The Quick Read: Texas treats cash-out on a homestead as its own kind of loan, with state rules that sit on top of FHA’s. Those rules, and the way FHA mortgage insurance counts against the state’s fee cap, push most Texas homeowners toward other structures. The debt-payoff mechanics below still apply to any cash-out that does close. Confirm availability with a licensed loan officer before you plan around it.
Key Takeaways
- Debts paid at closing go straight from the title or escrow company to the creditor. They come out of your cash proceeds and drop out of the debt-to-income calculation.
- On an FHA cash-out the base ratios are 31/43. Documented compensating factors can reach 40/50 at the top tier.
- FHA cash-out tops out at 80% of value. Texas also caps all liens combined on a homestead.
- Texas homestead cash-out has a mandatory waiting period and a post-signing right to cancel. Payoffs depend on both.
- Turning unsecured debt into debt secured by your home is the real trade-off. The payment may fall while the risk rises.
How Does an FHA Cash-Out Work?
An FHA cash-out replaces your current mortgage with a new, larger FHA-insured loan. The difference between the new loan and what you owe comes back as cash, or goes to creditors you name. Across the wholesale programs Lendmire places FHA files with, the cash-out reaches 80% of the home’s value. The home must be owned and occupied for 12 months before the case number is assigned.
That 80% is HUD’s cap. HUD lowered the FHA cash-out maximum from 85% to 80% for case numbers assigned on or after September 1, 2019. HUD said the change lined FHA up with Fannie Mae and Freddie Mac. The old leverage edge over conventional cash-out is gone.
Those two limits, 80% and the 12-month occupancy rule, are the first screen on any file. The second is how you plan to use the money. Paying off debts is the most common use. It is also the use that changes the most on the borrower’s side of the file.
Lendmire’s FHA cash-out refinance program page covers the program rules in more detail. Everything here is subject to lender guidelines and full file review.
Why Does a Texas Homestead Change the Answer?
Texas law, not the lender’s label, decides whether a loan on a homestead counts as a cash-out. That matters because the state attaches heavy conditions to any loan that pulls equity out of a homestead. The conditions come from the state constitution. Texas agencies adopted rules to interpret them, and joint state regulators administer those rules.
Here is the problem in plain terms. Texas caps the fees a lender can charge on a homestead equity loan at 2% of the loan. The Finance Commission’s rule notice describes the 2018 amendment that replaced the earlier 3% limit with 2%. FHA charges an upfront mortgage insurance premium of 1.75% of the base loan. Add an annual premium that runs between 0.15% and 0.75% of the balance, depending on term, loan amount and LTV. Mortgage-law practitioners read those premiums as counting against the cap. That leaves almost no room for anything else, which makes the loan hard to structure.
Here is what that does and does not mean:
- It is mainly a Texas problem, not an FHA rule. HUD’s published policy governs FHA loans nationwide. The federal handbook does not address Texas homestead rules at all.
- It is not a flat legal ban on paper. Practitioners describe it as possible in theory and unworkable in practice.
- Industry practice follows. Government-backed loans are generally kept out of the Texas home equity loan category in lender guidelines.
Texas homeowners who want cash out of a homestead are usually steered to a conventional Texas home equity loan. Other routes are a streamline on an existing FHA loan, or a refinance that takes no cash out. A loan officer can tell you which one applies to your file.
FHA rules apply to cash-out refinances generally, and the Texas rules change the timing and some of the structure.
How Is the Loan Underwritten, Step by Step?
Underwriting a cash-out with debt payoffs runs in a set order. Skipping a step is how files stall.
1. Eligibility screen. The lender checks occupancy, ownership seasoning, recent mortgage payment history and the loan program. In Texas, the lender also decides whether the homestead rules apply, whatever the loan is called.
2. Credit and decision score. The wholesale programs Lendmire works with start at a 580 decision score. HUD itself allows lower scores with a larger minimum investment, but the network does not reach below 580.
3. Appraisal sets the ceiling. The appraisal produces the value. FHA caps the new loan at 80% of that value. Texas separately caps all liens on a homestead combined. The tighter limit controls.
4. Payoffs become part of the loan math. The new loan has to cover the existing mortgage payoff, closing costs, any financed premium, and every debt you want cleared. Cash to you is whatever is left over.
5. Ratios get recalculated. Paid-off debts leave the monthly obligations. The base ratio pair is 31/43 (housing over total). Documented compensating factors, such as reserves or a strong payment history, can reach 40/50 at the top tier. On most files the automated underwriting finding governs, not a fixed ratio.
6. Conditions and payoff statements. The lender collects written payoff statements for each debt named in the file. Creditors are paid directly at closing.
7. Disclosure and signing. Texas adds a mandatory waiting period and a final itemized disclosure before you sign. That is covered in the section on closing day.
Which Debts Can Be Paid at Closing?
