If you reside in Texas, homestead protection is built into the Texas Constitution. It allows you to maintain your home free from the possibility of seizure by certain creditors. This protects Texas citizens from having their home taken from them in order to satisfy a judgment from creditors. And Texas is the only state that provides such safeguards.
Even if your salary is in the millions and you own a home in which you reside, you can have multiple judgments from creditors against you and basically be secure from those creditors because of the homestead protections under our state Constitution.
Under what conditions does the Texas Constitution actually protect your homestead from creditors?
The Texas Constitution protects Texas families or single adults from being forced to sell their homestead in order to pay debts and judgments. Although there are exceptions, these provisions are a great asset for homeowners. When you understand the basics, you can determine how this information can help you personally and how you can educate your real estate clients.
What is the definition of a “homestead”?
Posession of, actually living on, and using the real estate as your home is what makes the property a homestead in the eyes of Texas. If you don’t actually reside on the property, evidence of preparation for occupancy is needed. For example, a vacant lot can qualify so long as the owner expects to build a home on it. While mobile homes alone do not qualify, a mobile home permanently attached to real estate can be a homestead. These protections are applicable exclusively to individuals and families; however, only one property can qualify for homestead protection.
What is excluded from homestead protection?
- Corporations, partnerships, and LLCs
- Owner-financed mortgages
- Financial transactions between spouses related to divorce
- Taxes on the property and/or federal tax liens against both spouses
- Home improvement loans
- Reverse mortgages
- Home equity loans
- Liens that predate the homestead’s establishment
- Conversion or refi of a lien on a mobile home that is attached to the homestead
- Debtor’s ownership in corporations or business partnerships
How do the homestead protections affect real estate investors and their transactions?
Many times in connection with distressed properties which happen to be the seller’s homestead, the homeowner/seller will have liens and judgments against them for outstanding credit card debt and other consumer type indebtedness. These liens and judgments must be cleared from title in order to close with a title acceptable to the buyer. This is the case, although under the homestead provisions, these liens are not valid against someone’s homestead. Title underwriters, however, take the position that they are not going to determine what is and what isn’t someone’s homestead so these must be cleared in order to issue title.
Under Texas law, it is unlawful for a creditor to refuse to partially release a lien such as the above that is clouding the title of a person’s homestead. These liens can be cleared from the homestead often without the payment of any money to the creditor if attacked properly.
Many title companies leave it to the homeowner/seller to clear these liens. At the Lonergan Law Firm, we perform this legal service for individuals, whether we are closing the transaction or not.
Another key point to remember is that homestead protection is only available to a primary residence, so we recommend that investors place their investment properties in an LLC or other entity structure to protect these properties from any personal creditors.
Texas homestead provisions protect a non-owner spouse
One of the benefits to families of this protection is that the residence cannot be sold or financed with a lien without the express joinder of the non-owning spouse.
From the early days of the Texas Republic, our leaders felt the need to protect the spouse and children from the unilateral actions of the spouse holding the title to the family’s home. Our public policy has always placed a premium on maintaining the family home.
So if you, as an investor, are purchasing someone’s home (whether by cash, subject to, or with a loan), you must have BOTH spouses execute the Warranty Deed or there will be title issues down the road.
The title company will probably require the seller to execute a Marital Status Affidavit, in which the seller swears under oath to his/her marital status since owning the real property. This is essential for the title company to make sure that all required parties execute the warranty deed and other closing documents.
Gaylene Rogers Lonergan is a Board Certified Residential and Commercial Real Estate Attorney. If you have other questions about Texas homestead protection provisions, contact Gaylene at grogers@lonerganlaw.com.
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© Gaylene Rogers Lonergan and Lonergan Law Firm, PLLC, 2017. All rights reserved. This article is provided for educational reasons exclusively and is not meant to be construed as legal advice. The Lonergan Law Firm, PLLC, will represent you only after being retained and that agreement is made in writing.
Gaylene Rogers Lonergan | The Lonergan Law Firm | info@lonerganlaw.com | 214-503-7509
