Bulls & Blogs

Important news before you get a HELOC

Owner-occupied, Regulations Comments Off

Feb 052018

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

With rising home prices, you may be eyeing your increasing home equity with plans for remodeling or some other important need. However, before you do, take a few minutes to consider how the changes to the mortgage interest deduction might affect your tax bill.

It’s been well-reported that the new tax law reduces the max mortgage that qualifies for the mortgage interest deduction from $1m to $750k. For most of us, that’s not a big deal. The bigger deal is that starting this year, interest paid on a home equity line of credit (HELOC) no longer will be eligible for the deduction.

When you take cash out of your home, you have a couple options if you have an existing first mortgage. You can refinance the first mortgage adding to the balance the amount of cash you want, a so-called cash-out refinance, or you can use a HELOC, which typically is a 2nd lien on your home that leaves the existing first mortgage in place. Many folks prefer a HELOC because they have a really low rate for their existing first mortgage.

With the new tax law, the interest paid on a cash-out refinance is still eligible for the mortgage interest deduction. The interest paid on a HELOC is not.

So, before you decide which option to use, consider whether getting a new first mortgage would allow you to itemize your deductions. If it does, then you may find it’s a better financial decision to cash-out refinance your existing mortgage even though you may end up with a slightly higher interest rate.

Two troublesome quirks in the new TX home equity rules

Loan Guidelines, Owner-occupied, Residential Mortgage Comments Off

Jan 042018

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

As we discussed last year, Texans changed the rules for homeowners who want to take equity out of their homes. TX Equity loans, what we call cash out loans, are a special type of conventional loan because the TX constitution provides homeowners some unique protections. As a result, the loans have slightly higher interest rates and higher closing costs than other conventional loans.

The changes approved by voters last fall mainly benefited homeowners with lower-priced homes and homeowners in rural areas. However, attorneys, as they’re apt to do, have noticed a couple quirks in the wording that could cause problems.

– The rules now allow a lender to charge closing costs equal to 2% of the loan amount, down from the previous limit of 3%. However, this amount now excludes the appraisal and survey fees and a fee for a title policy and policy endorsements established in accordance with state law. It’s the “in accordance with state law” part that is at issue. Our attorneys are recommending a conservative reading, which could add a few hundred dollars back to the total subject to the 2% limit.

– The rules also now allow homeowners on ag-exempt land to take out home equity loans. The issue is the state tax code says an ag-exemption is not allowed on land that secures an equity loan. While this likely was an oversight, and the Comptroller may correct the problem soon, the risk for homeowners is that they’ll lose their ag-exemption. That raises the horror of property tax rollbacks.

Even with the issues, the changes are a welcome relief for homeowners wanting to use their home equity, and in time I suspect the state will resolve the issues in the favor of homeowners.

One way to cash out an LLC-held rental property

Investment, Loan Guidelines, Residential Mortgage Comments Off

Apr 162016

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Yesterday, we discussed how Fannie Mae has rescinded a portion of its loan guidelines concerning investors’ ownership of properties in LLCs. Specifically, according to conversations with Fannie, the change means an investor must move a property into his or her name 6 months prior to being eligible to take cash out of the property.

However, Fannie left open one avenue for cashing out a property in an LLC. It’s called the Delayed Financing program. If an investor purchases a property using cash, and holds the property in an LLC, the investor may pull out up to 75% of the equity within the first 6 months of ownership as long as all the members of the LLC will be on the cash out loan.

Note the two important conditions: It must be a cash purchase, and the cash-out refinancing must close within 6 months of purchase.

I suspect Fannie may eventually realize how silly the conflicting guidelines are, but the inertia that must be overcome to correct them is pretty grand.

In the meantime, please don’t forget that neither Fannie nor Freddie allow you to close a loan with an LLC holding title to the property. You must close in your name. Many investors move properties to their LLCs after closing, but be aware that doing so could trigger the loan’s “Due on Sale” clause.

Fannie makes it harder to cash out rental properties

Investment, Loan Guidelines, Residential Mortgage Comments Off

Apr 152016

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Investors who choose to hold their properties through LLCs need to be aware of a recent change Fannie Mae made to its loan guidelines. The guideline in question was called Continuity of Obligation, and Fannie enacted it in response to the financial crisis to combat fraud. The guideline established a timeframe a party must have owned a home prior to being eligible for refinancing.

For investors, the guideline specifically identified a property held by the investor in an LLC as meeting the requirement as long as that same investor was refinancing the property in his or her own name.

Earlier this year, Fannie rescinded the guideline in whole. The problem for investors is that means Fannie also rescinded the specific carve out for LLCs. Based on recent conversations with Fannie, without the carve out, an investor must first move the property into his or her own name prior to refinancing.

This becomes a big deal if the investor is trying to cash out the equity in the property. Fannie Mae still has a 6-month “seasoning” requirement for cash out loans. Without the LLC carve out, the investor now must move the property into his or her name 6 months prior to being eligible to take cash out of the property using a Fannie loan.

There still is one option available to investors using LLCs, and we’ll look at that tomorrow.