Home Equity Loan on duplex in Austin Texas

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Home Equity Loan on duplex in Austin Texas

Eric Guiltinan
Austin, TX · Member since 2015 · 40 posts · 33 votes

Hi BP,

This question goes out to all the Texas mortgage brokers and bankers out there. I have a duplex in Austin Texas that I would like to leverage for the purchase of another property. I lived in the duplex for one year after purchasing. I'd prefer to do a home equity loan instead of a refinance so that I do not have to give up my owner occupant rate. I understand that Article XVI, Section 50 of the Texas constitution forbids home equity loans on non owner occupied properties (only homesteads are allowed). If I were to move back into one side of the duplex could I take out a home equity loan? If so, would the appropriate LTV be 85%, 80%, or 75%? I believe my current LTV to be about 59%.

I've read that there are some issues with getting a home equity loan on a property that is generating rent.  Something about "additional collateral" which I don't fully understand.  I homesteaded the property when I lived in it and at the time TCAD wanted to know the square footage of each side.  I believe I technically only homesteaded 50% of the property.  At least I definitely only got 50% of the homestead tax exemption.  

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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
8y

@Eric Guiltinan @Austin Styer There is a LOT of misconceptions to this and I wanted to give some quick pointers on how to be successful when seeking cash out here in Texas.

1. You can ABSOLUTELY get a cash out loan on any 1-4 unit property with Fannie/Freddie in Texas. Even if the property is an investment property. The cash out limit will be limited to 75% on a SFH and 70% on a 2-4 unit property. Many banks DO NOT offer this loan and will blame it on the law but it is absolutely possible to do this. And just for clarification in case others read this, Fannie/Freddie loans would be a 30 year fixed rate mortgage. More on different products below

2. This is going to sound crazy but saying HELOC on an investment property will confuse a bank. To get more success if you are looking for this type of product you want to use the phrase "Line of Credit"...I know it sounds like we are splitting hairs but this is absolutely imperative to find this product in Texas. It is SUPER hard to find a LOC product here in Texas anyway but using that term will help. I had to call about 200 banks up here in Dallas and I found 3 that will do it. It's really hard but it is possible. The smaller the bank the better. If the bank has one location, that bank will be more likely to do it than a bank with 100 locations. Call both, but start with the smaller ones.

Keep in mind that the people you spoke with are trained to blame their bank's limitations on the state law.  Don't take this out on them.  Having been trained this way from a bank...and then seeing that things were very different...it made me very angry.  Don't get mad at the loan officer, they are told to say this stuff.  Drives me crazy but finding cash out loans in Texas is VERY possible...might be hard...but absolutely possible. 

Eric, your original post was about a property that you no longer live in.  If you have since moved back into the house let me know and I can give different guidance.

Hope this helps in some way.  Thanks!

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  • Carrie Hiner
    Real Estate Agent · Austin, TX · Member since 2015 · 181 posts · 75 votes
    9y

    Following ! 

    0Reply
  • David IvyPro Member
    Real Estate Broker · Austin, TX · Member since 2016 · 353 posts · 699 votes
    9y

    @Eric Guiltinan

    I sent your question to one of my lender friends here in Austin. I'll let you know what he says.

    0Reply
  • David IvyPro Member
    Real Estate Broker · Austin, TX · Member since 2016 · 353 posts · 699 votes
    9y

    @Eric Guiltinan

    My lender contact said that you should be able to get a 2nd lien position home equity loan from a local credit union, like RBFCU, without affecting your owner occupancy status and rate on your current 1st lien mortgage. He said you could probably draw up to 80% LTV. With the right credit union, or local bank, he said the issues you raise shouldn't be a problem.

    I'd be interested in an update, especially if you find out something different.

    0Reply
  • Eric Guiltinan
    OP
    Austin, TX · Member since 2015 · 40 posts · 33 votes
    9y

    So, I've done some more digging on this and it seems the law isn't very clear. I thought I'd share what I found in case other people stumble upon this in the future. First off, home equity loans and HELOC's on investment properties in Texas are forbidden. You can do a cash out refinance but not an equity loan or line of credit. There are several threads on BP with people in Texas looking for them and receiving some misinformation so I thought I'd put that out there.

