The Quick Read: A Texas home equity loan can be converted into an ordinary first-lien mortgage only if the refinance closes at least one year after the original loan, advances no new cash to the borrower, keeps total liens at or below 80% of the home’s value, and follows a separate written notice delivered before closing, with timing that varies by file and lender. The conversion can lower a payment by merging loans into one rate and term. The price is the loss of certain homestead protections. For investors, the rule matters mostly when equity from a primary residence funded a rental purchase.
- The rule applies to a Texas homestead, which is a primary residence. It does not apply to a rental property.
- All four conditions must be met. If one fails, the new loan stays a home equity loan.
- Any cash to the borrower at closing breaks the conversion. Financed closing costs do not.
- A converted loan permits foreclosure without a court order and carries recourse against the owner.
- Whether a lender offers a conversion at all is the lender’s choice.
What Does “Conversion” Actually Mean?
A conversion is a refinance that pays off a Texas home equity loan and replaces it with a regular mortgage that is no longer treated as a home equity loan. It lets a homeowner swap two loans, usually a first lien plus a home equity second, for one loan with one rate and one term. That is where a lower payment comes from.
How large a line the equity supports in Texas.
An equity line is sized by combined loan-to-value, occupancy, and credit — not by rental coverage. Switch the occupancy or the credit band and the ceiling moves with it.
Investment-property lines require a 700 minimum credit score; second-home lines start at a 640 minimum and primary-residence lines at 600, and the combined-LTV ceiling steps down as the credit band drops on primary-residence and second-home lines and holds on investment-property lines; the line cap steps down on primary-residence lines and holds at every tier on investment-property and second-home lines.
A debt-to-income ratio above 45% requires 680+ credit. Profiles under 640 are limited to single-family homes. At least 75% of the approved line is drawn at closing. Ceilings, floors, and caps update from Lendmire’s centralized guideline source.
Line estimate
Illustrative estimate only — not a quote, Loan Estimate, approval, or commitment to lend. The rate is an editable assumption; equity-line pricing is variable through both the draw and repayment periods and never converts to fixed. Occupancy and credit drive the ceiling together: an investment property tops out at 70% combined LTV (minimum credit 700, line cap $500,000); a second home tops out at 90% combined LTV (minimum credit 640, line cap $500,000), with the ceiling stepping down as the credit band drops (the cap holds at every tier); a primary residence tops out at 80% combined LTV (minimum credit 600), and its $750,000 maximum line is available only at 75% combined LTV or below with a 700-or-better credit profile (720 on the longer-runway program) and a full appraisal. Lines above $500,000 require a full appraisal. Credit, debt-to-income, property type, and full underwriting review all affect the final line.
One disambiguation first. The phrase “home equity conversion” also names the reverse mortgage for older homeowners. This article has nothing to do with that product. It covers the Texas refinance that takes a home equity loan out of its special legal category.
Texas treats home equity borrowing differently from every other kind of mortgage debt. A closed-end home equity loan and a home equity line of credit both fall into that category. The state’s rules cap the loan size, limit how often you can borrow, set a waiting period, and require specific notices. A conversion is the exit from that category.
Why It Used to Be Impossible
The old belief was that a home equity loan could never be refinanced into a regular loan. Under the old rule, any refinance that touched a home equity loan stayed a home equity loan, even when no cash came out. The Alston & Bird advisory on the Texas home equity amendments describes how that worked before voters changed it.
The myth: once a home equity loan, always a home equity loan.
The reality: that was true before voters approved the amendment known as Proposition 2. A page on the amendment confirms it passed in a November election and applies to loans made or refinanced on or after the following January 1. The amendment allows a seasoned home equity loan to be refinanced into one loan with one rate and term.
People still repeat the old rule because it was true for a long time and many lender pages never updated. It is also partly true today. If the refinance fails any one of the conditions below, the new loan stays a home equity loan.
The Four Conditions You Must Meet
All four conditions are mandatory. The Texas Legislative Council’s analysis of the amendment lays out the conditions and the notice timing, and the Alston advisory above gives the same list in plain English.
1. Seasoning of one year. The refinance cannot close before the first anniversary of the day the home equity loan closed. Count from the original closing date, not from the first draw on a line.
2. No new money. The only funds advanced can be those that pay off valid debts listed in the statute, plus the actual costs and reserves the lender requires. Nothing goes to the borrower.
3. The 80% cap. The new principal, plus every other lien of record, cannot exceed 80% of the home’s fair market value on the date of the refinance. That means a current valuation, not the value from the original loan.
4. Separate written notice. The lender must give the owner a notice on its own document ahead of closing, with timing that varies by file and lender. It cannot be buried in the loan package.
