Starting out, but need guidance with Texas limitations for cash out loans

1 Reply

Hello everyone!

I found the Bigger Pockets site at the beginning of the year, just as I was doing the classic New Year’s inventory and trying to figure out where to direct my energy and efforts next.  I’ve worked with the petroleum industry for a long time, and though I have made a good living, like many others of my peers, I’m in place that my current lifestyle is only sustainable as long as I continue to work til I drop dead.  But I want to retire!  Over the last four months I’ve spent many, many hours on the website, listening to the Podcasts, reading the forum postings, searching for information, reading just about every book suggested by anyone in the BP community, but it’s time to do something.  And frankly, I’m scared!  But I’m closing my eyes and getting started!!!  

I just made an offer on an REO today that happens to have multiple offers on it. Hoping to get some preferential consideration, I asked my Realtor to write the offer as a cash offer, with the expectation that I could work with a bank later and pull my money out so that I can have it available for other purchases. But I've read on Bigger Pockets about Texas having very strict regulations prohibiting cash out or HELOC's on investment properties, and a couple of lenders I've spoken with have said the same. So I'm turning to the BP community investing in Texas…Is there any way around that Texas requirement so that I can place a mortgage on a property I own free and clear in the States of Texas? Is there any type of institutional loans (other than HMLs) not subject to this limitation?

@Evelyn Randolph

Hi Evelyn, actually, the strict cash out rules are only on owner-occupied properties in TX. If you're living in a home and take out a mortgage that gives you even a penny of cash at closing, then you've flipped a switch that can't be flipped back for as long as you own and live in the home. Any refinance you do on the home in the future will be considered cash out as well, even if you don't take any cash at closing. 

Note that this only applies to financing on a property you're living in (and one you probably have homesteaded) and the maximum loan-to-value will always be 80%. Expect lending criteria to be stricter and closing costs to be a little higher on a TX cash out loan as well.  

If you want more information about TX cash out, do a search online for Texas 50(a)6 rules. 

Now, if you're talking investment property, the TX cash out rules do not apply. Be ready to hear differently from some lenders, but understand that many loan officers and loan processors aren't really that familiar with when the rules apply and when they don't.

I just ran into a very uneducated loan processor not long ago when I was refinancing a rental property in TX. The loan processor kept telling me I couldn't take any cash out at closing because of TX's weird rules. I had to politely correct her understanding of the rules and we were able to close shortly after that. 

Having said all this, note that there is one limitation that could apply to cash out on investment property loans - and it applies in all states, not just TX. You'll need to own the property for at least six months before you'll be allowed to do a cash out mortgage to recoup your capital. Make sure to plan for this if you decide to pay cash for the property. 

This six month rule applies only to Fannie Mae conventional loans, which is a very common financing source for investment properties. If you're working with a big-name and well known bank, they're probably offering Fannie Mae financing. If you're working with a portfolio lender (who keeps the loans on their books instead of selling to Fannie Mae) this limitation may not apply. 

Any more questions, let me know!

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here