    Second, owner occupied multi-families seem to fall into a sort of legal limbo.  They are homesteaded but they also have income producing units, which might not be allowed because the rent could be perceived as "additional collateral" that you are putting up for the loan.  "Additional collateral" is forbidden.

    The Independent Bankers Association of Texas says maybe it's allowed and to only do it if you can get a Title company to take responsibility.

    https://www.ibat.org/legal-ease/2009/14/home-equit...

    But I also found a training ppt from "American Title" in Houston and they say that not only will they not insure a home equity loan on an owner occupied duplex but that you also can't even get a conventional refinance as long as you live in it.  This leaves an owner occupant of a multi with no choice to access equity except to move or sell.

    https://www.ibat.org/legal-ease/2009/14/home-equit...

    It is frustrating to have these sort of restrictions put in place.  Especially since my situation seems to fall between the cracks.  Also, a little ironic that this comes out of Texas.

    0Reply
  • Eric Guiltinan
    OP
    Austin, TX · Member since 2015 · 40 posts · 33 votes
    9y

    @David Ivy

    David, seems we were typing at the same time.  Thanks for the info.  I'll try a credit union and see what they say.

    0Reply
  • Adam Morrell
    Leander, TX · Member since 2016 · 11 posts · 1 vote
    9y
    Texas, as much a free republic as it claims to be, has some really strange laws and codes just like every other jurisdiction. Thank you for looking into this as I was actually looking into this type of deal for my brother in law. Adam
    0Reply
  • Pat Jones
    Austin, TX · Member since 2017 · 6 posts · 1 vote
    9y

    ERIC-- if you find a bank or mortgage company the WILL do a cash out ['refit'] or even a Heloc on an owner-occupied Duplex in Texas let me know. I'm a retired attorney and even I don't understand why TX Const. 50(a)(6I appears to bar cash-out loans to owner-occupied multi family. What POSSIBLE public benefit is there in denying loans to duplex owners who choose to reside in their property by denying them access to their own equity?. It's an illegal 'unreasonable restraint on alienation' [U.S. Constitution] because it handicaps duplex owners who occupy, forcing them to 'move or sell' (as you aptly noted--they can move out and take out an investment loan, or sell, both choices are burdensome.) The real problem is none of the loan underwriters distinguish between a filed Homestead exemption and 'primary residence'...if you don't file a homestead on your duplex at all, 50(a)(6) should not even apply to your property [even if you reside there], lenders should be able to take signed 'homestead waivers' from borrowers who have not filed homesteads, taking the loan out of the scope of 50(a)(6), which applies only to HOMESTEADED property.  Regardless of whether they file a homestead or not, there are today over 70,000 Texas residents who owner-occupy their multi-family properties...it appears none of them can take cash out of the free-and-clear property they live in---ridiculous, an unlawful restraint on alienation, a handicap to duplex citizen-owners, and a sad reflection on the intelligence of our Texas legislature and mortgage lobby here. 

    0Reply
  • Joseph B. Davisson
    Dallas, TX · Member since 2015 · 58 posts · 55 votes
    9y

    It is often referred to as the "two kitchens rule" in Texas.  You might search this forum for "two kitchens" and find more information.

    I ran into the same problem years ago when I owned and occupied a duplex.  When I originally purchased it, I purchased it as a single owner occupied residence even though it was 2 addresses, but only had one property tax account.  My family lived in both sides and later converted one side to a rental. I tried to borrow against it a few years later and ran into the same problem.  I had the appraisal district set up different property tax accounts for each address (each side had a different address).  I lived in one side as my homestead, while I depreciated and rented the other half.  Multiple lenders promised me they could get the loan done and all of them failed for the same reason - 2 kitchens.

