4.2 The Eight Permitted Homestead Encumbrances & the § 50(e) Cash-Out Trap

4.2 The Eight Permitted Homestead Encumbrances & the § 50(e) Cash-Out Trap

Quick Answer: Article XVI § 50(a) lists eight debts that may encumber a Texas homestead, in this order: (1) purchase money; (2) taxes due on the property; (3) owelty of partition; (4) refinance of a permitted lien, including a qualifying federal tax lien; (5) work and material; (6) home equity; (7) reverse mortgage; (8) manufactured-home conversion and refinance. Anything outside that list is not a valid homestead lien under § 50(c). The trap originators hit most often is § 50(e): a refinance of an (a)(1)–(a)(5) debt that hands the owner extra cash is void as a homestead lien unless the file is a § 50(a)(6) equity loan or every extra dollar is for reasonable refinance costs, taxes, owelty, or qualifying improvements. Reverse mortgages and the Texas usury stack are Section 4.3; the (a)(6) conditions are Chapter 5.

OpenExamPrep publishes this independent Texas overlay study. It is not an NMLS, SML, or OCCC publication and does not claim official approval, partnership, or exact equivalence with those agencies' materials. Section 4.1 taught the homestead estate—who has one, how big it is, and who must sign. This section teaches the gates: which debts the Constitution will let through, and how an ordinary-looking refinance falls out of the list.

The eight § 50(a) gates, in constitutional order

(1) Purchase money. § 50(a)(1) allows a lien for the purchase money of the homestead, or a part of that purchase money. This is the ordinary first-lien purchase mortgage. The debt exists because the credit bought the sanctuary. Seller-finance purchase money is still purchase money; it is not an equity loan just because the seller is an individual.

(2) Taxes due thereon. § 50(a)(2) allows a lien for taxes due on the homestead. Ad valorem property taxes are the everyday example. Property-tax loans that refinance those taxes still have to live inside this gate (or a refinance gate) and the Finance Code chapters that regulate tax lenders. A private consumer debt is not “taxes” merely because the borrower intends to use proceeds to pay a tax bill—document the debt as the constitutional category it really is.

(3) Owelty of partition. § 50(a)(3) allows an owelty imposed against the entirety of the property by court order or by a written agreement of the parties to the partition, including a debt of one spouse in favor of the other from a division or award of a family homestead in divorce. Originators see this as a buy-out note secured by the homestead after a split. It is not a camouflage for cash-out to a third-party creditor.

(4) Refinance of a permitted lien. § 50(a)(4) allows refinance of a lien against a homestead, including a federal tax lien resulting from the tax debt of both spouses (family homestead) or of the owner. Rate-and-term refinance of purchase money is the everyday (a)(4) file. The gate narrows the moment the file advances additional funds, which is what § 50(e) governs and what the next part of this section drills.

(5) Work and material. § 50(a)(5) allows a lien for work and material used to construct new improvements if contracted for in writing, or to repair or renovate existing improvements only if all of the listed conditions are met: written contract with both spouses’ consent on a family homestead, given in the same manner as a homestead conveyance; the contract is not executed before the fifth day after a written application for any extension of credit for the work (unless immediate health-or-safety repairs, acknowledged in writing); a three-day rescission right in the contract (same health-or-safety exception); and execution only at the office of a third-party lender making the credit, an attorney at law, or a title company. Kitchen-table improvement contracts that skip those steps do not create a homestead mechanic’s lien.

(6) Home equity. § 50(a)(6) is the cash-out / equity gate. Chapter 5 teaches its conditions (80 percent combined loan-to-value, non-recourse, 12-day notice, 2 percent fee cap as constitutionally framed, closing locations, one equity loan, natural-person limits). Here, remember only why it sits on the list: Texas did not authorize general second mortgages. Cash-out against homestead equity is lawful only through this gate (or a reverse, or another listed purpose). § 50(a)(6)(O) says the lender may contract for any fixed or variable rate authorized under statute—which is the handoff to the Texas usury stack in Section 4.3, not a license to ignore Finance Code interest law.

(7) Reverse mortgage. § 50(a)(7) is a one-line gate. The definition and conditions live in § 50(k)–(p) and (v).

(8) Manufactured-home conversion. § 50(a)(8) allows conversion and refinance of a personal-property lien secured by a manufactured home to a lien on real property, including refinance of the purchase price of the home, the cost of installing it on the real property, and refinance of the purchase price of the real property. That is how a chattel loan on a home becomes a homestead real-property lien without pretending the deal is § 50(a)(6) cash-out.

§ 50(e) and § 50(f): the two ways a refinance leaves the list

§ 50(e) is the additional-funds rule. A refinance of debt described by § 50(a)(1)–(a)(5) that includes additional funds may not be secured by a valid homestead lien unless the refinance is a § 50(a)(6) equity loan or all of the additional funds are used for (i) reasonable costs necessary to refinance the permitted debt, or (ii) a purpose described by § 50(a)(2) (taxes), (a)(3) (owelty), or (a)(5) (work and material). Nothing else qualifies. A $12,000 credit-card payoff wired at closing is not a "reasonable cost necessary to refinance," and calling the loan a rate-and-term refinance on the Closing Disclosure does not make it one.

§ 50(f) runs the other direction. An existing (a)(6) equity loan may be refinanced as a § 50(a)(4) lien—out of equity-loan status—only through § 50(f)(2) and § 50(f-1), which Section 5.3 teaches in full: no closing before the first anniversary of the equity-loan closing, no additional funds beyond refinancing debts described by § 50(a)(1)–(a)(7) plus actual costs and reserves the lender requires, a combined principal at or under 80 percent of fair market value on the refinance date, and the separate (f)(2)(D) notice delivered within three business days of application and at least 12 days before closing.

Run the gate analysis before the product analysis. Ask which numbered subsection the debt lives in, confirm the formalities that subsection demands, and only then price the loan. A lien that never fit a gate cannot be repaired by good federal disclosures.

Official starting points

• SML laws page (lists Article 16, Section 50)
• Texas Constitution Article XVI § 50(a), (c), (e), (f), (f-1), (q)
• Property Code § 41.001 (encumbrances that may be properly fixed on homestead property)
• Finance Commission interpretations in 7 TAC Chapter 153