The constitutional amendment has changed certain options for the refinancing of home equity loans.  These options include (1) lowering the cap on home equity-loan related fees from 3 percent to 2 percent but excluding certain additional fees from counting towards the cap (2) refinancing of a home equity loan with a purchase money loan (3) changing the threshold of the amount of advances on a home equity loan as long as the principal amount remains below 80% of the fair market value of the home (formerly was below 50% of market value) ;  (4) allowing home equity loans against agricultural properties and; (5) establishing certain authorized lenders to make a home equity loan.

Fee Caps

The fee cap has been reduced from 3 percent of the original principal amount of the loan to 2 percent. However, certain fees are now excluded from this cap like the appraisal report, property survey, title insurance premiums, and title examination fees.   

These changes were brought forth to address problems with the old fee cap of 3% which included all third party fees that typically do not go to lenders like: appraisal, title policy, property survey, title examination. This was problematic for consumers with homes in rural areas, and with loan amounts at or below $100,000.00. Structuring a loan with a fee cap of 3% to include third party fees was difficult, meaning it would cost the lender money to close the loan. Consumers continue to have the same protection extreme fees and have more options to choose from.

Refinancing changes

Home Equity loan with Purchase money loans would allow consumers to borrow perhaps at a lower rate and have one payment on the total amount borrowed. This increases consumer choice by allowing the refinancing of two types of loans into one home-equity or non-home equity loan with one rate and one term provided certain restrictions are met for the loan being refinanced:

(a) Is not closed before the first anniversary of the closing date of any other home equity loan secured by the same homestead property;

(b) cannot provide any additional money to the borrower other than to cover the costs of the refinancing;

(c) cannot exceed 80% of the fair market value of the house at the time the homestead on the date of the extension of credit is made;

(d) the lender must provide a special notice to the borrower about the rights associated with a home equity or non-home equity loan 12 or more days before the date of the refinance.

• Home Equity loans to Non-Home Equity loans

Previously, Texas Home Equity laws encompassed the idea of “once-a-home-equity loan, always-a-home-equity-loan” so that homeowners who borrowed against the equity in their homes would have certain protections.  Now, consumers who wish to refinance as a non-home equity loan, must now take any cash advances and wait a year before refinancing.  The standard limit used for home equity loans of 80% of the home’s value remains the same.

Consumers would need to receive a notice that clearly explains the difference in the two types of loans so that they could make an informed choice. The notice would include a statement that the new loan would permit lenders to foreclose without a court order and that lenders would have recourse against other assets. Existing Home equity borrowers interested in refinancing their loans can continue to do so with a new home equity loan that carries with it all the protections enabling the consumer have more flexibility.

• Home Equity Lines of Credit

The proposed amendment would eliminate the restriction of 50 percent limit on the amount that can be outstanding on a Home Equity Line of Credit.  As a result, consumers are unable to access funds for which they were previously approved requiring owners to repay funds in order to access the remaining line of credit. The change would limit loans to 80 percent of the fair market value, making them consistent with regular home equity loans and protections.

• Agricultural Exemptions

The original home equity laws prohibits owners of larger farms and ranches to obtain home equity loans,  but Proposition 2 now allows homeowners on agricultural properties to enter into a voluntary lien to secure a home equity loan just as other Texans. 

Approved Lenders

The bill has updated the approved lenders that can make Home Equity loans, and including mortgage bankers, mortgage companies, including subsidiaries of entities that can already make loans including banks, savings and loan associations, savings banks, and credit unions.  All of the lenders added are highly regulated and held to the same standards as those who make loans now.

Hard money lenders can make Home Equity loans but must be licensed to do so.

The State of Texas legalized home-equity loans in 1997 with some of the nation’s toughest limits on how much a person could borrow. 20 years later, Proposition 2 has established a lower amount for expenses that can be charged to a borrower and removing certain financing expense limitations for a home equity loan, established certain authorized lenders to make a home equity loans, changed certain options for the refinancing of home equity loans, changed the threshold for an advance of a home equity line of credit, and allows home equity loans on agricultural homesteads.

The aforementioned comments are our interpretation of the changes delineated in Proposition 2.  One should not rely on our interpretation of the law but seek the advice of an attorney.

We are a hard money lender a/k/a asset based lender and we’re, therefore, not qualified to tender a legal opinion.