What does Texas law say about home equity loans?

Since January 1, 1998, Texans with sufficient equity in their homestead property have been allowed to use that equity to secure a loan, the proceeds of which may be used for any purpose desired by the homeowner. In most cases, Texans using their personal residence property as security for a home equity loan are able to claim the interest paid on the loan as a deduction from taxable income. If the loan is not repaid, the homestead property may be subject to foreclosure.

For many years, Texans were not allowed to borrow against the equity in their homesteads, largely due to concern that irresponsible borrowing or lending might cause families to lose their homestead properties to foreclosure. In order to protect against such losses, the laws authorizing home equity loans in Texas included a number of safeguards in the form of restrictions on both the borrowers and the lenders. These include:

  • Voluntary consent to the lien by all owners and their spouses.
  • Total borrowing against a homestead property may not exceed 80% of fair market value.
  • Loans are non-recourse to the borrower unless obtained through fraud.
  • Judicial foreclosure process is required.
  • Only one second-lien equity may exist on a property at anytime.
  • Lender may not require any additional security be pledged.
  • Lender may not accelerate the debt or foreclose simply because fair market value of the property has declined.
  • The loan must be repaid in equal monthly installments; no balloon payments.
  • No prepayment penalty is allowed if the loan is paid off early.
  • In most cases, property zoned for agricultural use may not be used as collateral for a home equity loan.
  • Only qualified lenders will be allowed to make Home Equity loans.
  • Home equity loans may be closed only in the office of the lender, a title company, or an attorney.
  • Borrowers may not close a home equity loan until the later of 5 days after receiving a prescribed disclosure notice from the lender, or 5 days after making application.
  • Borrower may rescind the transaction within 3 days after closing without cost.
  • Total fees associated with the loan may not exceed 3% of the loan amount.

Obviously, this is a very general discussion of the restrictions and requirements relating to home equity loans. Certain restrictions may not apply to every loan. If you are considering a home equity loan, you should obtain professional advice before doing so.