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 loans 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 a strong homestead state and the law favors homeowners over lenders. It’s important to work with a mortgage professional that understands the laws and can navigate the potential pitfalls.
You want to find a mortgage lender who has previously dealt with home equity cash out loans.
Texas Home Equity Cash Out A6 Refinances Overview
How does a home equity cash out work in Texas? The first thing you should know is that Texas A6 home equity refinances have unique characteristics. The following are some highlights:
- Texas home equity A6 home loans can only be refinances. Texas does not allow home equity loans for purchase.
- Texas A6 home loans are only applicable on owner occupied, primary homes.
- The combined loan to value (CLTV) is maxed at 80%.
- Certain closing cost fees are limited to 2% of the loan amount.
- A Texas A6 home equity loan cannot be refinanced for 12 months.
- A homestead can only have one Texas A6 mortgage lien.
- 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.
- The loan application (1003) and the Final Closing Disclosure (CD) must be signed the day before closing.
- A Texas A6 home equity loan must close in a title company. In other words, there are no remote closings.
- 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 Texas A6 Allowed On a Home
If you’re wondering how to tap into a home equity cash out refinance twice, it comes with stipulations.
If someone has an A6 first lien loan, this means they can’t get cash out with a new second lien.
Example: 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 to 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”
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 loan 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”.
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 it 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. You should factor in this rate spike when considering a home equity cash out loan.
Important Home Equity Cash Out Refinance Items
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.
2% max fees
This rule states that the Closing Costs (not including Prepaids) cannot total more than 2% of the loan amount. Most of the closing costs are fixed and total about $2,800ish in fees while Points and the Title Policy are percentages of the loan amount.
- This does not apply to third-party closing costs like attorney fees, appraisal fees, and title insurance fees. It applies only to fees charged by the lender such as origination and processing fees.
For a 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
When you’re considering a home equity cash out refinance in the state of Texas, it’s important to remember that closings must occur at a Texas title company.
You won’t be able to close remotely or through the mail; you’ll need to go into the title agency in order to move forward with your home loan application. While this process can seem tedious and time-consuming, it is ultimately beneficial as it provides an extra layer of security when handling such large amounts of money.
Plus, this is the way home loans have been handled in Texas for years, and the government isn’t one for quick changes.
Can’t do a Power of Attorney (POA)
Texas home equity cash out refinances require a personal appearance for all listed borrowers at the closing. If you’re considering a Texas home equity loan, one thing you should know is that Power of Attorney will not be accepted as an alternative to having an individual appear in person.
That means everyone whose name is on the note (and their spouse if they are not listed on the loan) should be present to sign documents at the closing table. Don’t worry, though. This shouldn’t be a hassle because Texas home equity cash out refinance loan closings are speedy and easy, allowing you to get the capital you need without it taking up too much of your valuable time.
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 Texas 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.
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 aren’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 transaction. Doing so puts the homeowners in 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 obvious answer is to 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 from 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 Texas Jumbo Home Loans; however, the home equity cash out refinance rates for interest 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, as we mentioned previously.
As always, please call us if you have any questions, we’re here to help.
12 Day Letter for Texas Home Equity Cash Out Refinances (A6)
Below is the verbiage found on the 12 Day Letter for Texas Home Equity Cash Out Refinances (A6). The goal of this blog post is to provide the verbiage for Texas A6 refinances in the event someone really wants the details for financing (or has trouble getting to sleep at night).
