Is the Property to be pledged homestead property only? Lenders must confirm only the Owner’s homestead property is pledged as collateral for a home equity loan. Lenders may not accept any additional real or personal property and may not replace non-homestead debt with a lien on an Owner’s homestead. See “Designation of Homestead Affidavit” located at the end of Chapter 13. It may be executed and recorded to establish homestead in the public record.
Is the property located inside a city, a suburb or in the country (i.e. 10, 100, 200 acres)? If the homestead property is urban, then the maximum acreage that may be pledged is 10 acres. On the other hand if the homestead is rural, then a single adult may pledge up to 100 acres and a married couple may pledge up to 200 acres.
PRACTICE TIP: Appraisals may contain more utilities than the five listed above, however only electric, natural gas, sewer, storm sewer and water are considered when determining if the homestead is urban or rural. Also, DO NOT rely upon the Urban, Rural or Suburban check box in the appraisal. Finally, if the appraiser has failed to fully complete the appraisal, a prudent lender will require the appraiser to complete this section of the appraisal even if that means that closing is delayed.
Who are the owners of the homestead? Are they married? Common law marriage? Same-sex Marriage? In Texas, a marriage is defined by statute as the union between a man and a woman age 18 or older. However, same sex marriage is now recognized as a constitutionally protected right. There are exceptions for persons under age 18 to marry, but since the age of majority in Texas is 18, lenders should generally not accept contracts from borrowers under the age of 18. Informal marriage, sometimes called common law marriage is recognized when a man and a woman 18 years of age or older (i) agree to be married; (ii) live together and (iii) represent to others that they are married.
PRACTICE TIP: If a couple represents themselves to be married, treat them as married until you receive a copy of the divorce decree that has been signed by a Judge. Do not permit a couple that has represented themselves as married to simply ‘change their mind’ or you risk documenting a home equity lien without all necessary signatures (i.e. the spouse). Remember, not obtaining the owner’s signature as well as the signature of the owner’s spouse is one of two ‘death penalty’ errors. The only cure for this error is for the spouse that did not originally sign, to subsequently sign the security instrument to permit the home equity lien to attach to his or her homestead.
Is the property vested in all owners of the homestead? Only the owner and owner’s spouse may pledge their homestead. A spouse that is married to the loan applicant but not vested in title is still required to consent to the home equity lien by signing the deed of trust. However, the non-borrowing spouse may not be required to sign the note if the applicant spouse qualifies for the loan on his or her own merit. If you have joint owners, all owners and their spouses must execute the homestead documents, but lenders should confirm that all parties consider the property to be their homestead.
Do the borrowers contemplate using a parent or other guarantor to qualify? Only the Owner’s homestead may secure the home equity loan. Parents may not sign guaranties for children and vice-versa. A guaranty or surety is considered additional property and prohibited.
Do the borrowers/owners contemplate using a power of attorney? Use of a Power of Attorney in a home equity transaction should be discouraged, but may be used if the title company will insure and, if you plan to sell the loan, your purchaser. It is recommended that you obtain these approvals in writing before underwriting the file. Also, most title companies will require the use of their approved specific power of attorney.
Is the property vested in a revocable living trust? Generally an owner’s trust should not be an owner in a home equity transaction. The Texas Tax Code permits the homestead exemption to attach to properties owned in trust. However, the language of the Texas Constitution requires the owner and the owner’s spouse to consent to the home equity lien. Since a trust may not marry, the implication is that trusts may not be borrowers. If an owner insists on having their trust own the homestead, the owner(s) may deed the property out of the trust and into their names individually and close the home equity. Then, after closing the owner(s) may convey property back into their trust.
PRACTICE TIP: Provided the property is their homestead, the trust is a revocable trust and the purpose of the conveyance is estate planning, then the Garn St. Germain Federal Depository Institutions Act will prevent the lender from exercising their rights under the due on sale clause. If you have a borrower that insists on this route, recommend they consult their attorney to determine whether they qualify for the exception in the Garn St. Germain Act. Also, you may want to recommend they purchase a T-26 Additional Insured Endorsement to their Owner’s Title Policy to add the name of their trust to the Owner’s Title Policy.
Does the property have a home equity loan currently in place on the Property? Lenders may originate ONE equity loan. Lenders may not combine a closed-end home equity with an open-end HELOC.
