Nature and Purpose of Right

The homestead provisions set out in the Texas Constitution create an exemption that precludes the seizure or forced sale of property. Since the homestead interest is considered an estate in land, any legal process concerning the homestead involves the title to real estate. The exemption created for the homestead interest is based on public policy considerations in order to secure to the family a place for home and shelter and shield from creditors a place the head of the family can conduct business.

Constitutional and Statutory Basis

Article 16 Section 50 of the Texas Constitution establishes and guarantees the right of homestead and prescribes the nature and extent of the homestead exemption. Although no aid was necessary in conjunction with the Constitution, Section 41.002 was enacted by the Texas legislature which statutorily sets out the homestead exemption. Title personnel must carefully examine each transaction involving homestead property because the homestead laws are enforced even if fraud has been committed and they are liberally construed by both state and federal courts.

Property Protected by Homestead Laws

The property protected by the homestead exemption extends to anything that has become a part of the real estate. This would apply to chattels which have become affixed to real estate and oil, gas, and other minerals in place. Another important statutory exception is for the proceeds of the sale of the homestead which are exempt for six months. Additionally, property received in exchange for homestead is exempt as well as proceeds of insurance received upon the destruction of the homestead.

Types of Homestead

Urban Homestead

An urban homestead is a homestead located within a city, town or village. Although the exemption for an urban homestead is ten acres, it may consist of one or more lots that are either contiguous or non-contiguous. In some cases a claimant may own more than one acre within an urban area. However, this fact does preclude the property from being claimed as homestead, it merely limits the amount of property that can be claimed. There are two types of urban homestead: residential and business. The residential homestead is the property which a party claims as his residence and can include contiguous or non-contiguous lots.  Sec. 41.002, Tx Property Code, provides for a checklist to aid in determining whether HS property is urban or rural.  Property is defined as urban if: 

1. It is located in a city limits or extra territorial jurisdiction of a city

AND

2. Is served by a police protection, paid or volunteer fire protection and at least 3 of the following services:

1. Electric
2. Natural gas
3. Sewer
4. Storm sewer
5. Water 

Prior law: Business homestead was abolished effective 1-1-2000 except that a lien validly created against a Texas homestead remains valid and a judgment against a debtor who had a business homestead remains unenforceable against that property. A person’s residential homestead is not lost by locating a business on it. A business homestead was the place the claimant used to exercise his calling or business. The property must be within the same corporate boundaries as the residential homestead. A person who claimed a rural homestead could not also claim a business homestead. A business homestead was available to a person even if they did not have a residential homestead.

Rural Homestead

The Constitution sets out that a homestead not in a city, town or village may consist of not more than 200 acres of land which may be in one or more parcels of land. By statute, the 200 acre exemption is limited to families while single adults who are not a member of a family are limited to 100 acres.

Who Is Entitled to Homestead

Both families and single persons are entitled to homestead rights in both the urban and rural areas. A family is oftentimes defined as a married couple with or without children and divorced or single persons with dependent children. However, several recent cases have defined a family as a group of individuals or are legally or morally obligated to support one another. Therefore, title agents must thoroughly investigate the family situation before agreeing to insure a single individual in a rural area.

Partners in a partnership may not have a homestead interest in partnership property. Likewise, a corporation may not have a homestead. However, title agents must watch for homeowners deeding their homestead property to closely held corporations and then borrowing money against the property. However, certain qualifying trusts under Texas Property Code § 41.0021 may have homestead rights if the settlor or beneficiary  actually resides in the property as his homestead.

Location of Property

Situs of dwelling

The situs of the dwelling determines whether a person has a rural or urban residential homestead. An urban area is defined as aggregation of inhabitants and collection of occupied dwellings. Title agents must remember that a person cannot have both an urban and rural homestead.

Scheme of development

The proximity between the municipal boundary line and the dwelling is a fact to be considered when determining whether a homestead is rural or urban. However, the mere act of platting and laying land into lots, blocks, and streets does not make property urban if it does not contain other characteristics of urban property. Consideration should be given to the following when deciding whether the property is rural or urban:

• city limits
• location of dwelling
• utilities and services
• use of lot and adjacent property
• occupations of persons in community
• presence or absence of streets, blocks, and lots

However, title personnel should remember that a homestead can still be considered rural even if within incorporated town. Property Code Section 41.002 says that property is urban if it is served by 3 or 5 types of municpal utilities and police and fire (volunteer or paid).

