State laws in Texas regulate home equity lending. The laws were designed to protect state residents from taking out risky home equity loans.
Now, federal laws provide similar protections for borrowers, but Texas’ unique regulations remain in place, making home equity borrowing different for Lone Star State homeowners.Â
Homeowners who want to unlock the power of their home equity in Texas should know about these rules before applying for a home equity loan.Â
How do Texas home equity loans work?
In any state, home equity loans convert a home’s real estate wealth into cash. The homeowner can spend the cash on anything, from an exotic vacation to a college education to a major home renovation.Â
But it’s not free cash. To get the loan, the borrower promises to repay the money with interest. If the borrower doesn’t repay as agreed, the lender could take the borrower’s home and sell it to pay off the loan.
Most of the time, this arrangement works well. The homeowner uses the needed cash and then repays the loan as agreed. The lender receives repayment with interest and earns a profit. When the loan balance reaches $0, the lender releases its claim on the home.
But things can go wrong. For example, what if a lender were to approve a loan that exceeded the home’s value? The home would become a liability for the homeowner instead of an asset. Or what if an unscrupulous lender approved a loan with payments the borrower could never afford? That could make foreclosure inevitable. Â
Texas home equity loan laws for borrowers
To protect Texas homeowners from these types of mortgage loans, the state has historically regulated home equity borrowing, following a tradition that existed before Texas joined the U.S. in 1845.
Texas’ lending laws have relaxed over the years, and federal regulations have tightened in the wake of the 2008 housing collapse. As a result, Texas now aligns more closely with other states compared to a generation ago.  Â
That said, Texas lenders and borrowers still follow a unique layer of state laws. These include:
A hard mortgage debt cap at 80 percent of home value
This rule can be more restrictive than it sounds. For example, let’s imagine a $400,000 home with $250,000 remaining on the primary mortgage balance. This home has $150,000 in home equity.
To follow the 80 percent loan to value rule, lenders in Texas can approve a home equity loan of only $70,000. This new $70,000 debt, added to the existing $250,000 debt, brings total debt to $320,000 which is 80 percent of the home’s $400,000 value.
In other states, borrowers might qualify for a larger home equity loan on the same home.
Waiting at least 12 days between applying and closing
To follow federal law, lenders must provide a Loan Estimate within three business days of the loan application. This document shows the mortgage loan’s upfront and long-term costs. Then the lender must wait three more days before closing the loan.
Texas homeowners have more time to consider a home equity loan’s terms and costs. Home equity loans in Texas won’t close until 12 days after the loan application date.Â
Allowing only one home equity loan at a time
In other states, homeowners could hold more than one home equity loan at a time, assuming they have enough home equity, have the credit score to qualify, and earn enough income to make monthly payments on multiple loans.Â
For example, homeowners who already have a fixed home equity loan could add a home equity line of credit (HELOC).Â
In Texas, homeowners can add only one home equity loan to a home. The loan could be either a HELOC or a home equity loan.Â
Allowing only one home equity loan per year
Texas homeowners can’t open more than one home equity loan per year.Â
This isn’t a big deal to most homeowners, but it does affect some would-be borrowers. For instance, someone who flips investment properties might use a home equity loan to finance a renovation project. When the flipped home sells, they could pay off the home equity loan.Â
In most states, the borrower could then repeat this process for another investment property. In Texas, this borrower would need to wait a year before taking out the next home equity loan.Â
Capping loan fees at 2 percent of the loan amount
This part of Texas law helps borrowers avoid excessive lender’s fees. For a $100,000 loan, lender fees couldn’t exceed $2,000. Fees charged by third parties such as home appraisers, title companies, and surveyors have been excluded from this cap.
Additional Texas home equity loan rules to know about
Texas borrowers should also know that:
— The home equity loan must be closed in person, not online, and the borrower must attend the closing. The closing can happen at the office of the lender, the closing attorney, or the title company.
— Loan funds will not be available until three business days after closing. During this three-day period, the borrower can back out of the loan. This three day recission period starts after the 12-day waiting period between loan application and loan closing.
— The lender cannot require the borrower to use loan funds to pay off other debts held by the same lender.
— Texas borrowers can use a new home equity loan, known as a 50(f)(2) loan, to refinance an existing home equity loan, but they must keep the first loan at least a year before applying for the refinance.
— Lenders must be licensed by the state Department of Savings and Mortgage Lending and the Texas Office of Consumer Credit.