    0Reply
  • Eric Guiltinan
    OP
    Austin, TX · Member since 2015 · 40 posts · 33 votes
    9y

    @Pat Jones

    My lender at UFCU said he could do it but I have a hunch it will fall through when it reaches underwriting.  I'll pm you his contact info.

    You sound as frustrated by the law as I am.  The legislature clearly didn't consider owner occupants of multi family properties when they drafted this section.  I've often thought that maybe I should contact my representative or something but then I realize that its probably a waste of time.  However... maybe a retired attorney is just the right person to get this rule changed :)

    1Reply
  • Pat Jones
    Austin, TX · Member since 2017 · 6 posts · 1 vote
    9y

    Note that the word 'single-family residence' appears NOWHERE [that I can find] in para. 50 (20 (a) (6), Texas Const  In other words, it's the LENDERs attorneys that are excluding owner-occupied duplex [multi-family] owners from getting 20(a)(6) Homestead loans in Texas.  Again, I see NO language in 20(a)(6) [the statute] that expressly EXCLUDES homesteaded multi-family properties homestead/occupied by the owner. [the resulting/related 'end argument' would be that Lender's are breaking the law by EXCLUDING owner-occupied multi family from 20(a)(6) loans. 

    0Reply
  • Eric Guiltinan
    OP
    Austin, TX · Member since 2015 · 40 posts · 33 votes
    9y

    I think the issue is that when you homestead a multi family you actually only homestead the portion that your living in.  For example your tax exemption is reduced proportionally to the square footage that you live in.  However the lien placed on the property to secure the loan is for the entire building.   Section 20(a)(6)(H) says that if the loan is secured by additional property other than the homestead that the bank cannot force a sale to recoup their money.  The end result is that they won't give you the loan.

    1Reply
  • Pat Jones
    Austin, TX · Member since 2017 · 6 posts · 1 vote
    9y

    I have yet to homestead so I do not know if you are correct or not, the tax bill currently is for ONE piece of property. If you see something on the count  do not know if the assessor splits the homestead. If the recorded DEED is split [which it's not currently], than if the property itself were split into two deeds, I suppose all you could borrow on would be the half of the duplex you resided in, yet you would still remain owner of both deeds [both halves]. The amount you could borrow would be cut in half, only your half would serve as collateral.

    0Reply
  • Pat Jones
    Austin, TX · Member since 2017 · 6 posts · 1 vote
    9y

    Never filed a homestead, but agree, the homestead exemption forms [county] ask what percentage (%), if any, of the physical property is income-producing-- suggesting county may only issue homestead based on percentage that's owner-occupied. [gee, does that mean county would refuse to issue ANY homestead percentage on a residence that's STR's [short term rented periodically?] Issue is not just homestead, it's the DEED...if a duplex were split into two (2) distinct recorded Deeds = two different property tax bills--- in that case the owner-occupier of the duplex would, in fact, be living in a 'single family home' with its own individual legal description, own separate homestead, and separate property tax bill. In that case, my guess is Lenders would make a Texas 50 (a)(6) loan BUT only on the lower/half value of that divided-deed duplex. [= worthless, small loan amount]. Fannie Mae ['FM'] refuses cash out/refis on Texas homes that engage in STR, have 'boarders', or are duplex [2 to 4 unit multifamily]. Apparently, FM believes that Texas Const. statute 50 (a) (6) bars these types of properties from refi--problem is that statute NEVER mentions 'singe family' nor does same statute expressly exclude multi-family. I don't see how simply making a loan on a duplex means the Lender is somehow taking additional collateral [a security interest] in the rental income. If lender is afraid a written Lease could prevent foreclosure, I don't get that argument either, as the written lease itself could easily be subrugated [made voidable] in case of foreclosure on the duplex. This is a scam to profit LENDER's who want higher rates from 'investment property loans'--- the ONLY type of loans one can apparently take out on Duplexes in Texas, and only on NON owner-occupied multifamily. Bottom line is that 'owner occupied' duplex owners--- consisting of more than 70,000 Texans---cannot take cash out/refis on their equity. Only in Texas. This arguably creates an 'unreasonable restraint' on alienation of property rights in violation of the U.S. Constitution.

