Texas Home Equity Cash Out Refinance (A6)

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A home equity cash out refinance on a primary residence in Texas is a unique home loan. The Texas Constitution has mandatory guidelines for these loan in Section 50(a)(6); hence the “A6” designation.

Many mortgage lenders won’t do Texas home equity cash out refinance A6 loans because of the strict governance of these loans. Texas is strong homestead state and the law favor homeowners over lenders. It’s important to employ a mortgage professional that understands the laws and can navigate the potential pitfalls.

Texas Home Equity A6 Refinances: Overview

Texas A6 home equity refinances have unique charactisitcs. The following are some highlights:

  1. Texas home equity A6 home loans can only be refinances. Texas does not allow home equity loans for purchase.
  2. Texas A6 home loans are only applicable on owner occupied, primary homes.
  3. The combined loan to value (CLTV) is maxed at 80%.
  4. Certain closing cost fees are limited to 2% of the loan amount.
  5. A Texas A6 home equity loan cannot be refinanced for 12 months.
  6. A homestead can only have one Texas A6 mortgage lien.
  7. A 12-day letter must be signed before closing. This can be the cause for closing delays if a lender isn’t doing their job.
  8. The loan application (1003) and the Final Closing Disclosure (CD) must be signed the day before closing.
  9. A Texas A6 home equity loan must close in a title company. In other words, there are no remote closings.
  10. A Power of Attorney (POA) is not allowed.

80% CLTV max

“CLTV” means combined loan to value. An 80% CLTV means that all loans on the home can’t total more than 80% of the home’s value. Example: If a home is worth $500,000 then the total of all loans on the home can’t be more than $400,000 when getting an A6 Home Equity loan.

Only one A6 on a home

If someone has an A6 first lien loan, this means they can’t get cash out with a new second lien. Ex: If someone has a first lien where they received cash out three years ago and now they want to get a second lien HELOC for more cash, they won’t be able to do so since the first lien is already an A6.

Another example is if you want refinance an existing first lien mortgage and combine it with an existing second lien that’s an A6 loan (like a HELOC), the new single loan will be an A6 home loan even if you don’t take out cash. Because you’re combining the A6 second lien with the first the new loan becomes an A6 mortgage and you’re no longer eligible for a future HELOC.

Old Law: Once an A6, always an A6

This means that once a Texas A6 Home Equity loan is closed, that loan will forever be considered an A6 loan and subjected to these A6 rules. Ex: if someone has a mortgage of $350,000 on a home and gets a new $400,000 A6 loan to get some cash out, then that new loan will forever be an A6 loan. This means year later if that loan is refinanced, it will be subject to all these rules EVEN IF they don’t get any cash out on that refinance transaction. Once an A6, always an A6.

Old Law: “Once an A6, always an A6”

For decades Texas home equity A6 loans had the adage of: “once an A6, always and A6”. It used to be that once a loan was designated an A6 cash out loan, all future refinances of that loan would also have the A6 refinance designation – regardless of whether the future loans was a cash out refinance. That is no longer the case.

This meant that once a Texas A6 home equity refinance loan was closed, that loan would forever be considered an A6 home equity loan and subjected to these A6 home equity rules.

Example of old laws: if someone had a mortgage of $350,000 on a home and got a new $400,000 A6 cash out home loan, that new loan would have been forever an A6 home equity loan. This meant that years later if that loan was refinanced, it would have been subject to all these rules EVEN IF it wasn’t a cash out refinance transaction. “Once an A6, always an A6”.

Only one A6 on a home

If someone has an A6 first lien loan, this means they can’t get cash out with a new second lien. Ex: If someone has a first lien where they received cash out three years ago and now they want to get a second lien HELOC for more cash, they won’t be able to do so since the first lien is already an A6.

Another example is if you want refinance an existing first lien mortgage and combine it with an existing second lien that’s an A6 loan (like a HELOC), the new single loan will be an A6 home loan even if you don’t take out cash. Because you’re combining the A6 second lien with the first the new loan becomes an A6 mortgage and you’re no longer eligible for a future HELOC.

CD & 1003 signed 24 hours before closing

When closing on an A6 home loan, the final Closing Disclosure (CD) AND the 1003 Residential Mortgage Loan Application must be signed the day before closing by all parties on the note (AND their spouses even if their spouses are not part of the loan). Failure to sign the documents will result in a delay of closing.

Can’t refinance for a year

Any loan with the A6 designation cannot be refinanced for 12 months. You are welcome to pay if off by paying cash or selling the home, you just can’t refinance it. This typically isn’t a big deal as most folks don’t typically refinance within a year after closing.

Rates a pinch higher

Rates for a Texas A6 Home Equity loan are typically .1% to .2% higher than rates for a “normal” rate and term refinance.

