Can a Texas veteran get a VA cash-out refinance loan on their home?

Plain-English summary

A Texas veteran who already owns a home and has built up equity might want to refinance through the U.S. Department of Veterans Affairs and take some of that equity out in cash. The chair of the Texas House Committee on Defense and Veterans' Affairs asked the AG whether that kind of loan, a VA cash-out refinance secured by the veteran's homestead, is allowed under Texas law. He attached a letter from the Texas Department of Savings and Mortgage Lending concluding that veterans with VA loans cannot get a cash-out refinance equity loan in Texas.

The AG agreed. A Texas "cash-out" loan is a home equity loan, and home equity loans are governed by Article XVI, section 50(a)(6) of the Texas Constitution. That provision protects the homestead from forced sale and, since a 1997 amendment, allows homeowners to borrow against their equity, but only on strict conditions. One of those conditions, in subsection 50(a)(6)(H), is that the loan cannot be "secured by any additional real or personal property other than the homestead." The home itself has to be the only collateral.

A VA loan is built around a federal guaranty: the government guarantees a portion of the loan to private lenders and, on default, pays the lender and steps into its shoes. The AG concluded that the federal guaranty functions as additional collateral beyond the homestead. Even if a veteran kept the cash-out within the 80 percent equity limit and conformed other terms, the guaranty itself violates the homestead-only collateral rule. So the Texas Constitution prohibited a VA cash-out refinance loan on a Texas homestead.

Currency note

This opinion was issued in 2018. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

What the opinion meant for those who asked

The requesting committee chair and the Legislature (as the opinion described them): The opinion confirmed the Department of Savings and Mortgage Lending's reading. Under Article XVI, subsection 50(a)(6)(H), a VA cash-out refinance loan could not be made on a Texas homestead because the federal guaranty is collateral beyond the homestead.

Texas veterans considering a cash-out refinance (as the opinion described them): The opinion treated a VA cash-out refinance on a homestead as unavailable in Texas. The AG noted, in a footnote, that subsection 50(a)(6) governs home equity loans and does not reach a traditional VA purchase-money mortgage or a straight (non-cash-out) refinance.

Lenders and mortgage regulators (as the opinion described them): The opinion relied on the joint Regulatory Commentary and on 7 Tex. Admin. Code section 153.8(2), which treat a guaranty or surety as additional property for purposes of subsection 50(a)(6)(H), so a guaranteed equity loan fell outside what the constitution permits.

Common questions

Can a Texas veteran do a VA cash-out refinance on their house?
Under this opinion, no. The AG concluded that the federal VA guaranty is additional collateral beyond the homestead, which Article XVI, subsection 50(a)(6)(H) of the Texas Constitution does not allow for a home equity loan.

What exactly is the problem with the VA loan?
The guaranty. The VA program guarantees part of the loan and can pay the lender on default, then collect from the veteran. Texas regulators and the AG treated that guaranty as collateral in addition to the home, and a Texas home equity loan can be secured only by the homestead.

Does this also block a regular VA mortgage or a normal refinance?
No. The opinion said subsection 50(a)(6) governs home equity (cash-out) loans and does not apply to a traditional VA purchase-money mortgage or a refinance that is not a cash-out.

Would staying under the 80 percent equity limit fix it?
The AG said no. Even if a veteran kept the cash-out within the 80 percent limit and conformed other terms, the existence of the guaranty as extra collateral still ran afoul of subsection 50(a)(6)(H).

What is a "Texas cash-out" loan?
The opinion described it, quoting the Fifth Circuit, as a home equity loan governed by Article XVI, section 50(a)(6) of the Texas Constitution: a new, larger mortgage replaces the existing one and the borrower takes the difference in cash, converting built-up equity into cash.

Background and statutory framework

Article XVI, section 50 of the Texas Constitution protects the homestead from forced sale for all debts except those the constitution specifically excepts. For most of its history the provision excepted only liens for purchase money, taxes, or home improvements. A 1997 constitutional amendment added home equity loans, letting homeowners who have repaid their home loans or accumulated equity borrow against that equity, subject to the conditions in subsection 50(a)(6).

Those conditions are extensive. Among them: the loan may not exceed 80 percent of the home's fair market value (§ 50(a)(6)(B)); it must be without recourse for personal liability against each owner (§ 50(a)(6)(C)); it may be foreclosed only by court order (§ 50(a)(6)(D)); fees to originate, evaluate, maintain, record, insure, or service the loan are capped (§ 50(a)(6)(E)); and the loan cannot be secured by any additional real or personal property other than the homestead (§ 50(a)(6)(H)).