Has a home equity loan been recorded on title in the last 12 months? Lenders must verify the owner(s) has not previously pledged the homestead as collateral for a Texas Home Equity Loan in the preceding 12-month period since only one equity loan is permitted every 12 months. However, the modification of a home equity loan is authorized within a year provided no new money is advanced and no new term is included that would not have been permitted by applicable law on the date of the original closing.
PRACTICE TIP: Review Schedule C of the title commitment and verify whether an equity loan was originated or recorded within 12 months of your closing date. If 12 months have elapsed since the closing date, but not the funding date, consider delaying closing until 12 months have elapsed from the funding date to avoid any argument that two home equity loans were originated in less than 12 months.
Is closing scheduled to occur at a title company, attorney’s office or the Bank’s office? Owner(s) must sign their home equity documents at the office of a title company, attorney’s office or lender’s office. Also, the office must be a permanent physical address, not a temporary office. Mail outs are generally not accepted unless the owners sign the documents at one of the three permanent offices listed above and your issuing title company agrees to insure the closing without excepting coverage on the compliance requirements that were not within their control. After closing, if you discover a mistake and need the owners to sign anything related to the home equity loan, DO NOT mail the document(s) to the owner. Have the owners return to the place of closing or other approved office to execute the documents. In the event you have an owner whose spouse is incarcerated, because of the permanent physical address restriction, you will have to use a Power of Attorney. You must work closely with the title company and determine whether they will insure the transaction and under what circumstances. Most title companies that agree to insure, will require use of their approved Special Power of Attorney form. Their form will likely include release language through which the incarcerated spouse disclaims all causes of action against the title company. If you plan to sell the loan, you should also secure written approval from your investor consenting to the use of the Power of Attorney.
Is there sufficient equity in the property to justify a home equity loan (i.e. 80% CLTV)? Determine if the borrower/owner(s) has adequate equity in the homestead property. All outstanding loans cannot exceed a maximum cumulative loan-to-value (“CLTV”) ratio of 80%. The principal loan amount when added to the aggregate total of the outstanding principal balances of all other indebtedness secured by valid encumbrances of record against the homestead cannot exceed 80 percent of the fair market value of the homestead on the date the extension of credit is made.
Has the appraisal or evaluation been received? Has the appraiser’s name and valuation been inserted into the Fair Market Value Disclosure? At closing the Owner and the Lender will have to execute a Fair-Market-Value (“FMV”) Disclosure statement in which the parties agree to the FMV of the homestead property as of the day of closing. The fair market value must be determined using either an appraisal or evaluation prepared in accordance with a state or federal requirement applicable to home equity loans. The appraisal or evaluation should be attached to the disclosure statement. See Chapter 3 “Evaluations and Appraisals.”
Have all homestead owners been provided the 12-day Disclosure? Have all homestead owners read, signed and dated the 12-day Disclosure? Are the borrowers planning a vacation soon? The 12-Day consumer disclosure must be given at application and the lender should have all homestead owners and their spouses sign and date to establish delivery. It is recommended that you make a copy and give to each owner and place the original in your file. The day you give the disclosure is Day Zero; the earliest closing date must be at least 12 calendar days after the date the Owner makes application or receives the 12-Day Consumer disclosure, whichever is later. Note: If the lender mails the 12-Day Consumer disclosure to the owner(s), the lender must allow a reasonable period of time for delivery. A period of three calendar days, not including Sundays and federal legal public holidays constitutes a rebuttable presumption for sufficient mailing and delivery.
Has the Pre-Closing Fee Disclosure been provided to all homestead owners at least one day before the Business Day that the loan is scheduled to close? An equity loan may not be closed before one business day after the date that the owner of the homestead receives a final itemized disclosure of the actual fees, points, interest, costs, and charges that will be charged at closing. If a bona fide emergency or another good cause exists and the lender obtains the written consent of the owner, the lender may provide the preclosing disclosure to the owner or the lender may modify the previously provided preclosing disclosure on the date of closing.
Have all borrowers been provided a copy of the loan application if it was not previously provided? An equity loan may not be closed before one business day after the date that the owner of the homestead receives a copy of the loan application, if not previously provided, and at least one day before the Business Day that the loan is scheduled to close. At closing, the lender must provide the owner with a copy of the final loan application and all executed documents that are signed by the owner at closing in connection with the equity loan. One copy of these documents may be provided to married owners. This requirement does not obligate the lender to give the owner copies of documents that were signed by the owner prior to or after closing.