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Types of home equity loans available in Texas
As Texas and federal laws have aligned more in recent decades, Texas borrowers can access most of the same loan products available for accessing their home equity. These include:
Home equity loans
Home equity loans resemble a home’s primary mortgage: They usually have a fixed interest rate and level payments. Borrowers receive a lump sum of money from equity. These loans are often called second mortgages.Â
While laws require a 12-day waiting period between loan application and closing, Texans don’t have to wait that long to see their options. Better’s all-online application process can show loan offers within a few minutes.  Â
Home equity lines of credit (HELOC)
Home equity lines of credit use the value of a home to secure a revolving credit line. HELOCs usually feature a variable interest rate, and borrowers make payments only on the amount drawn from the credit line. In a sense, they work like credit cards except with much lower rates, thanks to the security of home equity.
Usually after 10 years, the credit line expires and the remaining balance converts to a fixed home equity loan.Â
Cash-out refinances
In Texas, cash-out refinances are called Section 50(a)(6) or “A6 loans.” Like other cash-out refinances, these loans combine primary mortgages and home equity loans into one loan.Â
For example, let’s imagine that $400,000 home again. This homeowner owes $250,000 on the primary mortgage and has $150,000 in equity. An A6 loan on this home would include enough to pay off the $250,000 mortgage along with extra cash from equity.
Texas’s 80 percent rule still applies, capping this refinance size at $320,000, which is 80 percent of the $400,000 home value. This means the borrower could pocket $70,000 on closing day after the existing $250,000 loan gets paid off. Then, the homeowner makes one mortgage payment, on the $320,000 loan, instead of making two separate loan payments.
Texas A6 loans are conventional cash-out refinances. Loans backed by the federal government, including FHA and VA loans, will not qualify. Also, on a home financed by an A6 loan, the homeowner can’t add a home equity loan or HELOC later.Â
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Pros and cons of Texas home equity loans
As in any state, home equity loans in Texas have pros and cons for borrowers:
Texas home equity loan pros
— Lower interest rates: Compared to personal loans or credit cards, home equity loans can offer significantly lower interest rates. The security from using home equity as collateral reduces the risk for the lender, making lower rates possible.
— Larger loan sizes: Even with the 80 percent loan to value (LTV) cap on loan sizes, home equity loans can be larger than unsecured loans.
— Flexible borrowing: Texas laws once required home equity loan funds to be spent on home improvements. This is no longer true. Borrowers can use the money for any need. They can consolidate other debt, for example.
— Tax benefits: When funds from a home equity loan pay for home improvements to the home itself, interest on the loan can be deducted from income taxes.
— Strong consumer protections: Stricter home equity laws protect homeowners from getting in too deep on a home equity loan, jeopardizing the home. Â
Texas home equity loan cons
— The lien: The lien on the borrower’s home allows larger loan sizes and lower interest rates, when compared to unsecured loans. But the lien also means borrowers who fail to repay a home equity loan could lose their home. Homeowners should use equity to build a more stable future; not to pay for temporary needs.
— Limitations: Texas laws no longer limit the way homeowners can use home equity funds, but state rules can still limit borrowing. For example, a homeowner with only 20 percent equity can’t leverage that borrowing power. Â
— Market fluctuations: Despite Texas’s limitations on home equity loans, borrowers can still get in over their heads and risk losing the home. If housing values declined, a large home equity loan could leave a home too heavily mortgaged.
How are home equity loan interest rates in Texas?
Home equity loan interest rates in Texas typically resemble national averages. Of course, each individual borrower’s rate is unique to the borrower. Rates depend on the borrower’s location, credit profile, and income level.
The loan’s size in relation to the home’s value and the loan’s term also affect borrowing rates.
What’s the best way to see what rate you might qualify for? A pre-approval. Better’s pre-approval does not require a hard credit check and can show results in as little as three minutes.
Texas home equity loan requirements
Attaching the loan to the borrower’s home equity lowers the risk lenders take with home equity loans. This opens the door to lower interest rates for borrowers.
But having enough home equity won’t guarantee loan approval. Other requirements include:
— Credit score: FICO 620 is the minimum credit score requirement. Depending on the other requirements, lenders may want to see a credit score of 720 or higher
— Debt-to-income ratio (DTI): This ratio compares the borrower’s debts to their income. Lower debt ratios are better. A ratio above 36 percent may be too high.Â
— Source of income: Lenders like borrowers with steady, reliable sources of income. Someone who’s worked the same job for at least two years and has W2 forms to document this income usually meets this definition.Â
— Extra equity: In Texas, at least 20 percent of the home equity must remain unborrowed, but leaving more equity untouched can make the loan even more secure. A new home appraisal must verify the home’s value.
These qualifying rules can be interdependent. For example, a borrower whose DTI is a little too high might compensate by showing an excellent credit score or by applying for a loan that leaves 50 percent equity untouched.
Better's Home Equity Loans stretch wealth farther
A home equity loan can tap wealth that’s stored up in a home, allowing homeowners to leverage the home without selling it.Â
Homeowners make their wealth go farther when they find a lender that offers competitive rates and low fees.
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