The Department of Savings and Mortgage Lending's letter identified several conflicts between a VA cash-out refinance and these conditions, including the VA program's higher lending limit (up to 90 percent under 38 C.F.R. § 36.4306(a)(1)) and its funding fee. The AG rested the conclusion on the collateral point. A VA loan is a guaranty program (38 U.S.C. §§ 3710, 3703(a)(1)(A)): the government induces private lenders to lend by guaranteeing part of the loan, and on default the VA pays the lender and is subrogated, or buys the property (38 U.S.C. § 3732(a)(1)), creating a debt the veteran owes the United States (38 C.F.R. § 36.4326(e)).

After the 1997 amendment, four state agencies issued a Regulatory Commentary on equity lending, which the Texas Supreme Court has found persuasive (Stringer v. Cendant Mortg. Corp.; Cerda v. 2004-EQR1 L.L.C.). The Commentary concluded that a guaranty or the obligation of a cosigner or surety is additional collateral not permitted with an equity loan. A 2003 amendment (§ 50(u)) authorized the Legislature to give agencies interpretive authority (Tex. Fin. Code §§ 11.308, 15.413), and the Finance Commission and Credit Union Commission promulgated a rule providing that "[a] guaranty or surety of an equity loan is not permitted. A guaranty or surety is considered additional property for purposes of Section 50(a)(6)(H)" (7 Tex. Admin. Code § 153.8(2)). Reading the constitution, the Commentary, and the rule together, the AG concluded that the VA guaranty is additional collateral, so the Texas Constitution prohibited a VA cash-out refinance loan.

Citations

Statutes and constitutional provisions:

• Tex. Const. art. XVI, § 50(a), (a)(6), (a)(6)(B)-(E), (a)(6)(H), (u)
• Tex. Fin. Code §§ 11.308, 15.413
• 7 Tex. Admin. Code §§ 151.1(a), 153.8(2)
• 38 U.S.C. §§ 3703(a)(1)(A), 3710, 3729(a)-(c), 3732(a)(1)
• 38 C.F.R. §§ 36.4254, 36.4306(a)(1), 36.4313(d), 36.4326(e)

Cases:

• Lawrence v. Fed. Home Loan Mortg. Corp., 808 F.3d 670 (5th Cir. 2015)
• Patton v. Porterfield, 411 S.W.3d 147 (Tex. App.—Dallas 2013, pet. denied)
• Stringer v. Cendant Mortg. Corp., 23 S.W.3d 353 (Tex. 2000)
• LaSalle Bank Nat'l Ass'n v. White, 246 S.W.3d 616 (Tex. 2007)
• Cerda v. 2004-EQR1 L.L.C., 612 F.3d 781 (5th Cir. 2010)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0183
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2018/kp0183.pdf

Original opinion text

Best-effort transcription from the official PDF. Minor extraction artifacts were corrected; the linked PDF is authoritative.

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

February 26, 2018

The Honorable Roland Gutierrez Opinion No. KP-0183
Chair, Committee on Defense and Veterans' Affairs Re: Whether veterans with Veterans
Texas House of Representatives Affairs home loans may execute a cash-out
Post Office Box 2910 refinance loan on their homestead property
Austin, Texas 78768-2910 (RQ-0176-KP)

Dear Representative Gutierrez:

    You seek clarification about whether Texas veterans may execute a U.S. Department of Veterans Affairs cash-out refinance loan on their homestead property. Request Letter at 1. A "'Texas Cash Out' loan is a home equity loan governed by Article XVI, Section 50(a)(6) of the Texas Constitution." Lawrence v. Fed. Home Loan Mortg. Corp., 808 F.3d 670, 672 n.3 (5th Cir. 2015). With your request you include a letter from the Texas Department of Savings and Mortgage Lending concluding that "veterans having VA loans are not able to obtain a cash-out refinance (equity loan) in Texas." [2]

    Texas Constitution article XVI, section 50 protects the homestead from forced sale for payment of all debts other than those specifically excepted by the constitution. TEX. CONST. art. XVI, § 50(a). For most of its long history, article XVI, section 50 excepted only liens securing purchase money, taxes, or home improvement debts. See Patton v. Porterfield, 411 S.W.3d 147, 156 (Tex. App.—Dallas 2013, pet. denied). Pursuant to a 1997 constitutional amendment, the provision now permits home equity loans. See id.; TEX. CONST. art. XVI, § 50(a)(6) (protecting a homestead "from forced sale, for the payment of all debts except for ... an extension of credit" that meets specified requirements); see also Stringer v. Cendant Mortg. Corp., 23 S.W.3d 353, 354 (Tex. 2000) (discussing 1997 amendment). "The amendment allows homeowners who have either entirely repaid their home loans or who have accumulated equity in their homestead over and above existing liens to apply for a loan against that equity." Stringer, 23 S.W.3d at 354; see also LaSalle Bank Nat'l Ass'n v. White, 246 S.W.3d 616, 618 (Tex. 2007) (Home-equity loans "permit homeowners to use the equity in their home as collateral to refinance the terms of prior debt and secure additional loans at rates more favorable than those for consumer loans.").

