay the fee if you receive VA compensation for a service-connected disability, are eligible for compensation but receive retirement or active-duty pay instead, are a surviving spouse receiving Dependency and Indemnity Compensation, have a pre-discharge rating showing eligibility before closing, or are an active-duty Purple Heart recipient who provides proof by closing. If you are later awarded compensation retroactive to before closing, you may qualify for a refund. More detail is in our VA funding fee guide.

Refinancing a conventional or FHA loan into a VA loan

VA’s cash-out program is also the only path for moving a non-VA mortgage into a VA loan. Veterans use it to drop FHA’s monthly mortgage insurance or conventional PMI, since VA loans carry neither. Removing monthly mortgage insurance is one of the listed net tangible benefits, so the refinance can qualify even if the rate does not change much.

In Texas, how you structure it matters. If the new VA loan only pays off the existing first lien plus allowed closing costs and the funding fee, with no money back to you and no other debts paid, it is a refinance of the existing lien rather than a 50(a)(6) home equity loan. The 80% cap, 2% fee cap and 12-day wait do not apply, so you can refinance above 80% of value. The moment you take cash or pay off a credit card, car loan or other non-mortgage debt, the loan becomes a 50(a)(6) loan. If the loan you are refinancing is already a Texas home equity loan, the new loan must either be another 50(a)(6) loan or meet the Section 50(f)(2) conditions, including a one-year wait and the 80% limit.

VA cash-out vs. IRRRL vs. HELOC

If you only want a lower payment on an existing VA loan, the VA IRRRL streamline refinance is usually faster and cheaper. If you are weighing a VA cash-out against a conventional one, see refinancing a VA loan to conventional; in Texas both are held to 80%, so the funding fee and pricing tend to decide it. Herring’s cash-out refinance options include conventional and government loans.

Closing a Texas VA cash-out: 12-day notice, rescission and the 2% fee cap

The Texas Constitution sets a minimum timeline that no lender can shorten. Here is the sequence for a 50(a)(6) VA cash-out:

1. Application and the 12-day notice. The lender gives you the constitutional “Notice Concerning Extensions of Credit.” The loan cannot close before the 12th day after the later of your application date and the date you received that notice (Section 50(a)(6)(M)(i)).
2. COE and appraisal. The lender pulls your COE and orders the VA appraisal. The appraised value sets the 80% ceiling.
3. VA net tangible benefit disclosure. Delivered within 3 business days of application, then again at closing.
4. Final itemized disclosure. You must receive the final itemized list of fees, points, interest and costs at least one business day before closing, unless you consent in writing to a bona fide emergency exception.
5. Closing location. The loan must close at the lender’s office, an attorney’s office or a title company. Mail-away and kitchen-table closings are not allowed.
6. Fair market value acknowledgment. You and the lender sign a written acknowledgment of the home’s value.
7. 3-day right of rescission. You and your spouse can cancel without penalty within three days after closing. Funds are disbursed after that period.

Most Texas VA cash-out refinances take about 30 to 45 days from application to funding, depending on the appraisal and title work. The constitution only sets the floor. For a broader look at Texas cash-out rules across loan types, see Herring’s guide to Texas cash-out refinancing and our article on cash-out refinance credit scores in Texas.