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Other Items to Note Important

12-Day Letter

The Texas A6 12-Day Letter is a loan disclosure that is part of the initial Loan Disclosure Package that is sent by the lender. The letter states that all people on the note (and their spouses even if they’re not on the loan) must sign and date the letter in order to start the 12-day clock. Once the form is signed, the loan cannot close any earlier than 12 days (not counting Sundays and Federal holidays). This is really only an “issue” when someone delays signing this disclosure.

3% max fees

This rule states that the Closing Costs (not including Prepaids) cannot total more than 3% of the loan amount. Most of the closing costs are fixed and total about $2,800ish in fees whiles Points and the Title Policy are percentages of the loan amount. For loan amount under $150k(ish) this rule becomes difficult to meet since those fixed costs become a bigger percentage; in this instance the interest rate will start to increase via Premium Pricing to cover the costs since fees will be waived. What’s ironic is that the Texas Legislation created this rule to protect the consumer; however, it adversely impacts those with smaller loan amounts. That’s the government hard at work folks.

Must close at a Texas title company

Texas A6 home loans must close at a Texas title company – i.e. they do not allow for remote or mail-out closings.

Can’t do a Power of Attorney (POA)

Texas A6 Home Equity loans do not allow Power of Attorney at closing. Everyone on the note (and spouses if they’re not on the loan) must be present at closing and sign for themselves.

HELOCs are Texas A6 Loans

A Home Equity Line of Credit (HELOC) is a Texas A6 loan. As stated previously, a HELOC will not be available if a home already has an existing first lien with the A6 designation.

No Agriculture Tax Exemptions (except for Dairy Farmers)

The subject property for a Texas A6 home loan cannot have an agriculture property tax exemption on it UNLESS it’s a working dairy farm. Seriously! The dairy farmers of Texas must have had some serious pull with the Texas Legislature when this law was made. For everyone else with an “ag exemption” on the home, in order to refinance they will need to remove the exemption, pay five years of back-taxes based on the difference between “normal” tax amounts and that of the ag tax amount, and then refinance the loan. For this reason, 99.99% of the homes with Ag Exemptions won’t refinance because those back-taxes are expensive.

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Mistakenly Closed Texas A6 Loans

Texas home equity A6 loans can be complicated. What’s “interesting” (for a lack of better words) is that a Texas home equity A6 designation can be applied even when the homeowners isn’t getting cash out of the home.

We have seen the aftermath of when homeowners have unknowingly closed on a Texas home equity A6 refinance transactions. Doing so put the homeowners is sub-optimal positions for future mortgage refinance opportunities. (To be clear: these were not Mortgage Mark clients).

So what happened and how does someone prevent closing on a Texas A6 home equity refinance loan? The first and obviously answer is work with a true mortgage professional who will provide the proper council, consultation, and education. The second answer is to read the mortgage loan disclosures.

Side note: reading this blog will also help you identify the characteristics of a Texas equity A6 home loan.

Agency Cash Out vs. Texas Home Equity Cash Out A6 Refinance

The mortgage industry will designate refinance loans as “cash out” loans even when equity is not being tapped.

For example: Joe Buyer bought a home and secured a $400,000 mortgage. A year later Joe got a $100,000 home improvement second lien to build a pool. Now Joe wants to refinance and combine both those mortgages into a single loan. This new refinance will be treated as a cash out even though Joe isn’t tapping any new equity.

When a non-purchase second lien is combined with a first lien, this is an “Agency Cash Out.” The big catch, is that the homeowner needs to ensure that the lender and/or title company doesn’t designate this as a Texas home equity A6 cash out refinance.

Even though the aforementioned example isn’t a Texas A6 home equity loan, lenders will often take the most conservative approach and require the A6 designation. This is wrong and inaccurate. Do not let a lender’s ignorance determine your financial future.

General Things to Note

A Texas A6 designation is given to any cash out home equity loan on a primary residence in Texas where cash is provided to the borrower. (Note: paying off non-mortgage debts such as credit cards is considered getting cash out). Mortgages on second homes and investment properties are NOT subjected to the aforementioned rules. Texas A6 loans are different than Agency Cash Outs or Home Improvement Second Loans; those types of loans don’t actually allow for cash to be taken out of the home and provided to the borrowers.

Texas A6 Equity loans can be done on Jumbo Home Loans; however, the interest rates can be higher and the loan to values will be reduced. Also, Texas A6 loans cannot be done on homes that have an agricultural tax exemption (unless it’s a dairy farm. Seriously, the dairy farmers must have had a Political Action Committee working hard for them to make this exception).

As always, please call us if you have any questions, we’re here to help.