    Yet, in keeping with the intent to protect the homestead, article XVI, subsection 50(a)(6) places many restrictions on a home equity loan. See TEX. CONST. art. XVI, § 50(a)(6)(A)-(Q); see also Patton, 411 S.W.3d at 156-57 ("Article XVI, section 50(a)(6) ... establishes the terms and conditions a home-equity lender must satisfy to make a valid loan."). Relevant to your question, subsection 50(a)(6) limits a home equity loan to an aggregate principal amount that "does not exceed 80 percent of the fair market value of the homestead." TEX. CONST. art. XVI, § 50(a)(6)(B). It provides that the extension of credit must be "without recourse for personal liability against each owner." Id. § 50(a)(6)(C). Subsection 50(a)(6) also requires that the extension of credit be "secured by a lien that may be foreclosed upon only by a court order." Id. § 50(a)(6)(D). The subsection limits the fees "necessary to originate, evaluate, maintain, record, insure, or service the extension of credit" to three percent of the principal. [3] Id. § 50(a)(6)(E). Further, subsection 50(a)(6) provides that the extension of credit cannot be "secured by any additional real or personal property other than the homestead." Id. § 50(a)(6)(H).

    The letter accompanying your request letter states that the provisions set out above conflict with aspects of a U.S. Department of Veterans Affairs cash-out refinance loan. See Attachment at 1-2. The letter recites that a U.S. Department of Veterans Affairs cash-out refinance loan allows a maximum lending limit which is above the 80% limit allowed under subsection 50(a)(6)(B). See id. at 2; 38 C.F.R. § 36.4306(a)(1) (providing that amount of a refinancing loan "may not exceed an amount equal to 90 percent" of the dwelling). The letter states that veterans using the U.S. Department of Veterans Affairs home loan guaranty benefit must pay a funding fee, which can vary from .5% to 3.3% while subsection 50(a)(6)(E) limits fees and charges to no more than 3%. See Attachment at 2; see TEX. CONST. art. XVI, § 50(a)(6)(E); 38 U.S.C. § 3729(a)-(c) (providing table for determining amount of loan fees and providing for waiver of fees); 38 C.F.R. §§ 36.4254 (authorizing certain fees and charges), 36.4313(d) (providing schedule of permissible charges and fees). The letter also asserts that a U.S. Department of Veterans Affairs cash-out refinance loan is prohibited by subsection 50(a)(6)'s provisions regarding personal liability, homestead as sole collateral, and foreclosure only by court order. See Attachment at 2 (citing TEX. CONST. art. XVI, § 50(a)(6)(C), (D), (H)).

    At its core the U.S. Department of Veterans Affairs loan benefit is a guaranty program. It assists eligible veterans by guarantying home loans made to them by private lenders. See 38 U.S.C. § 3710 (guarantying loan for purchase of home); see also id. §§ 3701-3736. It operates by inducing private lenders to loan eligible veterans 100 percent of a home's purchase price by guarantying a certain percentage of the loan. See id. § 3703(a)(1)(A). Upon a default by the veteran, the U.S. Department of Veterans Affairs pays the private lender the amount of the guaranty and becomes subrogated to the lender for that amount. Id. § 3732(a)(1). Alternatively, the U.S. Department of Veterans Affairs can purchase the property by paying the lender the outstanding balance on the loan and receiving an assignment of the loan and security. Id. § 3732(2)(A). Payment of the guaranty or purchase of the property from the lender on behalf of the veteran constitutes "a debt owing to the United States by such veteran." 38 C.F.R. § 36.4326(e).

    You suggest that the terms of a U.S. Department of Veterans Affairs cash-out refinance loan could be conformed to satisfy many of subsection 50's requirements. Request Letter at 1. As an example, you state that a veteran with 50% equity in his or her home wanting to do a 30% cash-out would be within the 80% limit of subsection 50(a)(6). Id. While many terms of a U.S. Department of Veterans Affairs cash-out refinance loan might be written to comply with the provisions of subsection 50(a)(6), the fact that the U.S. Department of Veterans Affairs provides a guaranty on the loan and thus serves as collateral other than the homestead precludes a U.S. Department of Veterans Affairs cash-out refinance loan in Texas. See TEX. CONST. art. XVI, § 50(a)(6)(H).

