Biff owns his home in town. In Texas, we call this his “homestead.” You are his acquaintance but not a relative. He wants you to loan him money and says he will let you use his homestead as collateral. Can you help?
Sort of. You can make Biff a loan but cannot take his home as security. You are not an authorized lender. Do not give him money if you are relying on his home being your security. If you do then you have no security when he refuses to repay you.
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~ The Allen Firm team (and Josh) | Your Legal Guides
PS. If you are a lender, investor, or an individual from whom people ask for loans then keep reading..
Here are the four basic scenarios where Biff could use his homestead as collateral for a loan:
Scene 1: – buy
Biff is buying a new home and asks Bank #1 to make him a loan for the purchase. The bank can make the loan and use Biff’s new home (his homestead) as security.
Scene 2: – build
Biff is going to build a new home on a lot he owns and asks Bank #1 to make him a construction loan. The bank can make the loan and use Biff’s new home as security.
Scene 3: – refinance
Biff got mad at Bank #1 (the bank which made him his first loan to buy his house (or build it)). He asks Bank X to make him a loan to refinance the Bank #1 loan. Bank X can only loan the amount needed to refinance the Bank #1 loan and use Biff’s home as security.
Scene 4: – home equity
Biff needs cash. He asks Bank X to make a loan so he can get cash and use his home as security. Since Bank X is an authorized lender the bank can make a home equity loan and is able to use Biff’s home as security.
If you/Bank take Biff’s homestead as security under any different scenario there is a good chance the lien is not valid. Biff would still owe the money but you/Bank may be un-secured. Be careful.