Urban Homesteads

Residential

Residential homestead property is comprised of a lot or lots of not more than ten acres which must encompass all improvements. Any excess property is subject to the rights of creditors and may be sold to satisfy judgment liens, etc.. Any separate lots which are adjacent to the residential homestead may also be claimed as homestead. These adjacent lots do not have to be contiguous and may not have been acquired at the same time. Title agents should not insure adjacent lots as non-homestead property until the homestead claimant can amass one acre to designate as homestead.

It is possible to insure rental property as non-homestead property even when the borrower does not have a homestead which is comprised of one acre. Title agents must consider the following before committing to insure:

• Whether the borrower(s) own the property they are currently residing in;
• Whether or not there is a written lease;
• Do the proposed borrower(s) have an occupation which would allow them to have a possible business homestead in the subject property (i.e., builder, real estate agent, etc.);
• Are the lessees relatives of the proposed borrower(s).

If the answers to these questions are favorable, the title agent must still make an inspection of the subject property and have a strong homestead affidavit executed which will help to satisfy the “intent to occupy” question. If the title agent finds that the subject property is contiguous to the claimed homestead property or that the proposed borrower(s) has a family relationship with the tenants in property, the title agent should not insure the property as non-homestead property. See discussion on out of state residents in 8.02.6 for additional details.

Business Homesteads

Texas abolished business homesteads 1-1-2000.

Rural Homesteads

As discussed previously, rural homestead claims made by a family can encompass up to 200 acres and 100 acres for a single person. The improvements which give the property its homestead character such as the dwelling, garage, barn and other out buildings must be included within the claimed property. Contiguity of the claimed acreage is not necessary and courts have allowed properties transversing county lines as well as acreage that is 80 to 100 miles apart to be claimed as one rural homestead.

Excess property over the allowable acreage amount may be reached by creditors to satisfy judgment liens or other debts. Likewise, a homestead claimant may designate excess property under the Texas Property Code so it can be encumbered for non-homestead purposes or reached by creditors. This designation of acreage must:

• be in writing
• name the grantee
• state the number of acres
• be signed and acknowledged
• filed with the county clerk in the county where the property is located

See also Texas Bulletin TX2015004 – LEGISLATIVE UPDATE 2015 Amends Chapter 205 Estate Code to Add Section 205.000 to Define Homestead or Except as a Homestead or Either Related Exempt Property 

In General

Under Article 50, Section 16 of the Texas Constitution, Homestead property can be encumbered for eight purposes:

• purchase money
• improvements
• owelty of partition imposed by court order or written agreement of the parties
• refinance of a federal tax lien 
• taxes
• improvements
• home equity
• reverse mortgages
• conversion of personal property loan on manufactured housing units to a real property loan

Any liens against the homestead that do not qualify within the above-referenced categories are absolutely void and pass no rights to a lienholder. No change of circumstances will make the attempted lien valid. The reasoning behind this statement is that the time for determining the validity of a lien is when the initial lien is given. Therefore, renewals and extensions of void liens are void also. Additionally, the foreclosure of an invalid lien is void and passes no title to a purchaser at a foreclosure sale.

However, if a purchaser of a particular property assumes an otherwise void lien, the lien is enforceable against the property. The reason for this is because the assumption of the lien qualifies as purchase money to the new purchaser. Another way an otherwise invalid lien may be enforceable is by subrogation. If the loan proceeds were applied to a valid lien against the homestead, the mortgagee will be subrogated to the rights of the holder of the pre-existing lien. Although subrogation is helpful when claims arise, it should never be depended upon as a reason for insuring an otherwise invalid lien against homestead property.

Purchase Money Liens

Acquisition of Property

A lien for all or part of the purchase price of a property is valid as against a homestead. Purchase money liens which also secure other indebtedness are not destroyed because a portion of the lien is unenforceable; however, title agents should not insure in this type of situation without the consent of underwriting counsel.

Refinancing the Homestead

A valid purchase money lien that is renewed and extended or replaced with a new obligation has the same effect as the lien it replaced. Stewart Title Guaranty Company will allow closing costs to be included within the refinanced amount in accordance with our bulletin 93-5-TX ·          NOTE: In Texas refinancing is a term of art with the specific meaning that the existing lien is being acquired and equitably subrogated to the new lender, thus maintaining the same priority.  Refinance in Texas does not occur with home equity loans even though the terms are used interchangeably in other states.

Although a purchase money lien that has become unenforceable by the statute of limitations can be revived with partial payments of the underlying obligation, this type of situation should never be insured without the express consent of underwriting counsel.

