Things aren't always bigger in Texas. To the delight of its homeowners, the Lone Star State boasts some of the country's strongest curbs on home equity lending. These effectively reduce the size of the average Texas home equity loan and foster a range of safeguards for local homeowners who wish to tap the equity in their homes without taking on undue risk. At the same time, it's crucial for homeowners to understand their responsibilities as borrowers and take steps to minimize the risk of unpleasant surprises.
A Brief History of Home Equity Loans in Texas
Texas has a singular relationship with the home equity lending industry. The state banned home equity loans as late as 1997 and continues to subject lenders to far stricter constraints than most other states. This stems from Texas's longstanding protection of homesteading rights and the unique title structure that governs all private property transactions within the state.
In 1997, the Texas Constitution's Section 50 gave home equity lenders the right to operate within the state on a limited basis. Section 50's provisions are exceedingly strict, and lenders that fail to follow them can face serious penalties. In the most extreme case, lenders may be forced to forfeit the principal and interest balances on non-compliant loans.
Unique Attributes
Since home equity lending became legal in Texas, the state's industry has had to follow some unique rules. These include:
- Restrictions on the total value of mortgage debt: Homeowners can't owe more than 80 percent of the market value of their home on combined mortgage loans and home equity vehicles. As a given homeowner's equity increases, the amount that he or she may borrow against the home increases.
- Limits on leverage: Borrowers are permitted to take out just one loan per year and aren't permitted to obtain secondary loans before repaying a primary home equity loan.
- Land use issues: Agricultural land can't be used to secure a home equity loan.
- Time limits and foreclosure restrictions: After closing on a loan, borrowers enjoy a three-day grace period during which they can cancel receipt of the loan at any time. Also, lenders can't unilaterally initiate foreclosure proceedings against delinquent borrowers.
Overall, these rules are designed to shield borrowers from predatory lending practices and reduce the prevalence of over-leverage.
Recent Changes to the Law
A recent Texas Supreme Court decision has strengthened the state's homeowner-protection laws even further. These decisions resulted in three principal changes to Section 50:
- Closing notices: Home equity loans can't be closed until 12 days after the borrower receives the lender's official "notice of rights."
- In-person closing: Borrowers are no longer permitted to close home equity loans via power of attorney privileges. Henceforth, borrowers must personally supervise closings at the office of the lender, the lender's attorney or the borrower's title holding company.
- Caps on front-end fees: Lenders aren't permitted to charge front-end fees of more than 3 percent on home equity loans. Front-end fees include prepaid interest payments but exclude "traditional" interest payments.
Cautions and Caveats
Texas takes good care of its landowners, but local borrowers shouldn't assume that they have carte blanche to abuse their home equity loans. While the state prohibits the forced sale or seizure of homestead properties by unsecured creditors, it allows home equity lenders to initiate court-approved foreclosure proceedings on delinquent borrowers. Before taking out a loan, homeowners should carefully determine how much they can afford to borrow and make a strict budget for repayment purposes. Thanks to Texas's robust homeowner-protection laws, borrowers who keep this information in mind should find their home equity loans manageable.
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