Who Converts and Who Doesn’t
Scenarios vary, so this table sorts the common ones.
| Scenario | Converts? | Why |
|---|---|---|
| No cash out, loan older than one year | Yes, if all four are met | Meets seasoning and no-new-money tests |
| Cash to borrower at closing | No | Breaks the no-new-money condition |
| Closing costs financed into the loan | Yes, if within the cap | Actual costs are a permitted advance |
| Home equity loan closed under one year ago | No | Fails the one-year seasoning test |
| Combined liens above 80% of value | No | Fails the cap |
| Refinance into a new home equity loan | Not a conversion | Full home equity rules apply again |
The financed-closing-costs row surprises people. Rolling permitted costs into the new balance does not turn the loan back into a home equity loan, as long as the total stays under the cap and no cash goes to the borrower.
What You Give Up
A lower payment is the visible benefit. The invisible cost is legal protection.
| Feature | Home equity loan | Converted loan |
|---|---|---|
| Foreclosure | Court order required | Court order not required |
| Recourse | Limited to the home | Against the owner and spouse |
| Loan structure | Subject to home equity limits | Regular first-lien terms |
| Payment | Two loans, two terms | One loan, one term |
In plain terms, if the loan goes bad, the lender has an easier path to the house and can pursue the borrower for a shortfall. A homeowner with stable income and a strong equity cushion may accept that trade. A homeowner with variable income may not.
A Worked Example in Percentages
Run the numbers on a modeled homestead. These inputs are assumptions, not market data.
Say a first lien equals 55% of the home’s current value and a seasoned home equity loan equals 15%. Combined, the liens sit at 70%. Refinance costs and required reserves add another 2% of value, so the new loan would bring total liens to 72%. That is under the 80% cap, so the cap test passes.
The payment drops because one loan replaces two. Older home equity loans often have shorter terms or interest-only periods, and merging them into one amortizing loan can spread the balance over a longer term. The break-even logic is simple: divide the total refinance costs by the monthly savings. If the borrower plans to sell or refinance again before that point, conversion loses money even though the monthly payment is lower.
Now change one input. Suppose the borrower also wants a modest cash reserve at closing. That one request breaks the no-new-money condition, and the whole refinance becomes a home equity transaction.
The Process, Step by Step
1. Confirm the existing loan type. Verify the debt being paid off is a home equity loan or line. If it is, the conversion path applies.
2. Check seasoning. Count one year from the date the home equity loan closed. Closing before the anniversary fails the test.
3. Choose the new loan type. The borrower can refinance into a new home equity loan or a non-home-equity loan, but the notice itself says this applies only “if offered by your lender.” Many lenders do not offer the conversion.
4. Deliver the notice. The separate notice must reach the borrower before closing, and the exact timing depends on the file and the lender. A law-firm summary of the agency’s interpretations reports that when the borrower first applied for a different loan type, the timing clock for delivery starts when the application is amended or a new conversion application is submitted.
5. Value the property. The 80% test runs on fair market value as of the refinance date, so expect a full valuation.
6. Structure the payoff. The loan amount is limited to the payoff, other permitted debts, and actual costs and reserves. Nothing extra.
7. Sign the affidavit. An affidavit signed by the owner or spouse, acknowledging the requirements are met, conclusively establishes the loan as a permitted type, per a JD Supra law-firm article.
Where This Touches a Rental Investor
The conversion rule is a homestead rule. It attaches to a borrower’s primary residence, and a DSCR loan finances a rental, so a rental refinance does not carry these constraints. A cash-out on a Texas rental runs on rental coverage and the property’s equity. The Lendmire complete DSCR loans guide walks through how that qualification works.
Here are the situations where the rule still reaches an investor:
- Equity pulled from the homestead to fund a rental. The home equity loan sits on the primary residence even though the money went into a rental. Lendmire’s piece Using Home Equity For Down Payment On Investment Property covers that funding route.
- An investor who owns both. A homestead payment and a rental portfolio are separate files. Lowering the homestead payment through conversion does not change how the rentals qualify, though it can help overall cash flow.
- Wanting a standard first lien back. Some investors convert to free up flexibility on their personal residence before the next purchase.
Brokering a conversion on a homestead is a different business from placing a DSCR loan. DSCR loans are designed for non-owner-occupied investment properties. Because they are business-purpose investor loans, they are reviewed differently from a standard owner-occupied mortgage.
Across the wholesale network, a few program facts help frame the investor side, all subject to lender guidelines:
- A DSCR cash-out refinance on a standard rental generally tops out around 75% LTV, with about 6 months of seasoning as the common expectation.
- Coverage of 1.00 is where select programs start. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted.
- Credit of around 660 is what most programs want, and 700+ opens the strongest leverage tiers.
