AIO:  Texas Edition

Texas is different.

There are a few differences with how the All in One Loan works in the state of Texas. Due to some January, 2018 amendments to the Texas Constitution and how Texas state law treats HELOCs differently than any other state, we want to lay out the key distinctions for you here.

While AIO Loans on second homes and investment properties are virtually identical to the AIO everywhere else, having an AIO on your primary home (called a Homestead) in TX requires a few finer points of instruction. And if you’re using an AIO to purchase a primary residence, there are even more requirements.

Texas has a section in their constitution wherein it stipulates certain details around the legalities of HELOCs—Section 50 (a)(6). Though this was drafted with cash-out refinances in mind, we have to abide by these stipulations, even on a new purchase (for a primary residence) where there’s no cash being taken out. Since it is a line of credit and borrowers will be able to advance from their line after lowering their balance, AIO in TX has to comply with those A6 requirements.

In summary, on a primary residence (read: homestead), there are 5 distinctions: (1) a prohibition of sweep accounts which demands a manual interest payment, (2) a mandatory minimum on advances from the HELOC, (3) a 2% bank fee limitation, (4) a 12-day notice and cooling-off period, and (5) an in-person, in-state signing requirement. To complicate things just a little further: a second home or Investment property in TX will be considered a “homestead” if the buyer has no other property in TX.

Now, let’s unpack what those all mean for an AIO Refinance and an AIO Purchase on a primary residence.

Primary Residence: Refinancing into AIO.

On a primary residence, the state of TX prohibits sweep accounts. What that means is that instead of your deposits (into the AIO checking account) automatically sweeping into the HELOC each night to lower the balance, you’ll have to manually move the money over.

It also means that your line of credit won’t be able to simply increase your outstanding balance by absorbing each month’s interest cost—you’ll have to manually pay that as well (by depositing funds designated as a “regular payment” into the account before the 21st of each month).

TX also has a minimum advance of $4,000 from your HELOC. This means that you’ll need to move at least $4,000 from your AIO HELOC into your AIO Checking account when you move money over. Click below for how we recommend managing this minimum and making your monthly interest payment.

Primary Residence: New AIO Purchase.

If you are using an AIO on a new purchase for your primary residence, in addition to what applies on a refinance, there are a few more idiosyncrasies regarding the closing process:

  1. You have to sign in person at a lender’s office, attorney’s office, or a title office. No mobile notaries are allowed.

  2. Your spouse will have to sign as well, even if they are not on the loan.

  3. You have to sign in Texas. You cannot simply sign in any title office out of state, you’ll have to travel to TX for the signing.

  4. You will have to sign a 12-day letter of acknowledgement at least 12 days before closing. This simply acknowledges that you understand how the state of TX treats HELOCs and forces a 'cooling-off’ period for a client to have to wait until they can close on the loan.

Your lender has a few requirements as well, such as sending your Closing Disclosure (CD) out at least one day before closing, and restricting any bank fees (eg Processing, Underwriting, or Document Preparation) to no more than 2% of the loan amount. Discount points, Appraisal, Surveys, and any Insurance or Property taxes are excluded from this amount. To see the full list of what is included or excluded in that 2% cap, click here.

Second Homes & Investment Properties

Thankfully, AIO Loans on 2nd Homes and Investment properties operate virtually identically to AIO in any other state:

  • Sweep account works as usual

  • Interest charges automatically draw from HELOC

  • No minimum advances from HELOC

  • No requirement to close in person

  • No requirement for spouse to sign at closing

  • No requirement to close in Texas

  • No requirement to sign a 12-day letter

Now, if you live out of TX and want to buy a 2nd home or investment property in TX, that will be considered a homestead (despite it not being your primary residence of occupancy), thus subject to A6 and all of the complexities delineated for a primary residence. If you already own a homestead in TX, you can purchase another property in TX with an AIO without it being subject to A6.

If there’s any verifiable way to prove that a new purchase could in fact be a second home, we recommend going that route to gain all of the customary AIO benefits and avoid all of the corresponding Texas restrictions.