Intro to Texas Lending Equity Laws

Author: Keith A Campbell on November 16, 2009

While this article is geared for people residing in Texas, others may be interested in the very different lending laws found in that state. By and large, the loan process, rules and regulations vary very little from state to state and if you can make a loan in Florida you can make one in California. Hawaiians also have a few laws that lenders need to be well versed in, but for this article we are going to just focus on Texas.

Texas equity laws are just convoluted enough that most homeowners themselves are not aware of them, or if they were at one time well versed in the laws, they usually forget by the next time they refinance.

I also know that there are a number of lenders who will not make loans in Texas due to those very laws, or if they will do the loans it has to be originated by a specially trained loan officer living in Texas. Although I live in California and worked in California while I was a Mortgage Consultant I worked for one of the few companies that allowed its loan officers to do business in Texas. Now, having said that, most loan officers will do one loan there and swear never to do another, leaving it up to more experienced loan officers.

For a while I specialized in lending in Texas so I am going to try to give you a rundown of some of the differences in lending practices for the state. Most of the confusion has to do with current equity laws that are fairly new and many homeowners have had no reason to familiarize themselves with those laws. Prior to 1997 Texas homeowners were not allowed to take equity out of their house. Home equity loans were not possible there so that means you cannot take out a second loan to help with the purchase of the home. It all has to be done with a single loan and cannot be used to have any cash out or pay off any debt. That was pre-1997. Post-1997 is a different story altogether.

Now that 1997 has come and gone homeowners are allowed to do some of the very basic things that people in every other state has been doing for decades. People in Texas can do a cash-out loan. They can pay off debt with their refinance. If they need a second to buy the home it is now possible. There are some tight restrictions though.

Part two on Texas Equity

Now I will get into the specifics of the laws governing borrowing in Texas. Let me say first off I am not a lawyer but I do know through trial and error how to borrow in Texas. When you do decide to borrow keep these laws in mind and speak to a lender physically in Texas and they will have a lawyer who really knows the law.

First of all, if one is doing a cash out refinance, one can only borrow up to 80% of the value of the home, and no more. That restriction right there will derail a good many loans, especially non prime deals. And the term for that kind of loan is Texas Equity. Borrowers in Texas are able to borrow more than 80% of the home’s value within certain guidelines. Let’s say it is 2009 and you are doing a refinance and need to borrow 85% in order to make the deal work. That is all well and good as long as you have never, in the past, taken any cash out for any reason.

If you did a refinance in 2006 and took out $3000 to remodel your bathroom, you cannot exceed 80% in your new loan, nor can you ever exceed it in the future. If you bought the home in 2000 and had to have a second to get into the home, you can never go above the 80% ceiling to refinance again. So, even though Texas Equity is allowed, its restrictions make it tough going. When you are doing a refinance it is a good idea to provide you lender with past closing statements to show that cash was never taken out of the home. If your docs show that four years ago you did a refi and you wound up with $287 in cash out, you now fall into the new rules governing Texas Equity.

These laws were put into place to protect borrowers, but many of them feel that they are too restrictive, inhibit borrowing and can lead to disastrous consequences. Shouldn’t Texas catch up with the 49 other states that allow them to use equity built up in their home? Of course you hear in other states of the nightmares created by equity stripping, and that is part of what Texas is trying to prevent. But what about the family that needs to refi out of an ARM before it resets to a level they cannot afford? They may need to go o 87% to make the loan, but Texas says you can’t. Laws put in place to help borrowers are now a thorn in people’s sides as they try to salvage their lives amidst our disastrous economy.

The company I worked with had their own guidelines for lending in Texas. One had to do with having a lawyer review any loan to check for violations of Texas Equity laws. There is also a 12-day quiet period (Texas laws) that begin when the lender mails out disclosures, and no one can contact the borrower in any way during those 12 days.

There are also some other laws governing home equity loans, like the one that restricts borrowers to one home equity loan a year, or one that says borrows can only have one home equity loan open at a time. So much for the people who would need a first a second and a third to get into a house , like many Californians.

Lenders are prohibited to charge more than three percent of the principal amount of the loan. At first look this sounds great. It sounds like the law is protecting borrowers from predatory lending practices. In reality it prevents lenders with inexpensive homes to get a loan. There are a number of expenses involved in closing a loan and can seem insignificant when the loan is a half a million dollar loan. However, if you have a $25 thousand dollar home those expenses easily can add up to more than 3% of the loan amount and you cannot make the loan, even if the borrower wants to. I have had this problem before and you get the lender to slash expenses, you get the title company to cut its fees and you even hit up the appraiser to cut his fee, and when it’s all said and done you still can get below 3%.

There are other laws we won’t get into, those will be handled by the lender and the lawyers who are doing the deal. The ones I have covered I learned by experience, took my lumps, took notes and jumped back in the fray. I soon became the authority on lending in Texas and all the states loans came to me.

If you are a homeowner in Texas make sure you talk to a lender in Texas, and I don’t mean a national lender that can lend in the state, but actually talking to someone in Texas, that way you know you are talking to someone who knows the laws.

Good luck and happy financing.

Bankruptcy Revisited

Author: Keith A Campbell on November 11, 2009

Here is another look at the B word, bankruptcy, and how your lender treats it. If you have gone through a BK recently or are considering it, you may want to take a look at this.

I am not going to attempt to give you advice or guidance on whether you should file for a bankruptcy or not. What I do want to do is let you know how a lender will treat your bankruptcy.

