Texas provides homeowners with specific laws that keep them safe when engaging with home equity lenders. Learning about Texas home equity loan rules helps you understand how these loans work and what to expect when you apply for one. Learn about the pros and cons of a home equity loan and the types of restrictions surrounding these types of loans.

What Is a Home Equity Loan?

A home equity loan allows you to borrow against the amount of money you’ve already invested in your home’s original loan and the current value of your property. For example, if you bought a house for $100,000, have paid off $30,000 of it, and the property has increased to $110,000, the home equity equates roughly to $40,000.

Home equity lenders give you a lump sum similar to a personal loan. Like your house payment, you have to repay the loan in monthly payments. Your lender will also consider information like your monthly income and credit score to qualify you for your home equity loan.

Pros of a home equity loan include the ability to use it as you wish, with many homeowners choosing to put the funds back into their home for improvements or additions. Others use it to consolidate credit card debt.

Cons include the inability to get a home equity loan due to your credit score or monthly income, regardless of how much equity you have in your home. Lenders must prove that you can safely pay the funds back in.

Texas Laws for Home Equity Loans

Home equity loan requirements in Texas provide a safety net for both the lender and the borrower. Some of the borrower’s rules for home equity loans include:

1. You Can Only Use 80 Percent or Less of Your Home’s Equity

To protect both the borrower and the lender, the state of Texas won’t allow you to take out a home equity loan for more than 80 percent of your home’s equity. This applies even when you have a current loan on your home, meaning that the sum of your equity loan and your current mortgage cannot outstrip more than 80 percent of the home’s total equity.

2. You Can Only Have One Home Equity Loan

Homeowners can only have one home equity or cash-out refinance loan at a time. This rule prevents you from having more lines of credit than you can reasonably afford.

3. You Can’t Take Out More Than One Home Equity Loan Every 12 Months

Regardless of how quickly you pay off your home equity loan, you can only take one out each year.

4. Loans Must Close at Least 12 Days After Applying

Texas home equity loan rules include information collection and verification, often taking at least two weeks if not longer. As such, the state requires that home equity loans remain open until 12 days pass.

5. Only Primary Residences Qualify for a Home Equity Loan

If you do not primarily live in your home, you cannot use it for a home equity loan. Second homes, vacation properties, or rental houses do not meet the requirements for a home equity loan.

Texas Laws for Home Equity Lenders

Just as the state has protection for lenders, borrowers can expect the following from home equity companies:

1. Lenders Can’t Charge More Than Two Percent in Fees

Texas places a cap on home equity loans that make it unlawful for lenders to charge more than two percent on the loan’s principal. While this saves you from incredibly high interest rates, this doesn’t include surveys, appraisals, or title fees associated with procuring the loan.

Lenders must also provide you with an itemized list of all charges including fees and interest payments along with the principal amount.

2. Lenders Can Only Finance You Based on Your Home Equity

Home equity lenders can only loan funds against your home’s equity. They cannot lend you home equity funds against valuable properties like boats, vehicles, or other goods.

3. Lenders Require State Licensure

All home equity lenders must maintain state licensure to continue providing loans to borrowers.

Other Guidelines to Know

While understanding the laws around borrowing and lending home equity loans helps you make an informed decision, other important information includes:

Home equity loans come with a three-day grace period during which the borrower can cancel the loan without any penalties.

Home equity lenders can’t force borrowers to pay a loan earlier than the agreed upon date.

Lenders may use fixed-rate or adjustable-rate loans. The borrower remains accountable for understanding and agreeing to the type of loan provided.

Trying to understand Texas home equity loan rules on your own can prove challenging, so working with the right mortgage company makes all the difference. Call Champions Mortgage in Sugar Land, TX at (281) 727-2500 to learn more about home equity loans in Texas.