What Makes Texas Home Equity Loans Different
Texas treats home equity loans differently than other states. The state constitution includes Article XVI, Section 50(a)(6), which creates strict rules for home equity lending. These rules exist to protect homeowners from predatory lending practices.
When you get a home equity loan in Texas that falls under Section 50(a)(6), your lender faces additional requirements. One of the most important involves title insurance. Standard title insurance policies don't provide enough protection for these specialized loans.
Say you're refinancing your Texas home to pull out $75,000 in equity for home improvements. If this loan qualifies as a Section 50(a)(6) equity mortgage, your lender must secure enhanced title insurance coverage. This isn't optional — Fannie Mae requires it for any lender wanting to sell the loan.
Required Title Insurance Endorsements
Your lender must obtain three specific types of coverage beyond the basic title insurance policy.
The first requirement is Form T-42, the Equity Loan Mortgage Endorsement. This endorsement provides specific protections related to equity lending. The form includes several coverage paragraphs labeled 2(a) through 2(f). Your lender cannot accept a T-42 endorsement that excludes or modifies any of these coverage sections.
Paragraph 2(f) provides optional coverage that becomes mandatory for Fannie Mae loans. Many title companies might try to exclude this coverage to reduce their risk, but your lender must insist on its inclusion.
The second requirement is Form T-42.1, the Supplemental Coverage Equity Loan Mortgage Endorsement. This endorsement adds even more protection beyond what T-42 provides. It includes coverage paragraphs 1(a) through 1(k), and none of these can be excluded or modified.
The Texas Insurance Commission occasionally updates Form T-42.1 to add new coverage paragraphs. When this happens, your lender must obtain coverage for these new paragraphs as well.
Additional State-Approved Endorsements
Texas continues to develop new title insurance endorsements for equity mortgages. When the Texas Insurance Commission approves a new endorsement that provides additional mortgagee coverage, your lender must obtain it.
This creates an ongoing obligation. Your lender cannot simply secure the endorsements that existed when they first started making equity loans. They must stay current with new requirements as they emerge.
For example, if Texas approves a new Form T-43 endorsement six months from now, your lender must begin obtaining this endorsement for all new Section 50(a)(6) mortgages. The endorsement becomes required as soon as it becomes "legally available."
Why These Requirements Exist
Fannie Mae imposes these strict title insurance requirements because Texas equity mortgages carry unique risks. Section 50(a)(6) creates specific borrower protections that can affect the lender's security interest in the property.
Texas law includes a 12-day right of rescission for home equity loans. Borrowers can cancel the loan for any reason within 12 days of closing. This creates title complications that standard insurance doesn't address.
The state also limits how much equity you can borrow against your home. If a lender violates these limits, the loan might become unenforceable. Standard title insurance doesn't protect against this risk, but the required endorsements do.
Texas places restrictions on loan fees, prepayment penalties, and other loan terms. Violations can affect the lender's ability to foreclose. The enhanced title insurance coverage protects against losses from these compliance failures.
What Your Lender Must Verify
Your lender needs to confirm that the title company understands these requirements. Many title companies are familiar with standard residential transactions but may not know the specific endorsement requirements for Section 50(a)(6) mortgages.
The lender must review the title commitment to ensure all required endorsements are listed. They cannot accept a policy that excludes coverage paragraphs or adds exceptions to the required endorsements.
Your lender should verify that the title company has current versions of all required forms. The Texas Insurance Commission periodically updates these endorsements, and using outdated versions won't satisfy Fannie Mae requirements.
Common Problems and Complications
Title companies sometimes resist providing the full coverage required by these endorsements. They may try to add exceptions or exclude certain coverage paragraphs to limit their exposure. Your lender must reject any endorsements with unauthorized modifications.
Some title companies don't stock the required endorsement forms or aren't familiar with their requirements. This can delay your closing while the title company obtains the proper forms and reviews their coverage obligations.
Rural areas of Texas may have limited title company options. If your local title company cannot provide the required endorsements, your lender may need to work with a different company, potentially adding time and complexity to your transaction.
The cost of these additional endorsements gets passed to you as the borrower. Enhanced title insurance coverage costs more than standard policies, and these costs appear in your closing expenses.
Impact on Your Loan Process
These title insurance requirements don't change your loan application or approval process. They affect what happens behind the scenes between your lender and the title company.
Your lender will coordinate with the title company to ensure proper coverage. You don't need to request these endorsements yourself — your lender handles this requirement.
However, you should understand that these requirements might limit your choice of title companies. Not every company can provide the required coverage, especially in smaller Texas markets.
The additional endorsements may also increase your closing costs. Enhanced title insurance coverage costs more than standard policies, and you'll pay for this protection through higher title insurance premiums.
References
For the official guidelines, see 4702.5: Special title insurance requirements for Texas Equity Section 50(a)(6) Mortgages in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
No spam · Unsubscribe anytime
Original Freddie Mac Guideline Text
Texas Equity Section 50(a)(6) Mortgages must be covered by a title insurance policy meeting the requirements of
Chapter 4702
with the endorsements described below:
An Equity Loan Mortgage Endorsement (Form T-42). The Form T-42 endorsement must include the optional coverage provided by paragraph 2(f) of the endorsement, and there must not be any exceptions to, or deletions of, paragraphs 2(a) through 2(e) of the Form T-42 endorsement.
A Supplemental Coverage Equity Loan Mortgage Endorsement (Form T 42.1). There must not be any exceptions to, or deletions of, paragraphs 1(a) through 1(k) of the Form T-42.1 endorsement or any subsequent subparagraphs added to Paragraph 1 by any revision of the Form T 42.1 approved by the Texas Insurance Commission.
Any other endorsement that provides additional optional mortgagee coverage that is approved by the State of Texas Insurance Commission. The endorsement must be obtained by the Seller for Texas Equity Section 50(a)(6) Mortgages originated on and after the date the endorsement becomes legally available. There must be no exceptions to, or deletions of, any paragraphs providing additional coverage in any such endorsement.