NOTICE CONCERNING EXTENSIONS OF CREDIT DEFINED BY SECTION 50(a)(6),
ARTICLE XVI, TEXAS CONSTITUTION:
SECTION 50(a)(6), ARTICLE XVI, OF THE TEXAS CONSTITUTION ALLOWS CERTAIN LOANS TO BE SECURED AGAINST THE EQUITY IN YOUR HOME. SUCH LOANS ARE COMMONLY KNOWN AS EQUITY LOANS. IF YOU DO NOT REPAY THE LOAN OR IF YOU FAIL TO MEET THE TERMS OF THE LOAN, THE LENDER MAY FORECLOSE AND SELL YOUR HOME. THE CONSTITUTION PROVIDES THAT:
(A) THE LOAN MUST BE VOLUNTARILY CREATED WITH THE CONSENT OF EACH OWNER OF YOUR HOME AND EACH OWNER’S SPOUSE;
(B) THE PRINCIPAL LOAN AMOUNT AT THE TIME THE LOAN IS MADE MUST NOT EXCEED AN AMOUNT THAT, WHEN ADDED TO THE PRINCIPAL BALANCES OF ALL OTHER LIENS AGAINST YOUR HOME, IS MORE THAN 80 PERCENT OF THE FAIR MARKET VALUE OF YOUR HOME;
(C) THE LOAN MUST BE WITHOUT RECOURSE FOR PERSONAL LIABILITY AGAINST YOU AND YOUR SPOUSE UNLESS YOU OR YOUR SPOUSE OBTAINED THIS EXTENSION OF CREDIT BY ACTUAL FRAUD;
(D) THE LIEN SECURING THE LOAN MAY BE FORECLOSED UPON ONLY WITH A COURT ORDER;
(E) FEES AND CHARGES TO MAKE THE LOAN MAY NOT EXCEED 3 PERCENT OF THE LOAN AMOUNT;
(F) THE LOAN MAY NOT BE AN OPEN-END ACCOUNT THAT MAY BE DEBITED FROM TIME TO TIME OR UNDER WHICH CREDIT MAY BE EXTENDED FROM TIME TO TIME UNLESS IT IS A HOME EQUITY LINE OF CREDIT;
(G) YOU MAY PREPAY THE LOAN WITHOUT PENALTY OR CHARGE;
(H) NO ADDITIONAL COLLATERAL MAY BE SECURITY FOR THE LOAN;
(I) THE LOAN MAY NOT BE SECURED BY HOMESTEAD PROPERTY THAT IS DESIGNATED FOR AGRICULTURAL USE AS OF THE DATE OF CLOSING, UNLESS THE AGRICULTURAL HOMESTEAD PROPERTY IS USED PRIMARILY FOR THE PRODUCTION OF MILK;
(J) YOU ARE NOT REQUIRED TO REPAY THE LOAN EARLIER THAN AGREED SOLELY BECAUSE THE FAIR MARKET VALUE OF YOUR HOME DECREASES OR BECAUSE YOU DEFAULT ON ANOTHER LOAN THAT IS NOT SECURED BY YOUR HOME;
(K) ONLY ONE LOAN DESCRIBED BY SECTION 50(a)(6), ARTICLE XVI, OF THE TEXAS CONSTITUTION MAY BE SECURED WITH YOUR HOME AT ANY GIVEN TIME;
(L) THE LOAN MUST BE SCHEDULED TO BE REPAID IN PAYMENTS THAT EQUAL OR EXCEED THE AMOUNT OF ACCRUED INTEREST FOR EACH PAYMENT PERIOD;
(M) THE LOAN MAY NOT CLOSE BEFORE 12 DAYS AFTER YOU SUBMIT A LOAN APPLICATION TO THE LENDER OR BEFORE 12 DAYS AFTER YOU RECEIVE THIS NOTICE, WHICHEVER DATE IS LATER; AND MAY NOT WITHOUT YOUR CONSENT CLOSE BEFORE ONE BUSINESS DAY AFTER THE DATE ON WHICH YOU RECEIVE A COPY OF YOUR LOAN APPLICATION IF NOT PREVIOUSLY PROVIDED AND A FINAL ITEMIZED DISCLOSURE OF THE ACTUAL FEES, POINTS, INTEREST, COSTS, AND CHARGES THAT WILL BE CHARGED AT CLOSING; AND IF YOUR HOME WAS SECURITY FOR THE SAME TYPE OF LOAN WITHIN THE PAST YEAR, A NEW LOAN SECURED BY THE SAME PROPERTY MAY NOT CLOSE BEFORE ONE YEAR HAS PASSED FROM THE CLOSING DATE OF THE OTHER LOAN, UNLESS ON OATH YOU REQUEST AN EARLIER CLOSING DUE TO A DECLARED STATE OF EMERGENCY;
(N) THE LOAN MAY CLOSE ONLY AT THE OFFICE OF THE LENDER, TITLE COMPANY, OR AN ATTORNEY AT LAW;
(O) THE LENDER MAY CHARGE ANY FIXED OR VARIABLE RATE OF INTEREST AUTHORIZED BY STATUTE;