Owelty Deeds

Most owelty situations involve a divorce. In order to insure these types of transactions, the title agent must ascertain the following:

• the homestead was community property;
  
  
• the divorce decree or judgment orders the payment of specific dollar amount for the partition or award of the homestead;
  
  
• the divorce decree orders the imposition of an owelty lien on the entire homestead;
  
  
• an acceptable owelty deed is received.

If the divorce decree does not divide or award the property, Stewart Title Guaranty will insure a refinance of an owelty lien by an ex-spouse if an acceptable owelty deed is received.

Title agents must make sure that the initial conveyancing document is an owelty deed. It is not permissible to insure a transaction where the parties have already recorded deeds and want to now file a correction owelty deed. Any questions in this area should be directed to underwriting counsel.

Overburdening and Spreading of Liens

These doctrines were abolished 1-1-2000 and 9-1-99, respectively.

Taxes and Assessments

Although a lien to secure a loan for payment and penalty and interest is valid against homestead property, consent to insure this type of lien must be sought from underwriting counsel.

Payment of certain federal tax liens can also be insured against homestead property if a few requirements are complied with:

• The federal tax lien must be filed of record.
  
  
• The federal tax lien must be filed against all record owners of the property (i.e., husband and wife, etc.)
  
  
• The tax lien must be a personal tax (i.e., 1040’s)
  
  
• Record owners state in an affidavit that they do not have other land or significant personal property.
  
  
• The refinance also secures other valid debt (for example, purchase money);
  
  
• The amount of the federal tax lien does not exceed the other valid debt;
  
  
• The new mortgage contains a “bad debt” provision (applying first payments to debt not validly secured);
  
  
• Title agent must obtain a letter from either the district director or assistant district director of the Internal Revenue Service waiving the exempt status of a residential homestead;
  
  
• The deed of trust must describe the federal tax lien being paid off with its filing data;
  
  
• The loan proceeds to pay off the federal tax lien must go through the title agent’s escrow account. Do not allow the lender or the borrower to handle the payoff of the lien. POA Liens
  
  
• Special assessments for condominium and townhome associations as well as those for homeowner associations may be foreclosed as against homestead property. If title agents encounter an insuring situation following the foreclosure of one of these special assessments, underwriting counsel should be consulted.  See discussion in 8.04 Homeowner Associations.

Improvements to Homestead

In order to obtain a valid lien against a homestead property for improvements, a mechanic lien contract must be entered into in accordance with Property Code Section 53.059. The written contract should:

• set forth the conditions of the agreement, character of material and cost of the work
  
  
• should be recorded before work is commenced although it is not fatal if recorded later
  
  
• entered into before work is commenced and acknowledged by all parties having an interest in the homestead.

If work was started on the improvement to the homestead before a mechanic lien contract was entered into by the parties, the entire project should be bonded as set out in Property Code Section 53.201 et. seq. or special escrow procedures should be followed throughout the construction period.

When one of these situations is encountered, underwriting advice should be sought before insuring the transaction because lien priority has been lost and the possibilities of mechanic lien claims greatly increased.

It is necessary to have the joinder of both spouses when a mechanic lien contract is entered into if the property is the homestead of the husband and wife even if the property is the separate property of one of the spouses. However there are few circumstances where non-joinder is permissible under Family Code Section 5.85 such as when a spouse has been permanently abandoned by the other spouse or where one of the spouses is insane even if they have not been adjudicated non compos mentis (NCM) by the court.

When a title agent encounters one of these situations, underwriting counsel should be sought before insuring.

A specific statutory notice as set out in Property Code Section 53.059(a) must be set out within the mechanic lien contract in order for it to be valid between the parties to the contract. However, after the contract has been assigned or renewed and extended, it is the position of Stewart Title Guaranty that the transaction may be insured even without the statutory notice being contained in the mechanic lien contract if the title agent seeking to insure the contract was not involved in the original transaction.

Oftentimes, the parties to the original mechanic lien contract want to alter their original plans or add extra items to their contract with the builder. If the parties’ original contract contemplated such a circumstance and contains a provision for such alterations and/or extras by providing for a certain percentage or dollar amount to be added to the original contract or other written documentation between the parties and builder to evidence their intentions, the dollar amount for the alterations and/or extras may be added to the original contract amount. However, if the original contract did not contemplate such an occurrence, a second mechanic lien contract may be entered into which specifies the alterations and/or extras to be added. At the end of the construction period, this second mechanic lien contract may be renewed and extended along with the first mechanic lien contract into permanent financing. Although the adding of additional monies to the original mechanic lien contract seems relatively easy, the title agent must always keep in mind that these additional monies must only be for alterations and extras not contemplated at the outset of construction. Additional monies for cost overruns are not insurable against the homestead of the parties to the transaction.

