Texas has historically been very protective of the homestead rights of its residents — so much so that these rights are set forth in the state’s constitution. Other than liens and judgments that attach under federal law such as federal tax liens, an individual’s homestead may only be encumbered in Texas if it is an encumbrance specifically authorized by the Texas Constitution. As a result, the decision as to whether a property should be classified as the borrower’s “homestead” for purposes of Texas law is important, particularly if the borrower will receive any cash back from the loan. 

Any loan secured by the borrower’s homestead which is structured to provide cash back to the borrower must be treated as a Texas home equity loan or what is often called an “(a)(6)” loan due to the constitutional provision which allows the encumbrance. If a borrower only owns one property in Texas, lenders may choose to allow a borrower to receive cash back on a loan (frequently referred to as a cash out loan) without the loan being documented as an (a)(6) provided the following are true:

• The borrower owns another property outside Texas which is their primary residence;
• The borrower executes an affidavit identifying such out of state primary as their primary residence and disclaiming the Texas property as their homestead (referred to as a Non-Homestead Affidavit);
• The title company will fully insure the transaction as a non-homestead cash out with no homestead exceptions.

As always, we recommend that lenders verify with their investors that this approach will be acceptable and that the resulting loan will be eligible for sale as a non-homestead ‘investment’ cash-out loan.

Borrowers who own multiple properties in Texas may enter into cash out loans on any non-homestead property provided they have disclaimed that property as their homestead. However, if a borrower only owns one property and that property is in Texas, the Texas property will be deemed to be the borrower’s homestead and any cash out loan will be treated as an (a)(6) unless the lender is willing to close it as non-homestead ‘investment’ as described above.