Most consumer debts can be paid at closing, but each type has its own paperwork. The table shows how they usually run on FHA files.
| Debt type | Who gets paid | What the file needs | Watch for |
|---|---|---|---|
| Existing mortgage | Title company | Payoff statement | Per-diem interest |
| Credit cards | Title company | Statement, account number | Balance changes |
| Auto loan | Title company | Payoff letter | Lien release |
| Collections | Title company | Payoff or settlement letter | Lender overlays |
| Judgments | Title company | Court payoff, release | Often must be cleared |
| Tax liens | Title company | Lien payoff letter | Texas limits on use |
A few notes on that table. HUD’s policy document, Handbook 4000.1, is the governing FHA policy. It handles collections, judgments and tax liens through their own rules. Judgments generally must be paid or placed on an acceptable payment plan. For collections, the treatment depends on account type, balance and whether a plan exists. Some lenders set stricter overlays than HUD. Confirm the current edition before relying on a section number.
Tax debt needs special care. Texas rules treat certain tax-lien payoffs through the loan as a trigger for the homestead equity rules. A tax professional can sort out the tax side. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
One more Texas limit applies. The state restricts requiring a borrower to apply loan proceeds to other debts. Whether you can direct the title company to pay named creditors, and who may be paid, comes down to how the lender structures the loan. Ask for that in writing at the start.
What Is the Order of Money on Closing Day?
The title or escrow company works through the money in a set order. Understanding it explains why the numbers must be final before you sign.
1. The old mortgage is paid first. It is the lien in first position, so its payoff comes off the top.
2. Other required liens are cleared. Second mortgages and any lien that would sit ahead of the new loan have to go.
3. Closing costs and the financed premium are settled. The upfront FHA premium is financed into the loan, so it shows up on the paperwork even though you do not pay it at the table.
4. Named consumer debts are paid. Each creditor gets a direct payment based on its payoff statement.
5. Whatever remains is yours. If the debts consume nearly all the available equity, the remainder is small.
The CFPB’s Closing Disclosure explainer shows where these items land. Payoffs appear in the Payoffs and Payments section, and the loan amount appears in a separate section. Cash to Close on page 3 is a different number from total closing costs. Many borrowers read it as the cost of the loan. It is not.
A worked scenario, in percentages
Say a homeowner owes 55% of the home’s appraised value on the first mortgage. Credit cards, an auto loan and one collection add up to another 10% of value. The cash-out ceiling is 80% of value. Closing costs and the financed premium take a slice of the remaining 15%. What is left comes back as cash. If Texas homestead rules also apply, they cap total liens, so the lower limit sets the actual ceiling.
Run on a file like that, the debts leave the ratio. The housing payment grows. The question is whether the single larger payment, with mortgage insurance on top, fits better than several smaller payments did.
How Do the Timing Rules Affect Payoffs?
On a Texas homestead equity loan, the clock matters as much as the math. The Texas Office of Consumer Credit Commissioner states that a 12-day waiting period applies before a home equity loan can close. It starts after you have applied and received the required consumer disclosure. Closing cannot take place before the 12th day.
Two things follow:
- Changed numbers can restart the process. If the final terms move in a way that triggers a new disclosure, the waiting period may restart. A payoff-heavy file should have its payoff figures confirmed up front.
- The right to cancel comes after signing. A Texas homestead equity loan carries a right of rescission. Funds are not released until that window passes. Payoffs to creditors go out after it closes, so balances and per-diem interest need to hold up through that point.
If a payoff comes up short, or a debt gets missed, the creditor is still owed the balance after closing. Get fresh statements that cover the funding date.
Where Does the General Rule Break?
These are the cases where the usual cash-out playbook stops working. Know them before you apply.
The label does not control. A loan that looks like a plain refinance can still count as a Texas homestead equity loan. Paying off an existing Texas home equity loan is the classic example. Texas law decides the category, not the lender’s name for the product.
A Texas home equity loan is hard to undo. Before 2018, a Texas home equity loan could only be refinanced into another home equity loan or a reverse mortgage. A law firm summary of SJR 60 explains how the amendment opened an exit. The exit comes with conditions: its own 12-day notice, a one-year timing limit, an 80% LTV limit, and a limit on additional funds advanced. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
Stacked liens. A second mortgage or HELOC does not add room. Texas counts all liens against the cap. So does FHA through the combined LTV limit.
FHA streamline is not a cash-out tool. The streamline refinances an existing FHA loan with no appraisal, a limited credit review and a net tangible benefit. The premium continues. It does not pay off debts, and HUD limits cash back.
A late payment is not fixed by a payoff. Paying off debts lowers your ratios. It does not erase a late mortgage payment in the last 12 months, and it does not change the 80% ceiling.
A non-borrowing spouse. Texas is a community property state. Lenders may count a non-borrowing spouse’s debts or collections in the review. Raise this at the start.
