Are Home Equity Lines of Credit (HELOCs) Allowed in Texas?

A Home Equity Line of Credit, or HELOC, offers homeowners a flexible way to tap into their home’s built-in value. Unlike a traditional loan that provides a lump sum upfront, a HELOC functions as a revolving line of credit, allowing you to borrow funds as needed, up to a set limit. Many homeowners find this useful for ongoing projects or unexpected expenses. While HELOCs are commonly available across the United States, Texas has distinct laws governing them. The good news for Texas homeowners is that HELOCs are permitted, subject to specific constitutional provisions designed to protect consumers.

Understanding Texas Home Equity Laws

Texas has a unique legal framework for home equity loans, including HELOCs, primarily rooted in Article XVI, Section 50 of the Texas Constitution. This constitutional provision imposes specific requirements and limitations that differ significantly from other states, reflecting a strong emphasis on homestead protection. These regulations ensure that homeowners are not over-leveraged and retain substantial equity in their property.

One primary restriction is the 80% Loan-to-Value (LTV) limit. The combined total of all debt secured by the homestead, including the first mortgage and the home equity loan or HELOC, cannot exceed 80% of the home’s fair market value as determined by an appraisal. Additionally, Texas law permits only one home equity loan, which includes a HELOC, to be outstanding on a homestead at any given time. If a homeowner wishes to obtain another home equity loan, the existing one must be paid off first.

Furthermore, a HELOC cannot be used for a cash-out refinancing of a prior home equity loan within 12 months. The law also prohibits prepayment penalties. Fees associated with a home equity loan are capped at 2% of the original principal amount, although certain third-party costs like appraisals, surveys, and title insurance are excluded from this cap.

Texas law also mandates a minimum initial draw amount for HELOCs. Borrowers are prohibited from using credit cards, debit cards, or unsolicited pre-printed checks to obtain advances from their HELOC. Lenders are required to provide specific disclosures to the borrower, outlining their rights and terms. A lender cannot require additional collateral beyond the homestead property to secure the HELOC.

Qualifying for a Texas HELOC

To qualify for a HELOC in Texas, homeowners must meet both general lending criteria and specific requirements mandated by state law. Lenders evaluate an applicant’s creditworthiness, including their credit score. While minimum scores vary, a score in the mid-600s is considered, with higher scores leading to more favorable interest rates.

Income and employment verification are important for qualification. Lenders assess a borrower’s stable income and employment history to ensure they can manage the debt obligations. This involves submitting recent pay stubs, W-2 forms, and tax returns for the past two years. Self-employed individuals may need to provide additional documentation such as profit and loss statements or 1099 forms.

Another key factor is the debt-to-income (DTI) ratio, which compares your total monthly debt payments to your gross monthly income. Lenders prefer a DTI ratio no higher than 43% to 50% for HELOCs, indicating a manageable level of existing debt. The property’s appraised value is a central element in determining the maximum loan amount available. Because of the 80% LTV rule, the appraised value directly impacts how much equity can be accessed through the HELOC.

The property must also be the borrower’s homestead. This ensures the loan adheres to the constitutional protections afforded to homesteads in Texas. Investment properties or second homes are not eligible for a HELOC under Texas law.

The Application and Closing Process in Texas

The process of applying for and closing on a HELOC in Texas involves several steps, each influenced by the state’s specific regulations. The process begins with the initial application submission, where borrowers provide personal, financial, and property details. This includes gathering necessary documentation such as proof of identity, income verification, current mortgage statements, and property insurance details.

Following the application, an appraisal of the property is conducted to determine its current market value. This appraisal is important for calculating the available equity and ensuring compliance with the 80% LTV limit mandated by Texas law. The cost for a full appraisal ranges from $350 to $700, and the timeline for completion is between 3 to 10 days.

A mandatory 12-day waiting period is enforced between the time the loan application is submitted and the actual closing of the loan. This “cooling-off” period is designed to provide the borrower ample time to review the loan terms and reconsider their decision. Specific disclosures must be provided to the borrower before closing, detailing the fees, interest, and other charges.

Texas law dictates requirements for the closing location. The closing must occur at the permanent physical address of the lender’s office, an attorney’s office, or a title company. It is prohibited for the closing to take place at the borrower’s home. After the closing, borrowers have a 3-day right of rescission. Loan proceeds cannot be disbursed until this rescission period has expired.