FHA vs Conventional Cash-Out for a Texas Homeowner Under the Homestead Cap

The Quick Read: On a Texas homestead, the equity ceiling for a cash-out loan is set by the state constitution, not by the lender. FHA cash-out is generally not offered on a Texas homestead, so conventional is the practical path for most owners. FHA remains the more forgiving program on credit and ratios, but those strengths rarely get to play here.

Here is the honest answer. Conventional cash-out is for the Texas owner who wants to pull equity from the home they live in. It works best with solid credit and room under the cap. FHA cash-out is for the borrower who needs flexible credit and debt-ratio rules. In Texas, though, that program mostly cannot be used on a homestead. Sources disagree on exactly why, so read “generally not offered” as a market reality, not a legal ruling. Check the details with a licensed Texas lender or attorney before you plan around either option.

One clarification first. “Homestead cap” also means the property-tax appraisal cap. This article is about the other one: the limit on how much a lender can put against your home.

Side-by-Side

Every figure above is subject to lender guidelines and full file review. Nothing here is a commitment to lend.

A quick note on the FHA row. Across the wholesale programs Lendmire works with, FHA cash-out reaches 80% LTV on a home you have owned and lived in for 12 months before the case number. That is the program on paper. Lendmire’s FHA cash-out refinance program page covers it for states outside the Texas homestead rules. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.

Why the Cap Is a Wall, Not a Guideline

Most borrowers assume a lender can bend a limit for a strong file. Not here. The 80% ceiling sits in the Texas Constitution, so no lender can grant an exception.

Texas A&M’s Real Estate Research Center explains the math this way. Your new loan plus every other debt secured by the home cannot exceed 80% of fair market value on the day credit is extended. You keep at least 20% equity.

The key word is “every.” Say your first mortgage already sits near 70% of value. You have roughly ten points of room, minus whatever costs you finance into the loan. A second lien or a HELOC does not add room. It uses room up.

Freddie Mac’s guide adds a useful wrinkle. Texas law, not the investor’s own refinance definitions, decides whether a loan counts as a Texas cash-out. A refinance with no cash taken out is generally treated differently from a cash-out. That distinction matters if you only want a lower balance or a different term.

When FHA Is the Better Fit

FHA is the better fit when credit or debt ratios are the obstacle and the property allows it. It is a structural fit more than a leverage fit.

Across the files we arrange, FHA works for borrowers with bruised credit. The wholesale programs we place with start at a 580 decision score. The base ratio pair is 31/43 (housing to total debt) with no compensating factors. Documented strengths can stretch that to 40/50 at the top tier. Conventional underwriting tends to be less forgiving of high debt-to-income.

FHA also carries a cost. The upfront mortgage insurance premium is 1.75% of the base loan, and it is usually financed. The annual premium runs between 0.15% and 0.75% of the balance, depending on term, loan amount and LTV. Above 90% LTV on a thirty-year loan, the annual premium lasts the full term. At or below 90%, it ends after eleven years. A cash-out tops out at 80%, so it falls in the second group.

So where does FHA fit a Texas owner? Three places:

• A home outside Texas rules. If the property is not a Texas homestead, the program’s own 80% cap applies.
• An existing FHA loan that does not need cash out. An FHA Streamline refinances an FHA loan with no appraisal and a limited credit review. It requires a net tangible benefit, and the premium continues. It does not pull cash.
• A no-cash-out refinance. An FHA rate-and-term refinance reaches 97.75% on a principal residence you have lived in for the previous twelve months. Texas treats that differently from a cash-out.

None of those gets you cash out of a Texas homestead. That is the catch.

On the 80% figure: HUD cut FHA cash-out leverage from 85% to 80% of adjusted value in Mortgagee Letter 2019-11. The letter says the change was meant to reduce risk to the FHA insurance fund. Older articles still quote 85%. Skip them.

Why FHA Cash-Out Is Generally Not Offered in Texas

Sources split on the reasoning. One Texas legal analysis concludes FHA insurance probably is not prohibited extra collateral, so an FHA home equity loan may be legally possible. But mortgage insurance premiums would count inside the constitution’s fee cap, which makes the loan uneconomic without a large lender credit. Some investor guidelines treat FHA loans as prohibited for a separate reason. The practical result is the same. Few lenders offer it.

