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.
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.
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.
considering homestead issues, one must determine its urban or rural character
and, if rural, whether it is family homestead or single adult homestead.
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.
1999, the Texas Legislature adopted a statutory definition for an urban homestead
(Tex. Prop. Code Ann. §§41.002(c)) as follows:
homestead is considered to be urban if, at the time the designation is made,
the property is:
within the limits of a municipality or its extraterritorial jurisdiction
or a platted subdivision; and
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:
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.
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.
must also ascertain whether the property in question is a "family"
homestead or the homestead of a single adult.
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.
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.
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.
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.
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?"
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
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.
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.
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."