Texas Veterans looking to tap into their home equity face restrictions unlike anywhere else in the country. The state maintains the nation's strictest homestead protections, and these constitutional rules significantly impact how Veterans can access equity in their homes.
The most important fact to understand is that VA cash-out refinances are limited in Texas. Let’s look at why these restrictions exist and explore the available alternatives.
Texas Homestead Protections Are Constitutional
Article XVI, Section 50 of the Texas Constitution establishes homestead protections that protect Texas homeowners from forced sales and predatory lending. In 1997, voters amended the constitution to allow home equity lending for the first time, but with consumer protections built into the constitutional language itself.
The Texas Real Estate Research Center at Texas A&M notes that lenders failing to comply with these constitutional requirements risk having their entire lien declared invalid, with potential forfeiture of all principal and interest.
The 80% Loan-to-Value Ceiling
Texas caps the total amount of all liens on your homestead at 80% of the property's fair market value, meaning that you must maintain at least 20% equity in your home at all times when taking a home equity loan.
This contrasts with VA cash-out loan requirements that allow Veterans to borrow up to 100% of their home's value in some cases.
Why VA Cash-Out Refinances Are Prohibited in Texas
Veterans cannot use VA-backed cash-out refinances in Texas because of two incompatible requirements.
First, Article XVI, Section 50(a)(6)(H) of the Texas Constitution prohibits home equity loans from being secured by any additional property beyond the homestead itself, stating the loan must be one that "is not secured by any additional real or personal property other than the homestead." The VA guaranty (where the Department of Veterans Affairs agrees to cover a portion of the loan if the Veteran defaults) is considered additional collateral under Texas law.
Second, the loan-to-value requirements are incompatible. Texas constitutionally caps all liens at 80% of a home's fair market value, requiring homeowners to maintain at least 20% equity. The VA cash-out refinance program allows borrowing up to 90% or even 100% of a home's value in some cases. This fundamental mismatch between federal VA guidelines and Texas constitutional requirements makes VA cash-out refinances impossible in the state, even if the additional collateral issue could somehow be resolved.
The Two Percent Fee Cap
Texas limits fees lenders can charge on home equity loans to 2% of the loan amount. This cap excludes certain necessary costs like appraisals, property surveys, and title insurance, but covers most origination and processing fees.
The constitution also mandates a 12-day waiting period after you submit your loan application or receive required disclosures (whichever comes later) before closing. This cooling-off period protects against high-pressure lending tactics.
Home Equity Options for Texas Veterans
While VA cash-out refinances aren't available, Texas Veterans have several alternatives.
Texas Section 50(a)(6) Cash-Out Refinance: You can refinance your existing mortgage (VA or conventional) into a conventional Texas equity loan. These loans must comply with all constitutional restrictions but allow you to pull cash out up to 80% LTV. This is the most common way Texas homeowners access home equity.
VA Purchase Loans: The restrictions on cash-out refinancing don't affect your ability to buy a home with a VA purchase loan. These loans work normally in Texas and offer standard VA benefits.
VA Interest Rate Reduction Refinance Loan (IRRRL): If you have an existing VA loan and want to lower your interest rate or switch from an adjustable to a fixed rate, the VA IRRRL program remains available in Texas. These streamline refinances don't involve cash-out and thus avoid the constitutional restrictions.
Understanding Texas Equity Loan Requirements
If you pursue a conventional Texas equity loan, expect a thorough process. Lenders must provide disclosures spelled out in the constitution. You'll receive a notice explaining your rights, loan terms, and protections under Texas law.
The loan must close at the office of the lender, a title company, or an attorney. You'll sign an acknowledgment of your home's fair market value alongside the lender.
Primary Residence Requirement
Texas home equity lending laws apply only to your homestead, meaning your primary residence. Investment properties, vacation homes, and rental properties don't qualify for Section 50(a)(6) loans.
How These Laws Protect Texas Homeowners
The constitutional caps on loan-to-value ratios help prevent homeowners from becoming overleveraged on their properties. The prohibition on additional collateral prevents complex loan structures that can confuse borrowers. The fee cap controls closing costs. Mandatory waiting periods provide time for consideration. The judicial foreclosure requirement ensures due process. Together, these protections prioritize homeowner stability over lender convenience.
While VA cash-out refinances aren't available in the Lone Star State, there are other options that provide access to home equity while maintaining the consumer protections that make Texas homeownership uniquely secure. Read more about VA refinancing.
Frequently Asked Questions
Can I use a VA loan to buy a house in Texas?
Yes. VA purchase loans work normally in Texas with all standard benefits.
If I have a VA loan, can I refinance to lower my interest rate?
Yes, you can refinance to lower your interest rate.
How much equity can I access with a Texas cash-out refinance?
You can refinance up to 80% of your home's appraised value, minus your existing mortgage balance (after paying closing costs), leaving at least 20% equity in the property.
How long do I have to wait between Texas equity loans?
You must wait one full year from the closing date of your previous loan before taking another one.
Can I get a home equity line of credit in Texas?
Yes, but it must comply with all Section 50(a)(6) requirements.
