Texas Home Equity Laws and Restrictions: Why HELOCs are Uncommon in the Lone Star State
Apr 27, 2023
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Texas has a strong regulatory system protecting consumers, which manifests in various ways, including unique laws governing home equity lending. Stemming from the state's long-standing protection of homesteading rights and its unique title structure governing all private property transactions, these laws impact financial products like home equity loans, home equity lines of credit (HELOCs), and cash-out refinances. In this comprehensive guide, we'll delve into the Texas home equity laws, explore the reasons behind the scarcity of HELOCs in the state, and discuss the restrictions that the legislation imposes.
A Brief History of Home Equity Lending in Texas
Unlike other states, Texas didn't allow home equity loans until 1997. Even after permitting these types of loans, the state's legislation restricts the loan size to protect homeowners from taking on undue risk. These restrictions and provisions are outlined in the 1997 Texas Constitutional statute known as Section 50.
Key Texas Home Equity Laws and Restrictions for Borrowers
Understanding Texas home equity laws can help you plan how and when to use your home's equity. These laws apply to home equity loans, home equity lines of credit, and cash-out refinances.
- Limited equity usage: Texas law restricts homeowners from using more than 80% of their home's equity. This limitation helps prevent consumers from taking on undue risk.
- One outstanding equity loan at a time: Texas law allows only one home equity loan or one cash-out refinance loan at a time. Homeowners must pay off the first loan before obtaining another.
- Twelve-month waiting period between loans: Even after repaying a home equity loan or cash-out refinance, Texas homeowners can only tap into their equity once per year.
- Minimum 12-day waiting period to close a loan: Loans cannot legally close sooner than 12 days after the borrower applies and receives official notice of borrowers' rights.
- Primary residence requirement: In Texas, you can only borrow against the property (one to four family units allowed) in which you live, not your second home or rental property.
Home Equity Lending Restrictions for Lenders in Texas
It's essential to understand the specific laws that lenders must follow when it comes to home equity loans and HELOCs.
- Fee limitations: Texas laws cap lender fees at 2% of a loan's principal. Survey, appraisal, and title fees are not included.
- No additional collateral requirements: A lender can't require homeowners to put up other valuables, such as cars, boats, or art collections, as collateral to secure a home equity loan.
- Lender licensing requirements: With very few exceptions, only authorized lenders may provide equity loans in Texas.
The Impact of Texas Home Equity Laws on HELOC Availability
The restrictions and provisions outlined by Texas home equity laws have contributed to the scarcity of HELOCs in the state. The limitations on borrowing against equity, waiting periods, and other regulations make HELOCs less accessible to Texas homeowners compared to other states. As a result, many homeowners in Texas seek alternative financial solutions, such as home equity loans and cash-out refinances.
Conclusion:
Texas home equity laws, with their unique restrictions and provisions, have resulted in fewer HELOC options for homeowners in the state. Understanding these regulations is vital for those looking to tap into their home's equity. Despite the limitations, Texas homeowners still have access to alternative financial products like home equity loans and cash-out refinances, which can provide valuable financial support for various purposes.
Hitch, Inc. NMLS #2383367 #2383367
2158 NW Toussaint Drive. Bend, Oregon 97703
1. Qualified applicants may borrow up to 95% of their home’s value. This does not apply to investment properties.
2. HELOCs have a 10-year draw period. During the draw period, the borrower is required to make monthly minimum payments, which will equal the greater of (a) $100; or (b) the total of all accrued finance charges and other charges for the monthly billing cycle. During the draw period, the monthly minimum payments may not reduce the outstanding principal balance. During the repayment period, the borrower is required to make monthly minimum payments, which will equal the greater of (a) $100; or (b) 1/240th of the outstanding balance at the end of the draw period, plus all accrued finance charges and other fees, charges, and costs.The lender will calculate this amount by taking the outstanding Account Balance on the last day of the draw period and dividing it by 240 months and then adding any finance charge that accrues but remains unpaid during the monthly billing cycle plus any other fees, charges and costs to the fixed principal payment that is due. During the repayment period, the monthly minimum payments may not, to the extent permitted by law, fully repay the principal balance outstanding on the HELOC. At the end of the repayment period, the borrower must pay any remaining outstanding balance in one full payment.
3. The time it takes to get cash is measured from the time the Lending Partner receives all documents requested from the applicant and assumes the applicant’s stated income, property and title information provided in the loan application matches the requested documents and any supporting information. Most borrowers get their cash on average in 21 days. The time period calculation to get cash is based on the first 4 months of 2024 loan funding's, assumes the funds are wired, excludes weekends, and excludes the government-mandated disclosure waiting period. The amount of time it takes to get cash will vary depending on the applicant’s respective financial circumstances and the Lending Partner’s current volume of applications. Closing costs can vary from 3.0 - 5.0%. An appraisal may be required to be completed on the property in some instances.
4. Not all borrowers will meet the requirements necessary to qualify. Rates and terms are subject to change based on market conditions and borrower eligibility. This offer is subject to verification of borrower qualifications, property evaluations, income verification and credit approval. This is not a commitment to lend.
5. The content provided is presented for information purposes only. This is not a commitment to lend or extend credit. Information and/or dates are subject to change without notice. All loans are subject to credit approval. Other restrictions may apply.