Initially, one needs to understand the different types of homestead in Texas. When considering homestead, one must consider whether it is urban, rural, residential, business, family and/or single adult.

An urban homestead of a "family" or of a single adult cannot exceed ten acres and must be used for the purposes of a home or as both a home and a place to exercise the business or calling of the claimant. A rural homestead of the "family" cannot exceed 200 acres and must be used for the purposes of a home and support of the family. A rural homestead of a single adult not entitled to claim other homestead cannot exceed 100 acres and must be used for the purposes of a home and support of the single adult. Please note the rural homestead gives 200 acres to the family but only 100 acres to a single adult.

A person can have only one homestead. The homestead is either rural or urban. A family or a single adult can have an urban residential or a combined residential and business homestead on not more than ten contiguous acres.

In considering homestead issues, one must determine its urban or rural character and, if rural, whether it is family homestead or single adult homestead.

Whether property is rural or urban homestead is a fact question to be determined in the final analysis in a court of law. Because of this, it will be very important for the underwriter on a home equity loan to make the appropriate determination. Evidentiary factors gleaned from cases over the years include the location of municipal boundaries, the location of the actual settled limits of town, whether the property was platted in lots and blocks, the use made of the property and surrounding properties, the occupation of the homestead claimant, whether the property was served with municipal utilities, services and streets, any consensual acts of the homestead claimant indicating an intention to treat the tract as urban property, the size and value of the property, and the existence of restrictive covenants on the property.

In 1999, the Texas Legislature adopted a statutory definition for an urban homestead (Tex. Prop. Code Ann. §§41.002(c)) as follows:

A homestead is considered to be urban if, at the time the designation is made, the property is:

1. Located within the limits of a municipality or its extraterritorial jurisdiction or a platted subdivision; and
   
   
2. Served by police protection, paid or volunteer fire protection, and at least three of the following services provided by a municipality or under contract to a municipality:
   
   
   1. Electric;
   2. Naturalgas;
   3. Sewer;
   4. Stormsewer; and
   5. Water

Whether the Property Code definition is constitutional has not been decided in the Texas courts. There is a split of authority in Federal decisions considering the constitutionality of the statute. It is questionable whether the Legislature can limit the definition of urban and rural homestead not intended by the Texas Constitution. Thus the Property Code definition will not be dispositive for the home equity loan underwriter.

In practice, the legal profession and title insurance companies have not given much credence to the Texas Property Code’s definition of an urban homestead. Customarily, lenders review the appraisals to determine the characteristics of the property and when in doubt, the more conservative view has been taken as to whether property is rural or urban homestead. Thus on business loans involving property that could be homestead, the restrictive rules regarding the types of valid liens against homestead have been applied. The property characterization as rural or urban has never been a practical problem until home equity was introduced, in that lenders took a very traditional, conservative approach and refused to take liens against property that may be homestead unless the loans were for a permissible Constitutional purpose. Non-homestead affidavits have been used but only when it is undisputed that other property clearly constitutes the homestead of the borrower and thereby not placing the lender at risk if the loan proceeds were for purposes other than allowed to be secured against the homestead.

One must also ascertain whether the property in question is a "family" homestead or the homestead of a single adult.

The traditional definition of "family" is not required to establish a family homestead. Case law has held the following to constitute a "family": (i) a single grandmother, her adult married daughter, and minor granddaughter (when daughter separated and living apart from husband due to family violence); (ii) adult child and parent; (iii) brother and sister; (iv) divorced parent and minor child (even if parent does not have custody); (v) grandparents and grandchildren; and (vi) a widower with no dependent children.

Thus, if you are dealing with rural property, consideration of whether the homestead is a "family" homestead or a single adult homestead will be very important in home equity lending in that you have a limitation of 200 acres for a family homestead and only 100 acres for a single adult homestead. One can basically conclude that a "family" consists of: (i) a group of people having the social status of a family living subject to one domestic government; (ii) the head of the family must be legally or morally obligated to support at least one other family member; and (iii) there must be a corresponding dependence by the other family member for this support. Apparently, the duty of support by the head of the family may be either legal or moral; however, for a dependent adult, the support must be financial.

In an urban setting, you may no longer have non-contiguous tracts to cumulatively comprise the urban homestead. A person may now have a lot or contiguous lots amounting to not more than ten acres of land, provided that the homestead shall be used for the purposes of a home, or as both an urban home and a place to exercise a calling or place of business. Business homestead now must be part of the same parcel of land used as the residential homestead. No separate business homestead is permitted. There is no such thing as a business homestead as part of a rural homestead. However, case law does exist which requires use of the rural homestead to support the family or single adult.

With this in mind, the next question might be, "How does a lender typically determine whether the homestead is urban or rural?" Typically, our clients discuss the issues with us and with the title company insuring the transaction, and if the title company agrees to insure the transaction based upon the firm or the client providing all information to the title underwriter, the title underwriter makes the decision whether to take the risk. In that home equity is new, we as of yet do not know how the title underwriters will react to this problem. At present, the T-42 title endorsement provides no coverage for this issue. Clearly, this will be a major concern for lenders. In most situations, the urban or rural nature of the homestead will be clear. In many situations, however, it will not be clear and, unfortunately, the lender’’s decision may not be in accord with the trier of fact.

A second series of questions are: "If the size of the homestead is greater than what is allowed to be taken as collateral, can the loan still be made on the smaller piece of property? Any special documentation needs? Does the "value" need to be apportioned, so that we avoid lending more than 80% of the smaller piece?"

Section 41.005 of the Texas Property Code allows an owner of property to designate a portion of that property as homestead if the property, either urban or rural, exceeds the allowed amount. You may, if the Voluntary Homestead Designation is utilized, make a home equity loan on the smaller piece of property. Although we have no guidance on the matter, we would advise that the value should be apportioned so that you avoid lending more than 80% of the value of the smaller tract.

In addition to the Voluntary Homestead Designation, we would advise that a survey be prepared to assure that the improvements on the property are within that portion designated as homestead. This survey will provide a valid field note description of the smaller tract. The appraisal would need to be prepared reflecting the value of the tract with the improvements designated as homestead versus the value of the remaining portion. Keep in mind that in the event of a foreclosure, you may recover collateral that is an "illegal lot." If the lot larger than ten acres is platted and you foreclose on a portion of it, some jurisdictions require a replat. Also, many deed restrictions prohibit resubdivision of lots. The prohibition of taking any additional real property as collateral on a home equity loan opens up many problems which were clearly not foreseen by the Texas Legislature.

Effective January 1, 2000, SJR 22 amended Section 51, Article XVI of the Texas Constitution to eliminate the problem of "overburdening" the homestead. In the past, if a lien being refinanced was on the entire tract which contained more than the allowed homestead exemption, the placing of all the prior debt on less acreage than previously encumbered could be considered an overburdening of the homestead and your lien on the lesser tract may be invalid. After January 1, 2000, "overburdening" the homestead is permissible.

There are volumes and volumes of books on Texas homestead law. You must understand that the concept of homestead in Texas dates back to the Stephen F. Austin Code of Civil Regulations which regulated the affairs of the first Texas colony in 1824. Homestead protection in Texas is very expansive and deeply rooted. The courts liberally construe homestead protection in order to accomplish the objective which has been founded on public policy of protecting citizens from their destitution. It has been said that "the liberality of the Texas homestead exemption is not lightly disturbed."