    1Reply
  • John Broussard
    Lender · Houston, TX · Member since 2008 · 252 posts · 60 votes
    9y

    I have clients that come to me all the time seeking to pull cash out on their primary residents  because they can't qualify for conventional financing. They get really pissed off when  they find out it's illegal  to do it any other way except with conventional financing. It's frustrating to not be able to access the equity in your property when your in a tough financial situation.

    1Reply
  • Pat Jones
    Austin, TX · Member since 2017 · 6 posts · 1 vote
    9y

    Exactly WHERE in the written Statute itself (Tex. Const. 50 (a) (6) does that statute prohibit/bar loans to owner-occupied[=homesteaded] Duplexes [or other 2 to 4 unit multifamily]?  I cannot find any language in the statute itself that allows FM [fannie mae] or any lender selling its loan to FM to refuse to write owner-occupied duplex loans [refi-cash out].

    0Reply
  • Eric Guiltinan
    OP
    Austin, TX · Member since 2015 · 40 posts · 33 votes
    9y

    Just a follow up here for those that find this thread in the future.  I finally ended up reaching out to my lender who sent my question directly to a Fannie underwriter and was told that Fannie and Freddie will definitely not purchase a home equity loan on an owner occupied multi.  In fact, the underwriter said that they will not even do a traditional non occupied cash out refi if you occupy a multifamily.  You need to move out first.

    I suppose there is some possibility of finding a bank that will hold the loan or sell it to investors but with Fannie and Freddie definitely off the table it becomes pretty difficult to find a loan. 

    They do these loans in other states.  Just not in (the nanny-state of) Texas.  But I believe it is just due to poorly crafted legislation where owner occupied multis were not considered.

    0Reply
  • Pat Jones
    Austin, TX · Member since 2017 · 6 posts · 1 vote
    9y

    "portfolio loans" = loans where the lender holds and does not sell the loan, are apparently the ONLY way a borrower can reside in his Texas multi-family unit and still get a loan. Rates may be higher....still do not understand why conventional loans [sold to FM [fannie mae] or SM [sallie mae] are not available, in otherwords I see no language in Tx const 50 (a)(6) that specifically prohibits conventional loans to mutl-family units [single lot, single land legal description]...because 50 (a) (6) does not exclude multi-family then FM and SM's exclusion would appear to be an unlawful policy =  an unreasonable restraint on alienation of property under U.S. Constitution.

    0Reply
  • Jonathan P Fly
    Professional · San Antonio, TX · Member since 2017 · 1 post · 1 vote
    9y

    You can convert the property to a condo at a minimal cost. You'll get two tax numbers - so it is not a multi. If you want, you can then put the rental unit into a LLC to give some liability protection. This way, you occupy 100% of your own "condo" as your homestead. You can set it up so that the rental unit's boundaries are very small (walls-in). I know it sounds extreme - but it's not. Texas has made condo conversions pretty easy - especially if you already own all of the property.

    1Reply
  • Bart H.
    Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
    9y
    Originally posted by @Jonathan P Fly:

    You can convert the property to a condo at a minimal cost. You'll get two tax numbers - so it is not a multi. If you want, you can then put the rental unit into a LLC to give some liability protection. This way, you occupy 100% of your own "condo" as your homestead. You can set it up so that the rental unit's boundaries are very small (walls-in). I know it sounds extreme - but it's not. Texas has made condo conversions pretty easy - especially if you already own all of the property.

     Maybe things have loosened up over the least 3-4 years, but I tried to refinance a second note on a condo  just to lower the interest rate and I couldnt find anyone to do it.  Not even the bank who held the first lean.  

