Refinancing a home loan is straightforward process. Providing there is enough equity in a home, a new home loan pays off an existing one and a borrower begins paying on a the new mortgage. As the concept is the same across the United States, all states have rules each lender and borrower must follow on refinance transactions. In Texas, the rules differ slightly from those enforced in other states.
Cash-out Refinance Rules
In Texas, refinance transactions where borrowers wish to receive cash are limited to 80 percent loan-to-value (LTV). This means a new loan amount cannot exceed 80 percent of the value of a home. A loan-to-value ratio is calculated by dividing the new loan amount by the value of the property. For example, if a borrower seeks a $75,000 mortgage on a home worth $112,000, the LTV would be 67 percent, and allowed under Texas law.
Three Percent Rule
Texas law states that only 3 percent of a new loan amount can be used for specific closing costs. These costs include appraisal fee, broker fee, cost of a survey and title, and underwriting. This rule protects the borrower from being charged excessive fees. However, it can be a drawback on small loans, where standard closing fees must be slashed, causing some lenders to shy away from markets where real estate values are on the low end of the spectrum.
On all Texas cash-out refinances, borrowers must wait at least 12 days before the loan can be approved by an underwriter. This allows the borrower time to make sure a refinance will best serve his needs and lenders to make safe loans.
Home Equity Loan Rules
In Texas, second mortgages and home equity lines of credit are treated as cash-out refinances. This means a second mortgage can only bring the combined loan-to-value ratio (amounts of first and second mortgages) to 80 percent. Borrowers are also only allowed to secure only one home equity loan per year and only one junior mortgage can be in place at one time. Texas lenders are also not permitted to require borrowers to pay debts with proceeds of second mortgages or home equity loans.