One of the advantages of living in Texas is its strong regulatory system protecting consumers. This manifests itself in many ways, including the unique laws governing home equity lending.
These laws in particular stem from the state’s long-standing protection of homesteading rights and its unique title structure governing all private property transactions. You might not know much about these statutes, but you may be familiar with the financial products that they affect— home equity loans and cash-out refinances.
Unlike other states, Texas didn’t allow home equity loans until 1997. Even after allowing these kinds of loans, Texas legislation restricts loan size so homeowners seeking to leverage their equity don’t inadvertently take on undue risk. All of these restrictions and provisions are outlined in the 1997 Texas Constitutional statute known as Section 50. You don’t have to read pages of complicated legislation to understand the basics—we have a simplified version right here.
Texas Laws Regarding Home Equity Loans for Borrowers
Knowing Texas home equity laws can help you plan how and when you use your home’s equity. These laws apply to home equity loans, home equity lines of credit, and cash-out refinances.
1. You cannot use more than 80% of your home’s equity.
Remember how we said these laws prevent consumers from taking on undue risk? One big part of this is limiting the amount of home equity that a person can borrow against. Texas law sets this at 80%. So, for example, if you have a home that is worth $200,000, and you don’t have a mortgage (you have paid off 100% of your home), the largest home equity loan that you could obtain would be 80% of the value, or $160,000.
Let’s say you still owed $60,000 on your mortgage—the maximum that you could take out would be a $100,000 loan.
Here’s our math:
$200,000 [Home Value] x 80% (maximum loan allowed) - $60,000 [Amount still owed] = Home Equity Loan Amount
What you owe on your mortgage and what you owe on a home equity loan must be less than 80% of the home’s value. This means that in order to take out a home equity loan, HELOC, or a cash-out refinance, you need to have 20% equity in your house, at a minimum. And, the more equity you have, the more you can borrow.
2. You can only have one outstanding equity loan.
Texas law permits that you can only have one home equity loan or one cash-out refinance loan at a time. If you want to get another loan, you’ll have to pay the first one off first.
3. You can only take out one equity loan every 12 months.
Even if you repay your first home equity loan or cash-out refinance, you are still only permitted to tap into your equity once per year. This is important to keep in mind if you think you might need another loan a few months down the road.
4. Loans cannot close sooner than 12 days from when you apply.
Because of requirements surrounding fact-checking, loans cannot legally close any sooner than 12 days after the borrower applies and receives official notice of borrowers’ rights.
That said, the loan-approval process generally takes a minimum of 30 days, which is something to note if you must have your funds by a particular date. Overall, the process remains less labor-intensive than applying for a mortgage.
5. You can only take out a home equity loan on your primary residence.
Thinking of taking out a home equity loan on your investment property? Think again. 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 Laws for Lenders
It also helps to know specific laws that lenders must follow.
1. Lenders can only charge you 2% of the loan amount in fees.
The Texas laws cap lender fees to 2% of a loan's principal. Survey, appraisal, and title fees are not included.
Additionally, lenders are required to provide an itemized list of all fees, points, principal, and interest to be charged by no later than the day before closing. Borrowers may waive this requirement with written consent.
2. Lenders can’t require any other collateral.
A lender can’t require you to put up other valuables like your car, boat, or art collection as collateral to secure your home equity loan.
3. Lenders must be licensed to provide home equity financing.
With very few exceptions, only authorized lenders may make equity loans.
Home Equity Loan Repayment and Closing Guidelines
Lastly, it’s important to know your rights when it comes to closing and repaying your home equity loan.
The loan must be closed only at the permanent office of a lender, title company, or attorney. The borrower themself (not a representative with power of attorney) must attend loan closings.
After closing, borrowers have a three-business day grace period for cancellation without penalty or charge. In accordance, loan proceeds can’t be delivered until three days after closing.
Home equity loans can be paid off before they’re due without penalty or extra charge.
Home equity loans cannot be converted to other types of loans.
The lender can’t require the borrower to apply loan proceeds toward other debts not tied to the home equity. The borrower may use proceeds for any lawful purpose.
Lenders can’t require a loan to be paid earlier than agreed upon based on the home value decreasing or the borrower defaulting on another loan.
Lenders may legally charge fixed or variable interest on home equity loans. Your interest rate should be clear and understood when you close.
If you have any questions regarding the repayment requirements for your home equity loan, be sure to speak with your lender prior to closing so you fully understand your obligations.
Use Your Home Equity to Meet Your Goals
A home equity loan can be a useful financial tool that can help you meet your goals, whether you’re funding a home improvement, consolidating debt, or anything in between. However, anytime you take out a loan, it’s important to understand the risks and relevant laws involved— and home equity loans are no exception.