Once construction is finished, the mechanic lien may be renewed and extended into a permanent lien. There are times when a title agent will encounter a situation wherein there is a mistake in the description of the property covered by the mechanic lien contract. An example of this would be if the contract was entered into in order to construct a house on Lot 45. The parties to the contract actually intended to and did construct the house of Lots 43 and 44. It is clear that this is a case of mutual mistake. The title agent should require that a suit be filed to reform the contract and establish the lien on the correct property. All parties to the contract (i.e., husband and wife) must be made parties to the suit. The issue of homestead must be raised and the judgment of the court should establish the lien on Lots 43 and 44.

Other liens that are enforceable against Texas homesteads are home equity liens (see bulletin TX000049 ) Form T-42 (mandatory with a 10% additional premium), Form T-42.1 (optional with a 15% additional premium); and reverse mortgages (see bulletin TX000056 and Form T-43); and conversion of a lien for a manufactured home secured by a retail installment contract.

In 2007, Texas voters amended Article 16 Section 50(a)(6) of the Texas Constitution dealing with home equity liens in four ways that apply to title companies: 1. Subsection (I) was amended to read: "is not secured by homestead property that on the date of closing is designated for agricultural use as provided by statutes governing property tax, unless such homestead property is used primarily for the production of milk"; 2. The provision that a new home equity loan cannot close within 12 months of an existing home equity loan is amended to provide: unless the owner on oath requests an earlier closing due to a state of emergency that: (a) has been declared by the president of the United States or the governor as provided by law; and (b) applies to the area where the homestead is located; (Example: a hurricane, tornado or flooding type disaster). 3. The provision prohibiting an owner of the homestead from signing any instrument in which blanks is amended to read "relating to substantive terms of agreement are left to be filled in". This means that non-substantive blanks would be permitted. Example: lines for co-borrowers when there are none would be non-substantive. 4. Finally, the constitution was amended to provide that at the time the extension of credit is made, [the owner of the homestead shall receive a copy of the final loan application and all executed documents signed by the owner at closing related to the extension of credit];

The notice provided by the lender to the borrower was amended to provide the changes set out above. Of particular importance to the title company is subparagraph I), which will read as follows: THE LOAN MAY NOT BE SECURED BY HOMESTEAD PROPERTY THAT IS DESIGNATED FOR AGRICULTURAL USE AS OF THE DATE OF CLOSING, UNLESS THE AGRICULTURAL HOMESTEAD PROPERTY IS USED PRIMARILY FOR THE PRODUCTION OF MILK.

See also Texas Bulletin TX2014004.

In General
A homestead is subject to an actual bona fide sale. Where there is a proper deed, duly acknowledged and joined by spouse, if necessary, it is effective as a conveyance as long as it is not intended as a mortgage. Temporary rental of the homestead to another will not terminate the homestead character of the property if no new homestead has been acquired by the parties. However, where property has never actually been the homestead of a party, the owner cannot later claim it as homestead if the property has been rented to another.

Abandonment of the homestead terminates the homestead exemption and subjects the property to liability for all debts. In order for an abandonment to occur, there must be:

• intention to permanently discontinue use; and
• actual discontinuance of use.

Abandonment is difficult to prove because one circumstance without the other will not effectuate an abandonment. If abandonment of a particular property as a homestead is being relied upon for insuring a particular transaction, title agents should always require a physical inspection of the property and a non-homestead affidavit which specifically disclaims the property sought to be insured while claiming other specific property as homestead. As an additional safeguard, the title to the property claimed as homestead should be examined to make sure that the parties do in fact own the property they are claiming as homestead. Any peculiar circumstances should be thoroughly discussed with underwriting counsel before closing the transaction.

Sale or Rental of Homestead
Properly executed contracts of sale are valid and enforceable and specific performance of the contract may be enforced by a court. For this reason, title agents should always require a release of a contract by all parties to the contract before releasing earnest money to any party. Parol (oral) evidence will not support a contract of sale. The contract speaks for itself.

Joinder of spouse is necessary if the homestead is the community property of the spouses. However, under certain circumstances according to Family Code Section 5.84, a spouse may sell community property without the joinder of the spouse. These circumstances include situations wherein the spouse has been permanently abandoned by the other spouse or where one of the spouses is mentally incompetent although not adjudicated as such.

These types of cases require a court order and must be reviewed by underwriting counsel before issuance of a title policy in connection with a sale of the property.

