Can You Get a Second Mortgage in Texas?

Texas, known for its strong homestead protection laws, presents a unique landscape for homeowners seeking to leverage their property’s equity. While common in many other states, the concept of a “second mortgage” in Texas is specifically governed by its constitution. It is possible to obtain a second mortgage in Texas, typically as a home equity loan or a home equity line of credit, provided certain conditions are met.

Texas Home Equity Lending Laws

Home equity lending in Texas operates under strict constitutional provisions, primarily Article XVI, Section 50 of the Texas Constitution. These laws safeguard homeowners by limiting how equity can be accessed. A key restriction is that total debt secured by the homestead, including the new home equity loan and any existing mortgages, cannot exceed 80% of the home’s fair market value, as determined by an appraisal at closing. This ensures a homeowner retains at least 20% equity.

The legal framework also prohibits certain loan features, such as negative amortization, where the principal balance increases because payments do not cover interest due. The loan must be for principal only. Lenders are restricted in the fees they can charge; fees are capped at 2% of the original principal amount, excluding certain third-party costs like appraisal and title insurance fees. A new home equity loan cannot be closed on the same property within one year of a previous home equity loan, even if the prior loan has been fully repaid.

Available Home Equity Product Types

In Texas, homeowners primarily access their equity through two product types: a Home Equity Loan and a Home Equity Line of Credit (HELOC). Both function as second mortgages, drawing against accumulated equity in a primary residence.

A Home Equity Loan provides a lump sum of money upfront, which the borrower repays over a fixed term with regular, often fixed, monthly payments. This structure offers predictability in budgeting, as the interest rate typically remains constant throughout the loan’s life.

A Home Equity Line of Credit (HELOC) operates more like a revolving credit account. Borrowers are approved for a maximum credit limit and can draw funds as needed during a specified “draw period,” often with variable interest rates. During this period, payments might be interest-only, after which a repayment period begins with principal and interest payments. The ability to borrow, repay, and re-borrow funds up to the credit limit makes a HELOC suitable for ongoing expenses or projects with uncertain costs.

Qualifications for Home Equity Lending

To qualify for a home equity loan or HELOC in Texas, borrowers must meet specific criteria established by lenders, in addition to state-mandated requirements. A strong credit score, often in the mid-600s or higher, is necessary. Lenders also evaluate a borrower’s debt-to-income (DTI) ratio, comparing total monthly debt payments to gross monthly income, to ensure repayment capacity.

Sufficient home equity is a requirement, aligning with the state’s 80% combined loan-to-value (LTV) limit. Borrowers must also demonstrate a stable income source, often requiring a history of consistent employment for at least two years. An updated appraisal of the property is required to establish its current market value, which directly impacts the maximum loan amount available.

The Application and Closing Process

The process of obtaining a home equity loan or HELOC in Texas involves several structured steps, beginning with a formal application. Lenders undertake a thorough review and underwriting process to assess the borrower’s financial standing and the property’s value. This includes ordering an appraisal to determine the current market value and conducting a title search to verify ownership and identify any existing liens.

Texas law mandates specific waiting periods to protect the homeowner. There is a mandatory 12-day waiting period between the date the loan application is submitted (or the borrower receives the required notice concerning extensions of credit, whichever is later) and the loan closing. After the loan closes, Texas law provides a 3-day right of rescission, allowing the borrower to cancel the transaction without penalty within three business days. Loan funds become available only after this rescission period has expired.

Homeowner Protections in Texas Home Equity Transactions

Texas law provides homeowners with distinct protections within home equity transactions, designed to safeguard their homestead. A home equity loan is non-recourse, meaning the homeowner has no personal liability beyond the property itself, unless fraud is involved. The law also prohibits the forced sale of the homestead for repayment of the home equity loan, except through a judicial foreclosure process.

Homeowners retain the right to cure a default, providing an opportunity to rectify missed payments before foreclosure proceedings can advance. The closing of a home equity loan must occur at a permanent physical address of the lender, an attorney’s office, or a title company, and cannot take place at the borrower’s home. Lenders are prohibited from requiring borrowers to sign blank instruments or documents with incomplete information. Upon loan repayment, the lender is obligated to provide a release of lien, confirming the debt has been satisfied.