    0Reply
  • Austin Styer
    Austin, TX · Member since 2017 · 7 posts · 2 votes
    8y

    Did anybody have any updates to this? I have a owner occupied duplex with at least 100-150k in equity. Is there any kind of exemption to getting a home equity loan if, say, I was planning on moving out withing 6 months? I purchased the property 3 years ago with the intention to someday pull out equity for a down payment and transfer to a full investment property. Would I have to move out first or could I get a refi then move out? If you have any advice or what you did please let me know. In trying to pull money out ASAP and purchase a house before interest rates climb a point this year as projected. 

    0Reply
  • Eric Guiltinan
    OP
    Austin, TX · Member since 2015 · 40 posts · 33 votes
    8y

    @Austin Styer, I haven't done any more digging on it but i'm not sure there is anything left to figure out. I think your best option, and I know its completely ridiculous, but you could move into a rental and then refinance into a non owner occupied loan. I think cash out refinance rules vary a bit but UFCU was willing to go to 30% LTV. Your other options are what were stated above. "Condo out" the property by splitting the deed and then refinance, or get a portfolio loan.

    If you find something else out please let me know.

    0Reply
  • Joe Scaparra
    Investor · Austin, TX · Member since 2013 · 680 posts · 1k+ votes
    8y

    Did anyone follow up with RBFCU as to if they will give you a HELOC on your owner occupied duplex. They might on 80% LTV on the entire duplex on half the duplex.....don't know.

    ON a side note, I did find a credit union that will give you a HELOC on an investment property Penfed Credit Union will do that.

    0Reply
  • Jay Helms
    Rental Property Investor · Gulf Breeze, FL · Member since 2014 · 1k+ posts · 733 votes
    8y

    Instead of a HELOC, can you do a cash-out refinance @Eric Guiltinan ?

    0Reply
  • Eric Guiltinan
    OP
    Austin, TX · Member since 2015 · 40 posts · 33 votes
    8y

    No, Fannie and Freddie will not buy cash out refis on owner occupied multis in Texas.  It needs to be a portfolio loan.  Or I guess a loan sold to someone other than fannie and freddie.  They will also not do a non occupied cash out refi on the property if you are living in one of the units.  I think a portfolio loan is a stretch since the law is a little vague and most banks will probably be conservative about it and come to the same conclusion that Freddie and Fannie have.

    If you aren't living in the multi than it is just a normal investment property and the normal rules apply. I think fannie and freddie set the LTV for a cash-out refi of a multi at 30% but I'm sure there are a lot of people on here with more experience with that than me.

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    8y

    @Eric Guiltinan @Austin Styer There is a LOT of misconceptions to this and I wanted to give some quick pointers on how to be successful when seeking cash out here in Texas.

    1. You can ABSOLUTELY get a cash out loan on any 1-4 unit property with Fannie/Freddie in Texas. Even if the property is an investment property. The cash out limit will be limited to 75% on a SFH and 70% on a 2-4 unit property. Many banks DO NOT offer this loan and will blame it on the law but it is absolutely possible to do this. And just for clarification in case others read this, Fannie/Freddie loans would be a 30 year fixed rate mortgage. More on different products below

    2. This is going to sound crazy but saying HELOC on an investment property will confuse a bank. To get more success if you are looking for this type of product you want to use the phrase "Line of Credit"...I know it sounds like we are splitting hairs but this is absolutely imperative to find this product in Texas. It is SUPER hard to find a LOC product here in Texas anyway but using that term will help. I had to call about 200 banks up here in Dallas and I found 3 that will do it. It's really hard but it is possible. The smaller the bank the better. If the bank has one location, that bank will be more likely to do it than a bank with 100 locations. Call both, but start with the smaller ones.

    Keep in mind that the people you spoke with are trained to blame their bank's limitations on the state law.  Don't take this out on them.  Having been trained this way from a bank...and then seeing that things were very different...it made me very angry.  Don't get mad at the loan officer, they are told to say this stuff.  Drives me crazy but finding cash out loans in Texas is VERY possible...might be hard...but absolutely possible. 

    Eric, your original post was about a property that you no longer live in.  If you have since moved back into the house let me know and I can give different guidance.

    Hope this helps in some way.  Thanks!

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