Texas Home Equity Loan

The Texas home equity loan laws are fairly new, just passed in 1997 through a constitutional amendment, and they are backed by very strong consumer protections. The competition for customers who want home equity loans is very active, and these loans are in demand even though Texas interest rates that average 6.24% to 8.25% are a little higher than the national average of 5.16% for home equity interest rates.

Texas has placed some strong limitations on the conduct of home equity lenders, and protections for the borrowers. The laws are complex enough that it may be advisable to ask a Texas real estate attorney to work with you in reviewing any documents for correctness and legalities of the agreement.

For consumers, there are special protections regarding a homestead:
• Creditors cannot claim against a borrower’s homestead in most situations other than home equity loans.
• Under home equity lending in Texas, the lender may foreclose and you could then lose your homestead. The home must be used as collateral for the home equity loan but nothing else may. If the home is foreclosed, lenders cannot sue for anything else.
• Borrowers are only allowed to have one home equity loan at any one time, once per year. Home equity loans cannot be converted to another loan of any type. The limitation is 80% of the home value on the current market. This includes all mortgages on that home, and not just home equity borrowing. Home equity loans cannot be taken on agricultural lands or open space lands.
• Lenders who provide home equity loans in Texas must be licensed by the state. The only unlicensed persons who can provide this type of loan would be either the property seller or a relative of the borrower.
• Borrowers can only be charged expenses that are loan fees and interest, plus some closing expenses and document fees.

There are some important time constraints with Texas home equity loans:
• Borrower must receive a complete closing statement a day in advance of the closing date that includes all disclosures of charges, points, interest, fees and other costs, unless there is an emergency. If they do not get it in time, the closing is delayed, which can add costs. Documents may require re-drafting, or an important interest rate lock may be lost.
• There must be 12 days from the time the borrower makes application for the home equity loan and closing. The same applies to receipt of the special notice of borrower’s rights. The borrower has 3 days in which to change their mind and cancel. There is no penalty applied if they cancel.

Lender restrictions include:
• Extra fees and costs cannot exceed 3% of the loan principal.
• Lender can only require the borrower to apply loan proceeds to a previous debt that had been secured by that homestead, or any other lender.
• Home equity loans cannot be closed anywhere other than at the lender’s permanent office, a law office, or at a title company office.
• Loan proceeds are held until after the three day cancellation period has passed.
• Any foreclosures under a home equity loan default must be court ordered.