Was the HELOC taken out at the time of purchase or subsequently?

It depends on when the HELOC was taken out. If you took out the HELOC at the time of the 1st mortgage when you bought the house, and have not borrowed against it, it's not a cash out. However, if you took it out after your first mortgage, and/or have borrowed against it anytime in the last 12 months, and if you want to combine it with the new first mortgage, then it's considered a "cash out."

If you didnt take the 2nd mortgage at time of purchase but got it later and pulled "cash out", that's why Fannie Mae, Freddie Mac consider it cash out.FHA considers it cash out if you havent used it in the last 12 months.