Home improvement loans in Texas: your options and the Texas rules on each

Why are home improvement loans different in Texas?

Texas protects your homestead in the state constitution. A lender can only place a lien on the home you live in for reasons listed in Article XVI, Section 50, and paying for improvements is one of the oldest reasons on that list. Every option below fits into one of those categories, and each one comes with its own rules about timing, signing, and how much you can borrow.

That is why advice written for other states can steer you wrong here. A HELOC in Texas is not the same product it is in California, and the contractor financing you are offered may put a lien on your home whether anyone mentions it or not.

Option 1: A cash out refinance or home equity loan

If you already have equity, you can pull it out as a lump sum, either by refinancing your whole mortgage or by adding a home equity loan behind the one you have. In Texas both fall under Section 50(a)(6), which caps everything secured by the home at 80 percent of its value.

On a home worth $500,000 with $300,000 owed, that cap leaves up to $100,000 to work with. The rules also include a 12 day waiting period before closing, closing at a lender, attorney, or title company office instead of your kitchen table, and one of these loans per 12 months. If you have a low rate on your current loan, a home equity loan usually beats refinancing the whole balance. My post on Texas cash out refinance rules walks through all of it.

Option 2: A Texas HELOC

A home equity line of credit lets you draw money as the project moves instead of all at once, which fits remodels that are paid in stages. Texas HELOCs follow the same 80 percent cap as other home equity loans, plus a few rules of their own: each draw has to be at least $4,000, and you cannot pull from the line with a debit or credit card.

That minimum draw is worth knowing before you plan on using a HELOC for small purchases at the hardware store. It works best for a contractor schedule with a few large payments.

Option 3: A renovation loan built into the purchase or refinance

If you are buying a house that needs work, or you do not have much equity yet, a renovation loan rolls the cost of the work into the mortgage itself and is based on what the home will be worth after the work is done.

The FHA Limited 203(k) covers up to $75,000 of nonstructural work like a kitchen, flooring, or a new roof. The standard 203(k) handles bigger and structural projects and requires a HUD consultant to oversee the work. Fannie Mae’s HomeStyle Renovation is the conventional version and allows projects FHA will not, like a pool or an outdoor kitchen, for buyers with stronger credit.

These take longer to close because the contractor bids and the as completed appraisal have to come together before closing. Around Austin right now, a lot of the renovation activity is on the east side, and there is always land being bought with construction loans, which is its own kind of build financing.

Option 4: A Texas home improvement loan with a contractor contract

Texas also allows a lien on your homestead for work and materials under Section 50(a)(5), the oldest home improvement rule in the constitution. This is often what sits behind contractor or lender financing for a specific project.

The protections are specific. The contract has to be in writing and signed by both spouses if the home is a family homestead. For repairs or renovations to an existing home, you cannot sign until at least five days after you apply for the financing, you have three days after signing to cancel without penalty, and the signing has to happen at the office of the lender, an attorney, or a title company. The waiting periods can be waived only for emergency repairs that affect health or safety, and only in writing.

If a contractor offers financing, ask directly whether it puts a lien on your home. If it does, these rules apply, and you should see them.

Which option fits your project?

Here is the quick way to sort it. If you have equity and one big project, a home equity loan or cash out refinance. If the work is paid in stages, a HELOC. If you are buying a fixer or do not have equity yet, a 203(k) or HomeStyle loan. If the project is small and you would rather not put a lien on your home at all, an unsecured personal loan from your bank may be simpler, even though it is not something I do. For what it is worth, on my own home I went with a HELOC because it fit my lifestyle better. That is the real point: the right choice depends on how your mortgage is set up and how money works for you, not just a list of pros and cons.

Send me the contractor quote and what you think the home will be worth when it is done, and I will lay the options next to each other so you can see which one costs least for your project.