Acquiring a HELOC snag

[Bruce Ray]

I live in Texas and was told by the lender representative I qualified for a HELOC on my home. I was really excited because this was going to be an awesome investment stream. I received a phone call from the loan specialist who explained I could not have two home equity loan products on the same property. I did a cash out refinance on my house a few month ago to do some home improvements. I was told I could refinance my house (no cash out) and then apply for a HELOC. I share this because I had no idea this would happen. It was good learning experience and hope this helps anyone who is thinking about doing a HELOC or other home equity programs. Don't know the restrictions in other states.

[Erin Deann Martin]

Yes - this issue is often misunderstood. There is an obscure part of the TX law that states that TX homeowners can't have two types of home equity loans at the same time. What some don't realize is that a previous cash-out refinance on a home often changes their loan type to a Texas Sec. 50(a)(6) loan - or"A6" loan - making it impossible to get a HELOC while the A6 mortgage is in place. The law also used to state that once a homeowner had an A6 mortgage, any future refinances would also need to be recorded as A6 loans, IE, "once an a A6, always an A6" (essentially making getting a HELOC impossible).

The TX legislature updated the law in 2018 to remove the "once an A6, always an A6" issue, but I've found some lenders aren't aware of the update and I've had to point them to the language in the actual law. This means that if you currently have a cash-out refi in place on a home, you'll need to refinance to a conventional rate-a-term/ non A6 loan BEFORE applying for a HELOC. There are no workarounds to this.

Finally, when/if you do, some lenders want to season the new refinance for one year before offering the HELOC. This is due to their misunderstanding of the law which states that a TX homeowner may not close on a HELOC or home equity product within 1 year of closing a previous home equity product. I found if you press them on this, and explain that closing on a non-A6 refinance loan is *not* the same as closing on a "previous home equity product" within one year, they usually agree (with some double checking by their underwriting/ law dept).  

So assuming you didn't do the previous cash-out refi (A6) loan within the past year, you can convert your A6 to a reg./rate-term refi, and then immediately proceed with the HELOC application. But be prepared to reference TX state law often to their underwriters. If your cash-out refinance is less than 1 year old, you'll have to wait until it hits the 12 month mark first.