The homestead exemption is way for someone who owes certain creditors to keep their home and ensure that creditors can’t claim it to pay a debt. This exemption was originally created in order to protect families from husbands, who might have gambling or alcoholic addictions, whom would make bad decisions with creditors that affected the whole family—such as losing the home in a bet. After the homestead exemption was created, the law required consent from both spouses in order to eliminate these kinds of problems. Now, the logic behind the homestead exemption is that, even if creditors are owed substantial amounts of money, it is easier for someone to make a living to repay the loans with a roof over their head than living on the streets.
Most states value homestead exemptions based on a maximum dollar amount, and, in fact, Texas used to be one of them. Under this view, if a homeowner’s residence is worth $150,000, but the homestead exemption is limited to $125,000, the homeowner is only protected on $125,000 worth of his or her residence. The homeowner would immediately be responsible for paying the other $25,000, which in some cases means selling the land the house sits on to pay the debt. Luckily, Texas has one of the most liberal homestead exemptions in the nation and is based on acreage, not a dollar amount. This means that a homeowner can build a $50 million house, and as long as it sits on the correct amount of acreage, the house is safe, from certain creditors, under the homestead exemption.
An urban homestead encompasses a 10-acre or less residence, for a family or a single adult, located within a municipality, its extraterritorial jurisdiction or a platted subdivision. The location requirements can seem confusing, but the reasoning behind extending the urban homestead a little outside city limits is that cities are expected and given room to grow and thus include homesteads within this growth range. There is one more requirement to fulfill that better defines the necessary location of a homestead: the homestead must be served by police protection, fire protection, and at least three other services provided by or under contract with your municipality. These other services include electricity, natural gas, sewage, storm sewers, and water services.
A rural homestead is up to 200 acres for a family residence and 100 acres for a single person. The entire 200 or 100 acres do not need to touch or connect to fall under this exemption, but should be within a relative distance from each other. However, all property must be inside the state of Texas.
As stated above, the homestead exemption protects homeowners from certain creditors, these include student loan creditors, credit card collectors, etc. However, the Homestead exemption will not protect homeowners from the following liens: (1) an Ad Valorem tax lien; (2) a Mechanic’s lien; (3) a Home Equity lien; and (4) a Purchase Money lien.
The lien with the biggest threat to a homeowner is the Ad Valorem tax lien. This is because it is superior to all other liens, requiring it to be paid before any other creditor. It will not go away until the taxes are paid off or the lien is foreclosed (home/land is sold to pay taxes).
A Mechanic’s lien, as well as a Home Equity lien, is considered a voluntary lien because it relates to unpaid charges for voluntary home improvement or construction costs. Note that for these to be valid, both spouses must sign the document creating the mechanic’s lien. These liens will attach to your homestead when the owner defaults. A creditor pursuing foreclosure or collection related to a Mechanic’s Lien may cause big problems for the homeowner because the entire construction loan may end up being accelerated and not be repaid pursuant to the terms of a loan.
A Home Equity loan is a particular type of loan obtained by a homeowner where the homeowner uses his/her home as collateral and grants a lien to the Lender. A Home Equity loan and the lien against the home has to meet detailed requirements of the Texas Constitution. A creditor may foreclose the home equity lien against the home after taking the appropriate required steps established by law.
A Purchase Money lien is also a voluntary lien which arises if you borrow money from a creditor to purchase something. This lien must be created at the same time of the purchase money agreement’s creation as well. An example would be Mary going to the ABC Bank to borrow money to purchase her new home. As Mary signs ABC Bank’s required documents to secure the loan, ABC Bank would also have her sign an agreement which provides she would be responsible for repaying the loan within a stated time period. ABC Bank would obtain a lien against her new home in order to secure the repayment of the Mary’s loan.
The Takeaway: Always read your loan contract and be sure to make a note of when your payments are due. Be sure to make payments on time. Even if you think you can always make those payments, sometimes unexpected expenses arise, so be sure to note when the creditor has the right to pursue enforcement of the lien against your home so you can make arrangements with the creditor in order to protect your home. Lastly, while paying off student loans and credit card bills are required—prioritize your debt repayments. Creditors such as these need to be repaid but they will have no rights to come after your home.
– The Business Team
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