Rental or second homes. FHA cash-out is for an owner-occupied principal residence. Occupancy decides the leverage, so a home you do not live in belongs in a different program.
What Does the Borrower’s Decision Look Like?
The decision is simple to state and hard to make. You are trading several unsecured payments for one secured one. Here is how it plays out.
What improves. Monthly cash flow often does. A CFPB sample Closing Disclosure shows the Projected Payments box, which combines principal, interest and mortgage insurance in one number. Compare that number with what you pay on the debts now.
What gets worse. The new loan generally runs longer than the debts it replaces. Total interest can rise even when the monthly payment falls. FHA mortgage insurance adds to the cost. On a thirty-year loan above 90% LTV, the annual premium lasts for the term. At or below 90%, it ends after eleven years.
What changes in risk. Credit card debt can be settled or discharged. A mortgage lien is attached to your home. The Texas Constitution protects a homestead from forced sale for most debts, as the Texas Attorney General’s opinion describes. A home equity loan is one of the listed exceptions. Moving card balances into the loan gives up part of that protection. This is why Texas built in the waiting period and the fee cap.
If FHA is not the fit
| Option | Cash out? | Best for | Texas note |
|---|---|---|---|
| Conventional home equity loan | Yes | Debt payoff on a homestead | Full homestead rules apply |
| FHA streamline | No | Lowering cost on an FHA loan | No appraisal, no cash |
| Rate-and-term refinance | No | Changing term only | Check the label rule |
| Keep current loan | No | Low existing cost | No new lien |
The mechanics from this article carry over. Payoff statements, direct creditor payments, the order of money, and the waiting period apply to a Texas conventional equity loan too. Lendmire can also compare how the FHA program fits against these alternatives on your numbers.
For the full set of steps and paperwork, Lendmire’s guide How to Qualify for an FHA Cash-Out With Debts Paid at Closing is a useful companion.
Key Terms Defined
Cash-out refinance: A new mortgage larger than your current one, where the difference comes back as cash or pays named debts.
Homestead: The home you live in, which Texas law protects from forced sale for most debts.
Combined LTV: The total of all loans against the home divided by its appraised value.
Payoff statement: A written balance from a creditor, good through a stated date, used to pay a debt in full.
Right of rescission: Your right to cancel certain loans after signing, before funds are released.
Debt-to-income ratio (DTI): Your monthly debt payments divided by your gross monthly income.
Where to Start
Begin with a list of every debt you want cleared and a rough value of your home. Then ask a licensed loan officer one question first: can this loan be done on my homestead, and under which structure? If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. Reach the team at 828-256-2183 or request a quote.
Frequently Asked Questions
Can I use an FHA cash-out to pay off credit cards on a Texas homestead?
It is rarely workable in practice. Texas homestead rules cap fees at 2% of the loan, and FHA mortgage insurance premiums count against that cap, which leaves little room. Most Texas homeowners are steered to a conventional home equity loan or another structure. Confirm what a licensed loan officer can structure on your file.
Do paid-off debts help my debt-to-income ratio?
Yes. Debts paid directly at closing drop out of the monthly obligations the lender counts. On FHA files the base ratios are 31/43, and documented compensating factors can reach 40/50 at the top tier. The new mortgage payment, including mortgage insurance, goes into the ratio in their place.
How much of my home’s value can I borrow with FHA cash-out?
Up to 80% of value, once the home has been owned and occupied for 12 months before the case number. HUD set that cap and described it as matching the Fannie Mae and Freddie Mac cash-out maximum. A Texas homestead is also subject to a combined-lien limit under state rules. Whichever is tighter controls.
Does paying off a collection or judgment come up on every file?
Treatment depends on the account. Judgments generally must be paid or placed on an acceptable plan. Collections depend on type, balance and any payment plan. Some lenders add stricter overlays than HUD. Ask early which of your accounts will be called out.
What if my payoff balance changes before closing?
Request updated payoff statements that cover the funding date. Per-diem interest and new charges can move the balance. On a Texas homestead loan, a change in final terms can also restart the disclosure period, so settle the numbers before the final disclosure goes out.
About Lendmire
Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. HUD press release on FHA cash-out LTV reduction
2. Texas Register adopted rules, 7 TAC Ch. 153
3. Finance Commission proposed rules for SJR 60
5. CFPB Closing Disclosure explainer
6. Texas Office of Consumer Credit Commissioner, advisory bulletins
7. Black, Mann & Graham SJR 60 handout
8. CFPB sample Closing Disclosure
9. Texas Attorney General’s opinion
This article is part of Lendmire’s FHA Loan series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: FHA Cash-Out Limits in Texas for Debt Consolidation With a High DTI · How to Pay Off Debts at Closing on an FHA Cash-Out With a High DTI · Texas FHA Cash-Out Requirements for a Homeowner With an Existing FHA Loan
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.