What is the Texas Section (a)(6) Loans?
Texas Cash Out Loans or Texas Home Equity Loan is the type of loan where a borrower pulls cash or equity from their home. It is merely a financial product that allows the borrower to use the market value of their home as a collateral for the loan. Typically, a loan secured by a real estate as a collateral is considered safe by lenders, hence, a lower interest rate compared to other types of loans. It is governed by the Texas Constitution Section (a)(6) Home Equity Mortgage Eligibility.
There are several reasons why a homeowner pulls equity out of their property. It could be to pay off a high-interest loan on credit cards or personal loans. It could be used to fund a college education, pay off a car loan, or even invest the equity of the home somewhere else that yields a higher rate of return. However, there are certain factors a borrower must consider:
Eighty Percent Cash out Rule in Texas: According to this rule, the loan one gets cannot go above eighty percent (80%) of the property’s appraised value. Let’s consider an example for better understanding of this law. If someone owns a home that has an appraised value of $100,000, and the person owes a current amount of $50,000. Then the total loan amount on a home equity loan would be eighty percent of the $100,000, which is equivalent to $80,000. The net amount of proceeds the borrower gets (without closing cost) would sum up to $30,000.
New Rule Change for Texas(a)(6): According to this rule, the total fees should not be more than 3% of the loan amount. That means, when one takes a loan of $100,000, then the total fees payable to all parties, would be three percent of the one hundred thousand dollars, which sums up to $3000. This includes the survey, title, underwriting, appraisal, preparation of documents and all other fees associated with the loan. The aim of this law is to protect the borrower, but technically, it penalizes lower loan amounts. This makes it difficult for people with low loan amounts to enjoy the advantage and benefit of a home equity loan. However, effective January 1, 2018, certain changes in this rule were implemented. They are as follows:
- Eliminating the ban on home equity loans on homesteads with Agricultural exemptions – Lenders may now close cash-out loans on properties with agricultural exemptions other than a dairy farm.
- Reducing the 3% cap fee to a 2% cap fee with certain fee exclusions – The total fees to refinance was lowered to 2% but also excluded certain third-party fees. The following fees are excluded from the 2% cap: (a) an appraisal performed by a third party, (b) a property survey by a state registered or licensed surveyor, and (c) state-based premium for a mortgagee policy of title insurance with endorsements. If a policy is not issued, a title examination report if the cost is less than the state-based premium without endorsements.
- Permitting, under certain conditions, a home equity loan to be refinanced as a non-home equity loan – Eliminating the “once a cash-out, always a cash-out” rule. The SJR60 permits a previous home equity loan to be refinanced as a non-home equity provided: (a) the refinance is not closed before the first anniversary of the date the home equity was closed, (b) no additional funds are advanced other than the funds advanced from the original purchase of the home or actual closing costs and reserves required by the lender, and (c) the principal amount of the refinance when added to the aggregate total does not exceed 80% of the homestead fair market value.
- Repealing the 50% ceiling on additional advances under Home Equity Lines of Credit (HELOC) – the 80% rule still applies.
- Updating who is authorized to make home equity loans – subsidiaries of banks, savings and loan associations, savings banks, and credit unions doing business under the laws of Texas or of the United States may make home equity loans.
- Amending the 12-day notice disclosure prescribed for 50(a)(6) loans – the major change to this notice is the verbiage regarding the 3% cap change to 2% cap.
Day 12 Rule in Texas: Each time one applies for a home equity loan, the mortgage company or Loan Originator would provide a form called “12-Day Letter”. This form mentions that until the twelve days are over, the loan cannot close. This probably is Texas’s way of giving people twelve days to rethink about doing the loan.
Three-Day Rule in Texas: Upon the end of the twelve days of waiting, the borrower can close on the loan but still have to wait for another three days after you close on the loan to get your money. After that, you get the funds or proceeds. These rules contribute to the thirty days that it takes to process Texas Cash Out Loans. There are many laws >surrounding refinance mortgage; therefore, make sure the professional you hire has proper insight into how things work.
Our Home Loan Specialists are here to assist you if you are considering a Texas Cash Out Refi in the Austin area.