First of all, having a recent bankruptcy on your credit is not an insurmountable problem. There are a lot of borrowers out there refinancing that have a BK on their credit report. Here are some things to keep in mind when preparing to refinance.

· You can refinance even if your BK was discharged less than a year ago

· You can refinance before you BK has been discharged

· Your score does not always dip under 500

The information I provide here will not be applicable to every lender, as each has its own guidelines, however lenders are surprisingly similar.

In all three of the places I worked, they allowed borrowers to refinance before a year had passed since the discharge date. There are some strict guidelines though, and you and your loan officer need to do some research before submitting a loan. One of the guidelines has to do with acceptable loan to value. Most lenders will only allow you to borrow 50 to 60 percent of the home’s value and that right there can kill a deal.

Many times borrowers are driven to bankruptcy due frequent refinancing that has eventually stripped all the equity out of the home making it impossible for just one more refi. Now the borrower is saddled with too much debt and a house note they can no longer afford. Unfortunately for the borrower this in this situation, there is usually not enough equity left to qualify for a refinance and they are stuck with the BK. Do your footwork, find out how much your home may be worth then start crunching the numbers. It’s a lot better to find out you don’t have enough equity before the loan is in process. If your bankruptcy is structured where you are making payments then you will need to get a bankruptcy rating, similar to a mortgage rating. Your bankruptcy is viewed as your last hope, so if you have had issues making your bankruptcy payments or are behind, most likely your lender will not want to refinance.

If you are unable to refinance prior to discharge, many lenders will refinance you even though it has been less than a year since discharge. If you or your lender is unsure of the discharge date look through your credit report and it is usually reported there. It is a good idea though to keep your discharge paperwork because that will also show the date of discharge. It will also list all of the debtors covered in the bankruptcy which can be a godsend if some of the companies on your credit report still show as active and not covered in the BK (Bankruptcy).

Lenders will look closely at your post BK credit history, and if that is rocky, your score may not have recovered enough to make a loan possible. Some lenders will still shy away from a borrower who has post BK dings even though his credit is above 500 because is leads the lender to believe nothing has changed with the borrowers spending habits. The lender will think that there is going to be another BK or a foreclosure in the near future.

So, while you can still refi right after a bankruptcy, the odds are pretty much stacked against you. You should keep in mind that your BK will stay on your report for at least seven years, if not ten. Clean up your act and show you have learned something through the BK. Keeping your post BK report squeaky clean will go along ways in demonstrating what you have learned.

If you have a perfect bankruptcy rating, enough equity, and a tri-merged score above 500 you may be a good candidate to refi out of the BK and that will be reflected well on your credit report. You may find your lender is going to be tighter with income guidelines, and you may need to be able to show all your income in the traditional way with W-2’s and pay stubs.

So good luck with the BK and happy searching for a loan.

How Second Mortgages Were Marketed as Home Equities and Captured America's Hearts and Minds

Author: Sol Nasisi on August 16, 2008

Over the last twenty years, financial companies have marketed second mortgages as home equity loans and lines and made it acceptable to borrow against your house. Consumers eagerly gobbled them up.

Have you taken out a home equity line or loan? If so, you've joined millions of others who have borrowed against their home's values. As the NY Times reports, over the last twenty years, home equity lines and loans have exploded in popularity:

"Since the early 1980s, the value of home equity loans outstanding has ballooned to more than $1 trillion from $1 billion, and nearly a quarter of Americans with first mortgages have them. That explosive growth has been a boon for banks. Banks’ returns on fixed-rate home equity loans and lines of credit, which are the most popular, are 25 percent to 50 percent higher than returns on consumer loans over all, with much of that premium coming from relatively high fees."

Unfortunately, with home prices falling and the economy softening, all of this debt is hurting many households.

"The portion of people who have home equity lines more than 30 days past due stands 55 percent above its average since the American Bankers Association began tracking it around 1990; delinquencies on home equity loans are 45 percent higher. Hundreds of thousands are delinquent, owing banks more than $10 billion on these loans, often on top of their first mortgages.

None of this would have been possible without a conscious effort by lenders, who have spent billions of dollars in advertising to change the language of home loans and with it Americans’ attitudes toward debt."

I worked at a large bank in the mid-2000s and remember the marketing machine that was put together to push these products out the door. Banks consciously targeted consumers, changing the name of the product from second mortgage to home equity to make it more palpable to consumers. There were television commercials, sophisticated direct mail programs, credit scoring, and all kinds of programs to sell and cross-sell home equities to as many customers as possible.

That being said, the banks never lied about the product. Consumers knew what they were getting themselves into and really didn't care about the risks. When the bank tried to provide customers with financial guidance and education on debt management, most consumers were only mildly interested . Many of my friends eagerly opened home equity lines and loans, seeing it as found money. So, who's to blame? The banks who pushed the product, or the consumers who eagerly gobbled it up?

The Times article quotes Sendhil Mullainathan, an economist at Harvard who has studied persuasion in financial advertising as saying:

“It’s very difficult for one advertiser to come to you and change your perspective. But as it becomes socially acceptable for everyone to accumulate debt, everyone does.”

I personally think that as the government racked up billion dollar deficits throughout the 80s and 90s, the concept of fiscal prudence and responsibility went out the door. Home owners who were once accustomed to paying down their mortgage now saw it as a source of borrowing power and like the government, tapped that source. Banks were only too eager to jump upon the bandwagon and fan the flames with some advertising lighter fluid.