    Shortly after the 1997 amendment allowing home-equity lending, four state agencies involved in such lending offered a Regulatory Commentary on the requirements of subsection 50(a)(6). [4] See REGULATORY COMMENTARY ON EQUITY LENDING PROCEDURES (Oct. 7, 1998) ("REGULATORY COMMENTARY"); [5] see also Cerda v. 2004-EQR1 L.L.C., 612 F.3d 781, 786-87 (5th Cir. 2010) (recognizing that the Texas Supreme Court considers this commentary to be persuasive (citing Stringer, 23 S.W.3d at 357)). The Regulatory Commentary determines that a "guaranty or the obligation of a cosigner or surety is considered additional collateral, and would not be permissible in connection with an equity loan." REGULATORY COMMENTARY at 6. The Texas Finance Commission and the Credit Union Commission later jointly promulgated rules similar to the interpretation set out in the Regulatory Commentary. [6] The Texas Administrative Code provides that "[a] guaranty or surety of an equity loan is not permitted. A guaranty or surety is considered additional property for purposes of Section 50(a)(6)(H)." 7 TEX. ADMIN. CODE § 153.8(2) (2017) (Joint Fin. Regulatory Agencies, Sec. of the Equity Loan: Subsection 50(a)(6)(H)). Thus, because a U.S. Department of Veterans Affairs loan guaranty is additional collateral contrary to article XVI, subsection 50(a)(6)(H), the Texas Constitution prohibits a U.S. Department of Veterans Affairs cash-out refinance loan. [7]

                                 SUMMARY

                  Because of the guaranty by the federal government, which is additional collateral, Texas Constitution, article XVI, subsection 50(a)(6)(H) prohibits a U.S. Department of Veterans Affairs cash-out refinance loan.

                                        Very truly yours,

                                        KEN PAXTON
                                        Attorney General of Texas

JEFFREY C. MATEER
First Assistant Attorney General

BRANTLEY STARR
Deputy First Assistant Attorney General

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

CHARLOTTE M. HARPER
Assistant Attorney General, Opinion Committee

[1] "A 'cash out' loan is a refinancing of an existing mortgage loan, where a new mortgage loan for an amount greater than the amount owed on the existing mortgage loan replaces the existing loan, and the borrower takes the difference between the two loans in cash, essentially converting some of the equity built up in the home into cash." Warfield v. Lash, No. 0252 Sept. Term 2015, 2016 WL 1122247, at *1 n.1 (Md. Ct. Spec. App. Mar. 22, 2016).

[2] See Letter from Honorable Roland Gutierrez, Chair, House Comm. on Def. & Veterans Affairs, to Honorable Ken Paxton, Tex. Att'y Gen. (Aug. 22, 2017) and attached letter from Tex. Dep't of Savs. & Mortg. Lending at 2 (Jan. 20, 2017), https://texasattorneygeneral.gov/opinion/requests-for-opinion-rqs ("Request Letter" and "Attachment," respectively).

[3] A recently approved constitutional amendment, would among other things, reduce this percentage to two percent but would exclude enumerated costs from being considered a fee. See TEX. CONST. art. XVI, § 50(a)(6)(E).

[4] "Originally, no Texas administrative agency was empowered with rule-making authority over the amendments. However, shortly after the amendment was enacted, four Texas agencies charged with regulating entities that made home equity loans issued an advisory publication entitled the Regulatory Commentary on Equity Lending Procedures." Cerda v. 2004-EQR1 L.L.C., 612 F.3d 781, 786 (5th Cir. 2010) (citing Stringer, 23 S.W.3d at 357).

[5] Available at http://occc.texas.gov/sites/default/files/uploads/disclosures/b98-2-home-equity-regulatory-commentary.pdf (last visited Dec. 14, 2017).

[6] A 2003 amendment authorized the Legislature to give state agencies authority to interpret provisions of article XVI, subsection 50(a). TEX. CONST. art. XVI, § 50(u); see also TEX. FIN. CODE §§ 11.308 (authorizing the Texas Finance Commission to interpret subsection 50(a)(5)-(7)), 15.413 (providing same authorization for Texas Credit Union Commission); 7 TEX. ADMIN. CODE § 151.1(a) (Joint Fin. Regulatory Agencies, Application for Interpretation).

[7] Subsection 50(a)(6) governs home equity loans and does not apply to a traditional U.S. Department of Veterans Affairs purchase money mortgage or a refinance loan.