A larger down payment lowers the monthly payment and can lift coverage. It never erases leverage caps, credit floors, reserve rules or property eligibility. Clearing the coverage test is also not the same as positive cash flow, because repairs, vacancy, management and utilities sit outside the calculation.
For investors who want a home equity line instead, the network’s investment-property lines run to 70% CLTV at a 700 minimum credit profile, up to $500,000, on a 5-year interest-only draw with a 25-year repayment period. Primary residences work differently. In Texas, a primary residence is a homestead and caps at 80% combined loan-to-value, and the state’s 12-day waiting period, one-lien-at-a-time rule and 12-month seasoning bind primary residences only. Texas second homes and investment properties are eligible as non-homestead transactions. Lines of this type are available through the 16 states where Lendmire brokers home equity products, which is narrower than the 41-market DSCR footprint. For the rental side of that question, see Lendmire’s piece on whether a first-time equity pull on a Texas rental can skip home-equity rules.
Where the General Rule Breaks
Several edge cases catch borrowers who assume the listed conditions are the whole story.
Refinancing into another home equity loan. That is not a conversion. The full home equity regime applies again, including the loan limits and notice rules. The borrower swaps one home equity loan for another.
Additional funds on a non-home-equity refinance. A refinance of ordinary homestead debt that adds funds is invalid unless it is a home equity loan or the added funds are for reasonable refinance costs or other permitted purposes. The cash-back trap works in both directions.
Modifications. A home equity loan and a later modification of it are treated as one transaction for purposes including the fee cap. A change that looks small can have consequences, so counsel matters here.
Notice sequencing. A borrower who applied for something else first can start the notice timing at the wrong point. Lenders that handle conversions carefully document the date of the new application.
Lender choice. A conversion is permitted by law, not required of any lender. Many lenders decline to do it. That is a common reason a borrower cannot find one.
Should You Convert?
Conversion tends to fit a borrower who meets most of these checks:
- The home equity loan is more than a year old.
- Total liens will stay comfortably under the 80% cap on a fresh valuation.
- The borrower wants no cash back.
- Income is stable enough to accept recourse and non-judicial foreclosure.
- The payment savings outlast the break-even period.
It tends to fit poorly when the borrower plans to sell soon, wants cash at closing, or values the court-order foreclosure protection. In that case, the existing home equity structure may be the better trade.
Tax treatment varies; consult a qualified professional before relying on any deduction.
Key Terms Defined
Homestead: the Texas owner-occupied primary residence that carries special legal protection.
Home equity loan: a loan or line secured by a homestead that is subject to the state’s home equity rules.
Seasoning: the minimum time that must pass after a loan closes before a refinance of it is allowed.
Recourse: the lender’s right to pursue the borrower personally for a shortfall after foreclosure.
CLTV: combined loan-to-value, the total of all liens divided by the home’s value.
Frequently Asked Questions
Does a converted loan stay a home equity loan forever?
No. Once all four conditions are met, the new loan is a regular mortgage and no longer carries home equity treatment. The change applies to loans made or refinanced from the January after voters approved the amendment. If any condition fails, the loan stays in the home equity category.
Can I take cash out during a conversion?
No. Any cash to the borrower breaks the conversion and turns the refinance into a home equity transaction. Actual closing costs and required reserves can be financed, but nothing beyond the payoff and those items can be advanced.
Does the conversion rule apply to my rental property?
No. The rule attaches to a homestead, which is a primary residence. A rental is not a homestead, so a rental refinance is underwritten on the property and the borrower’s profile. For a DSCR file, that means rental coverage, credit and equity, subject to lender guidelines.
What do I lose by converting?
You lose the court-order foreclosure requirement and the non-recourse protection. The state’s official notice says a converted loan permits foreclosure without a court order and is with recourse against the owner and spouse. For some borrowers the lower payment is worth it. For others it is not.
Will every lender do a conversion?
No. The state’s official notice says the option exists only if your lender offers it. Expect to ask directly before spending time on an application.
Next Step
If you are considering a home equity line and want to see how the numbers work, Lendmire can help you compare HELOC options based on the property, the equity available, credit profile, combined leverage, and your goals.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage broker that arranges home equity lines of credit in its 16 full-service states through wholesale lenders, on primary residences, second homes and investment properties. Every line is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Alston & Bird advisory on the Texas home equity amendments
2. Texas Legislative Council analysis of SJR 60
3. Baird Law on Texas Finance Commission interpretations
4. JD Supra: Texas voters ratify amendment
This article is part of Lendmire’s home equity line of credit program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How to Refinance a Texas Home Equity Loan on Your Homestead · How to Refinance a Texas Home Equity Loan Step by Step · Refinance Rules for Paying Off a Home Equity Loan on a Texas Homestead
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.