When Conventional Is the Better Fit

Conventional is the better fit when you have decent credit, real equity and a one-unit primary residence. In Texas it is the route most owners end up taking.

Fannie Mae’s Selling Guide sets the shape of a conventional Texas cash-out. It must be a first lien. It must be fixed-rate or a listed adjustable plan. The property must be a single-unit principal residence that is your Texas homestead. Two-to-four-unit properties, investment homes and second homes are ineligible. Temporary buydowns are excluded.

Freddie Mac’s guide caps the combined LTV at 80% as well, though it can be lower if other requirements demand it. That 80% is also the point where conventional mortgage insurance generally drops away. At or below that leverage, you can often avoid the monthly insurance that FHA requires. That is the biggest ongoing difference between the two.

Picture a homeowner with strong credit, a first mortgage at 55% of value, and a plan to fund a kitchen remodel. Conventional gives that owner about 25 points of room before financed costs. No FHA premium. No ratio gymnastics. It is a clean fit.

Now picture a homeowner with a first mortgage at 78% of value. Neither program helps much. The cap leaves almost nothing to borrow against. This is why appraised value and total liens decide the outcome before credit does.

Texas also adds guardrails on the property itself. The homestead cannot be secured by additional real or personal property beyond the home. Acreage counts: a Texas regulation treats an urban homestead secured by more than ten acres as a violation. Only natural persons get homestead protection, so a home held in an LLC or corporation does not qualify.

How the Process Differs From Other States

A Texas cash-out takes more steps than most borrowers expect. Three rules set it apart:

1. A mandatory waiting period. The loan cannot close until a set period after the lender gives you the required written notice.

2. Closing location. The loan must close at the lender’s office, an attorney’s office or a title company.

3. Everyone signs. Each owner and each owner’s spouse must consent.

Then the federal rule applies. On most refinances of a home you live in, you get a right to cancel. The CFPB explains that you have three business days, and Saturdays count. Cancellation must be in writing. A phone call is not enough. Funds move after that window closes.

Fees are limited too. The constitution caps lender-controlled fees, while some third-party charges may sit outside the cap. That cap is one reason FHA’s premium structure fits poorly here.

Key Terms Defined

Homestead: Your primary residence, which Texas law protects from most forced sales.

Cash-out refinance: A new loan that pays off your current mortgage and gives you the leftover equity.

LTV (loan-to-value): Your loan balance divided by the home’s appraised value.

Combined LTV: Your total debt secured by the home, divided by value. It includes every lien.

Mortgage insurance: A premium that protects the lender if you default. FHA requires it. Conventional loans can often avoid it at 80% LTV or below.

Rescission: Your right to cancel certain refinances within a set window after closing.

Verdict: Which One Fits Which Owner

For most Texas homeowners, this is not a close call. Conventional is the working option because FHA cash-out is generally not offered on a Texas homestead. FHA’s flexibility on credit and ratios is real, but it applies best to purchases, Streamlines and rate-and-term refinances. Its cash-out version offers no extra leverage here, since both programs stop at 80%.

Even so, the decision is less about FHA versus conventional than about room. Before you compare programs, add up every lien on your home and see where you stand against 80% of value. If the cushion is thin, no program fixes that.

If a second lien is what you are weighing, Lendmire’s piece Can a Texas Homestead Use a Second Lien Above the FHA Cash-Out Cap? walks through how the combined limit treats it.

Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.

If you are weighing a cash-out refinance on your Texas home against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches.

To see how much equity your Texas home could reach, request a homeowner scenario review with Lendmire.

About Lendmire

Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. Texas A&M Real Estate Research Center: What to Know About Home Equity Loans in Texas

2. Freddie Mac Guide §4301.7

3. HUD Mortgagee Letter 2019-11

4. Fannie Mae Selling Guide B5-4.1-02: Texas Section 50(a)(6) Loan Eligibility

5. CFPB: Right of Rescission on a Refinance