(P) ONLY A LAWFULLY AUTHORIZED LENDER MAY MAKE LOANS DESCRIBED BY SECTION 50(a)(6), ARTICLE XVI, OF THE TEXAS CONSTITUTION;
(Q) LOANS DESCRIBED BY SECTION 50(a)(6), ARTICLE XVI, OF THE TEXAS CONSTITUTION MUST:
(1) NOT REQUIRE YOU TO APPLY THE PROCEEDS TO ANOTHER DEBT EXCEPT A DEBT THAT IS SECURED BY YOUR HOME OR OWED TO ANOTHER LENDER;
(2) NOT REQUIRE THAT YOU ASSIGN WAGES AS SECURITY;
(3) NOT REQUIRE THAT YOU EXECUTE INSTRUMENTS WHICH HAVE BLANKS FOR SUBSTANTIVE TERMS OF AGREEMENT LEFT TO BE FILLED IN;
(4) NOT REQUIRE THAT YOU SIGN A CONFESSION OF JUDGMENT OR POWER OF ATTORNEY TO ANOTHER PERSON TO CONFESS JUDGMENT OR APPEAR IN A LEGAL PROCEEDING ON YOUR BEHALF;
(5) PROVIDE THAT YOU RECEIVE A COPY OF YOUR FINAL LOAN APPLICATION AND ALL EXECUTED DOCUMENTS YOU SIGN AT CLOSING;
(6) PROVIDE THAT THE SECURITY INSTRUMENTS CONTAIN A DISCLOSURE THAT THIS LOAN IS A LOAN DEFINED BY SECTION 50(a)(6), ARTICLE XVI, OF THE TEXAS CONSTITUTION;
(7) PROVIDE THAT WHEN THE LOAN IS PAID IN FULL, THE LENDER WILL SIGN AND GIVE YOU A RELEASE OF LIEN OR AN ASSIGNMENT OF THE LIEN, WHICHEVER IS APPROPRIATE;
(8) PROVIDE THAT YOU MAY, WITHIN 3 DAYS AFTER CLOSING, RESCIND THE LOAN WITHOUT PENALTY OR CHARGE;
(9) PROVIDE THAT YOU AND THE LENDER ACKNOWLEDGE THE FAIR MARKET VALUE OF YOUR HOME ON THE DATE THE LOAN CLOSES; AND
(10) PROVIDE THAT THE LENDER WILL FORFEIT ALL PRINCIPAL AND INTEREST IF THE LENDER FAILS TO COMPLY WITH THE LENDER’S OBLIGATIONS UNLESS THE LENDER CURES THE FAILURE TO COMPLY AS PROVIDED BY SECTION 50(a)(6)(Q)(x), ARTICLE XVI, OF THE TEXAS CONSTITUTION; AND
(R) IF THE LOAN IS A HOME EQUITY LINE OF CREDIT:
(1) YOU MAY REQUEST ADVANCES, REPAY MONEY, AND REBORROW MONEY UNDER THE LINE OF CREDIT;
(2) EACH ADVANCE UNDER THE LINE OF CREDIT MUST BE IN AN AMOUNT OF AT LEAST $4,000;
(3) YOU MAY NOT USE A CREDIT CARD, DEBIT CARD, OR SIMILAR DEVICE, OR PREPRINTED CHECK THAT YOU DID NOT SOLICIT, TO OBTAIN ADVANCES UNDER THE LINE OF CREDIT;
(4) ANY FEES THE LENDER CHARGES MAY BE CHARGED AND COLLECTED ONLY AT THE TIME THE LINE OF CREDIT IS ESTABLISHED AND THE LENDER MAY NOT CHARGE A FEE IN CONNECTION WITH ANY ADVANCE;
(5) THE MAXIMUM PRINCIPAL AMOUNT THAT MAY BE EXTENDED, WHEN ADDED TO ALL OTHER DEBTS SECURED BY YOUR HOME, MAY NOT EXCEED 80 PERCENT OF THE FAIR MARKET VALUE OF YOUR HOME ON THE DATE THE LINE OF CREDIT IS ESTABLISHED;
(6) IF THE PRINCIPAL BALANCE UNDER THE LINE OF CREDIT AT ANY TIME EXCEEDS 50 PERCENT OF THE FAIR MARKET VALUE OF YOUR HOME, AS DETERMINED ON THE DATE THE LINE OF CREDIT IS ESTABLISHED, YOU MAY NOT CONTINUE TO REQUEST ADVANCES UNDER THE LINE OF CREDIT UNTIL THE BALANCE IS LESS THAN 50 PERCENT OF THE FAIR MARKET VALUE; AND
(7) THE LENDER MAY NOT UNILATERALLY AMEND THE TERMS OF THE LINE OF CREDIT. THIS NOTICE IS ONLY A SUMMARY OF YOUR RIGHTS UNDER THE TEXAS CONSTITUTION. YOUR RIGHTS ARE GOVERNED BY SECTION 50, ARTICLE XVI, OF THE TEXAS CONSTITUTION, AND NOT BY THIS NOTICE
Mark Pfeiffer
Branch Manager
Loan Officer, NMLS # 729612
(972) 829-8639
MortgageMark@MortgageMark.com