Texas has a history of having some of the strongest debtor protection laws in the country. This arises out of the fact that large numbers of the original settlors in the 1800s came from other states where they were economically oppressed by heavy debts and debt collectors. Texas became a ‘debtors haven’. The early laws gave great protection against debt collectors to the extent that Texas Constitution of 1845 prohibited the incorporation of banks, and put your home or farm off limits to many types of debt collection remedies. It wasn’t till 1905 that Texas law allowed for the charter of state banks.
This legacy has survived to the present day, in two important factors. Texas law prohibits garnishment of wages, and protects one’s home (homestead) from being foreclosed, to pay debts, EXCEPT FOR, specific obligations listed in Article 16, Section 50 of the Texas Constitution. Allowable loans include purchase money mortgages and loans to finance home improvements. Article 16 puts strict limitations and conditions on the types of loans and indebtedness where a homestead could be used as collateral.
Over the years, Article 16 allowable types of indebtedness have increased. In 1997 Texas, for the first time, allowed homeowners to use the equity in their home as collateral for unrestricted cash borrowing. There are significant limitations on this type of loan, the most important being that a home equity loan plus other secured indebtedness (balance due on a mortgage and/or home improvement loan) cannot exceed 80% of the equity in the home.
In foreclosure proceedings, compared to a standard purchase money mortgage, for a home equity loan, a lender must go through additional procedural steps to foreclose and the borrower is allowed additional rights to challenge a foreclosure.
In addition to the home equity loan being allowed in 1997, Texas, permitted reverse mortgages for persons over 62. Reverse mortgages are a form of home equity loan and will be dealt with separately in a subsequent posting.
For more information on home equity loans go to: https://www.cutx.org/financial-advice-and-information/home-improvement/how-texas-home-equity-loans-work
If you need advice concerning a home equity loan, contact The Law Office of Elliott Klein, PLLC.