While this article is geared for people residing in Texas, others may be interested in the very different lending laws found in that state. By and large, the loan process, rules and regulations vary very little from state to state and if you can make a loan in Florida you can make one in California. Hawaiians also have a few laws that lenders need to be well versed in, but for this article we are going to just focus on Texas.
Texas equity laws are just convoluted enough that most homeowners themselves are not aware of them, or if they were at one time well versed in the laws, they usually forget by the next time they refinance.
I also know that there are a number of lenders who will not make loans in Texas due to those very laws, or if they will do the loans it has to be originated by a specially trained loan officer living in Texas. Although I live in California and worked in California while I was a Mortgage Consultant I worked for one of the few companies that allowed its loan officers to do business in Texas. Now, having said that, most loan officers will do one loan there and swear never to do another, leaving it up to more experienced loan officers.
For a while I specialized in lending in Texas so I am going to try to give you a rundown of some of the differences in lending practices for the state. Most of the confusion has to do with current equity laws that are fairly new and many homeowners have had no reason to familiarize themselves with those laws. Prior to 1997 Texas homeowners were not allowed to take equity out of their house. Home equity loans were not possible there so that means you cannot take out a second loan to help with the purchase of the home. It all has to be done with a single loan and cannot be used to have any cash out or pay off any debt. That was pre-1997. Post-1997 is a different story altogether.
Now that 1997 has come and gone homeowners are allowed to do some of the very basic things that people in every other state has been doing for decades. People in Texas can do a cash-out loan. They can pay off debt with their refinance. If they need a second to buy the home it is now possible. There are some tight restrictions though.
Part two on Texas Equity
Now I will get into the specifics of the laws governing borrowing in Texas. Let me say first off I am not a lawyer but I do know through trial and error how to borrow in Texas. When you do decide to borrow keep these laws in mind and speak to a lender physically in Texas and they will have a lawyer who really knows the law.
First of all, if one is doing a cash out refinance, one can only borrow up to 80% of the value of the home, and no more. That restriction right there will derail a good many loans, especially non prime deals. And the term for that kind of loan is Texas Equity. Borrowers in Texas are able to borrow more than 80% of the home’s value within certain guidelines. Let’s say it is 2009 and you are doing a refinance and need to borrow 85% in order to make the deal work. That is all well and good as long as you have never, in the past, taken any cash out for any reason.
If you did a refinance in 2006 and took out $3000 to remodel your bathroom, you cannot exceed 80% in your new loan, nor can you ever exceed it in the future. If you bought the home in 2000 and had to have a second to get into the home, you can never go above the 80% ceiling to refinance again. So, even though Texas Equity is allowed, its restrictions make it tough going. When you are doing a refinance it is a good idea to provide you lender with past closing statements to show that cash was never taken out of the home. If your docs show that four years ago you did a refi and you wound up with $287 in cash out, you now fall into the new rules governing Texas Equity.
These laws were put into place to protect borrowers, but many of them feel that they are too restrictive, inhibit borrowing and can lead to disastrous consequences. Shouldn’t Texas catch up with the 49 other states that allow them to use equity built up in their home? Of course you hear in other states of the nightmares created by equity stripping, and that is part of what Texas is trying to prevent. But what about the family that needs to refi out of an ARM before it resets to a level they cannot afford? They may need to go o 87% to make the loan, but Texas says you can’t. Laws put in place to help borrowers are now a thorn in people’s sides as they try to salvage their lives amidst our disastrous economy.
The company I worked with had their own guidelines for lending in Texas. One had to do with having a lawyer review any loan to check for violations of Texas Equity laws. There is also a 12-day quiet period (Texas laws) that begin when the lender mails out disclosures, and no one can contact the borrower in any way during those 12 days.
There are also some other laws governing home equity loans, like the one that restricts borrowers to one home equity loan a year, or one that says borrows can only have one home equity loan open at a time. So much for the people who would need a first a second and a third to get into a house , like many Californians.
Lenders are prohibited to charge more than three percent of the principal amount of the loan. At first look this sounds great. It sounds like the law is protecting borrowers from predatory lending practices. In reality it prevents lenders with inexpensive homes to get a loan. There are a number of expenses involved in closing a loan and can seem insignificant when the loan is a half a million dollar loan. However, if you have a $25 thousand dollar home those expenses easily can add up to more than 3% of the loan amount and you cannot make the loan, even if the borrower wants to. I have had this problem before and you get the lender to slash expenses, you get the title company to cut its fees and you even hit up the appraiser to cut his fee, and when it’s all said and done you still can get below 3%.
There are other laws we won’t get into, those will be handled by the lender and the lawyers who are doing the deal. The ones I have covered I learned by experience, took my lumps, took notes and jumped back in the fray. I soon became the authority on lending in Texas and all the states loans came to me.
If you are a homeowner in Texas make sure you talk to a lender in Texas, and I don’t mean a national lender that can lend in the state, but actually talking to someone in Texas, that way you know you are talking to someone who knows the laws.
Good luck and happy financing.
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