In situations wherein the homestead of the spouses is the separate property of one spouse, joinder of spouses is also necessary unless certain circumstances as set out previously exist and a court order pursuant to Family Code Section 5.83 is obtained.

When one of the spouses has been adjudicated incompetent, the competent spouse may sell and convey the homestead whether it is separate or community property according to Family Code Sections 5.82 and 5.84.

Before insuring a transaction involving these facts, underwriting counsel must be consulted.

Pretended Sales of Homestead
All pretended sales of homestead are void. A deed purporting to convey but is in fact intended as a mortgage or a conveyance that is simulated or pretended but has purpose of fixing a prohibited lien are examples of pretended sales. A claim of homestead can be made against the grantee in these types of cases. The purpose of the conveyance is determinative of whether or not the sale is a pretended sale.

Title agents should watch for the following types of transactions:

• sale and purchase by same parties who sold property within a short period of time
• sale of property with a lease back to the selling parties
• sale to close family relative
• sale to closely held corporation and former owner(s) still resides on the property

When there is a pretended sale, a homestead claim is valid against a purchaser or lender unless the purchaser or lender is a bona fide purchaser (BFP) for value without notice or knowledge of the facts. Continued possession by the former owner constitutes notice to both lender and purchaser and defeats the BFP defense. In addition to the above, Property Code Section 41.006(b) sets out that it is a Deceptive Trade Practice Act when there is a sale-leaseback at less than fair market value.

Title agents must be extremely cautious in this area and underwriting counsel should be consulted on each transaction which could be construed as a pretended sale.

Abandonment of Homestead
Homestead property retains its homestead character until the time title actually passes. A mere offer to sell is not enough to destroy the homestead character of a particular piece of property.

Temporary renting of the property as discussed above is not enough to constitute an abandonment. The intention of the lessor/owner is the key factor. When a homestead claimant has actually moved from the premises, whether or not there has been an abandonment is always a question of intent. If the parties occupy another property within the same area as the potentially abandoned property, intent and actual discontinuance of use must be shown. When the owner has purchased a new home and resides in it, a physical inspection of the former property and a title check on the new property should verify the abandonment.

If the parties are merely renting the property in which they reside and are seeking to borrow monies on a former homestead property for non-homestead purposes, title agents should not insure the transaction without underwriting approval.

In cases where the parties have relocated to another state, the same rules apply and the facts must be thoroughly ascertained before insuring a transaction involving the alleged non-homestead property.

Termination of Homestead by Death
Death terminates a homestead unless the claimant is survived by members of the family who are entitled to the homestead exemption. Such members would include a spouse, minor or unmarried children, or other members previously dependent upon the deceased. Creditors cannot enforce claims until the homestead rights of the survivors are removed.

Disclaimers and Estoppel
Misrepresentations may in some instances create an estoppel situation. However, this is more the exception than the rule because the owner may not, solely by the act of disclaiming property, preclude himself/herself from claiming homestead.

A lienholder always has a duty of inquiry as to whether or not a claimant is in possession of the property. Thus, a lienholder cannot successfully defend against a homestead claimant who is in actual possession by claiming estoppel on the basis of non-homestead claim in affidavits or a deed of trust or mortgage.

Where homestead claimants are in possession of the premises claimed as non-homestead property, they will not be estopped from later bringing a claim of homestead. However, where homestead claimants have designated a homestead by statute, they will be estopped from asserting that any property other than designated land is homestead. Additionally, where homestead claimants were not in actual occupancy of premises at the time of the placing of the lien in question, a lienholder who acted on misrepresentations will have a superior right.

Although the law has been established in this area, title agents should not insure a property falling into these areas without the express approval of underwriting counsel.

When a homestead claimant occupies two tracts, if either of two residences could be considered homestead, a claimant can claim either one and will be estopped from denying its status. An example of this would be one residence which constituted rural property and one residence which constituted urban property. However, if both tracts are rural, both may be able to be included within the total acreage allowed for a rural homestead. The same rule could be applied to contiguous urban parcels.

Title agents must be extremely cautious in this area and underwriting counsel should be consulted on each transaction which could be construed as a pretended sale. As mentioned in the next section, affidavits affirming that the seller has abandoned the homestead may also be appropriate.

See sample affidavits below:
Seller’s Bona Fide Transaction Affidavit
Purchaser’s Bona Fide Transaction Affidavit

See also Texas Bulletin TX2015004 – LEGISLATIVE UPDATE 2015 Relating to Residential Homestead Property Exemptions for Military Owners