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 employ a mortgage professional that understands the laws and can navigate the potential pitfalls. You will 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? 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 A6 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. 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 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”.
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 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.
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 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 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
Mark Pfeiffer
Branch Manager
Loan Officer, NMLS # 729612
972.829.8639
MortgageMark@MortgageMark.com
We assist clients with all type of mortgage loan programs