Must a 203(k) loan in Texas include a Mechanic's Lien Contract?
In a nutshell:
Must a 203(k) loan be made in connection with a Mechanic’s Lien Contract?
Under Texas law, yes, it must. A 203(k) loan includes funds for repairs and renovation of the borrower’s principal residence, which is either already owned by the borrower or is being purchased by the borrower. A borrower must reside or will reside in the property as a condition of obtaining a 203(k) loan.
In both instances, under Texas law, the subject property is the borrower’s homestead. That portion of the loan providing funds for the repairs and renovations cannot be secured by a lien upon the homestead unless certain requirements are met, primary among them are that the person who is to furnish material or perform labor and the owner must execute a written contract setting forth the terms of the agreement; The contract must be executed before the material is furnished or the labor is performed. The contract must be filed of record in the county in which the homestead is located. That also means that the owner cannot be their own contractor. The contractor must be a third party.
The deed of trust lien securing funds for repairs and renovations of the subject property under the 203(k) loan will only be valid against the homestead if it is given in renewal and extension of the lien established by the contract between the owner and the contractor. Therefore, if there is no contract between the owner and the contractor executed and recorded as stated above, then the 203(k) deed of trust will not be valid as against the homestead to the extent of that portion of the loan proceeds disbursed for the repairs and renovations.
The Texas Constitution, Article XVI, § 50(a)(5) and Texas Property Code § 53.254 provide other requirements which must be met in order for the lien upon the homestead for improvements, repairs and renovations to be valid. Customarily, the contract between the owner and the contractor takes the form of a recorded Mechanic’s Lien Contract, providing for a non-judicial foreclosure remedy.
The State of Texas famously recognizes one of the broadest homestead exemptions in the United States.1 Article XVI, § 50 of the Texas Constitution has long protected the homestead, strictly limiting the types of loans that may be secured by a homestead lien. Historically, constitutionally noncompliant homestead liens were absolutely void.2 What the Constitution forbids cannot be evaded even by agreement of the parties.3
In an urban area the homestead consists of one or more contiguous lots containing no more than ten acre; and in a rural area the homestead consists of no more than 200 acres.4
A homestead may be established upon unoccupied land if the owner intends to occupy and use the premises within a reasonable and definite time in the future, and has made such preparations toward actual occupancy that “are of such a character and have proceeded to such an extent as to manifest beyond a doubt the intention to complete the improvements and reside upon the place as a home.5 The purchase of building materials and preparation of plans for a home is sufficient evidence of the overt acts required to establish the existence of a homestead.6
Under the provisions of article XVI, § 50, of the Constitution, a valid lien could not be created upon a homestead to secure money borrowed for the purpose of paying for improvements on the property, even when the loan proceeds are actually used for that purpose, if there was no contract for furnishing the materials or doing the work.7
So, if a person (not having an existing homestead) purchases a property and simultaneously has the present intent to occupy and use the premises within a reasonable and definite time in the future, and has made such preparations toward actual occupancy that are of such a character and have proceeded to such an extent as to manifest beyond a doubt the intention to complete the improvements and reside upon the place as a home, then the property is their homestead.
In a 203-K loan, the borrower is purchasing the property to occupy and use the premises within a reasonable and definite time in the future and is simultaneously contracting for the construction of improvements to such homestead. For that reason, immediately upon acquiring title, the property becomes the borrower’s homestead.
In order for a lender to have a valid lien upon the homesteads for repairs and renovation improvements, certain events must happen. Among such critical events are the following:
- a. the work and material are contracted for in writing, with the consent of both spouses, in the case of a family homestead, given in the same manner as is required in making a sale and conveyance of the homestead;
- b. the contract for the work and material must expressly provide that the owner may rescind the contract without penalty or charge within three days after the execution of the contract by all parties; and
- c. the contract for the work and material is executed by the owner and the owner's spouse only at the office of a third-party lender making an extension of credit for the work and material, an attorney at law, or a title company. If such a contract is not created in that manner, there can be no valid lien upon the homestead to secure the monies loaned to pay for the improvements.8
In addition, to fix a lien on a homestead:
- a. The person who is to furnish material or perform labor and the owner must execute a written contract setting forth the terms of the agreement; The contract must be executed before the material is furnished or the labor is performed;
- b. If the owner is married, the contract must be signed by both spouses;
- c. If the contract is made by an original contractor, the contract inures to the benefit of all persons who labor or furnish material for the original contractor; and,
- d. The contract must be filed with the county clerk of the county in which the homestead is located. The county clerk shall record the contract in records kept for that purpose.9
All improvement in connection with a 203-K loan are repairs and renovations to the homestead. Therefore, in order for the Deed of Trust lien securing the a 203-K loan to be valid as to the cost of the repairs and renovations, the Deed of Trust must renew and extend a lien established by a contract for the work and material, created in accordance with Texas Constitution, Article XVI, § 50(a)(5) and Texas Property Code § 53.254. Customarily, the contract takes the form of a recorded Mechanic’s Lien Contract, providing for a non-judicial foreclosure remedy.
1Cadle Co. v. Ortiz, 227 S.W.3d 831, 835 (Tex.App.-Corpus Christi 2007, pet. denied).
2Wood v. HSBC Bank USA, N.A., 505 S.W.3d 542, 545 (Tex. 2016).
3Wood v. HSBC Bank USA, N.A., supra.
4Texas Constitution, Article XVI, Section 51.
5Farrington v. First Nat'l Bank of Bellville, 753 S.W.2d 248, 250 (Tex. App.-Houston [1st Dist.] 1988, writ denied).
6Clark v. Salinas, 626 S.W.2d 118, 120 (Tex. App. 1981), writ refused NRE, 628 S.W.2d 51 (Tex. 1982).
7Lubbock Nat. Bank v. Nickels, 63 S.W.2d 764, 766 (Tex. Civ. App. 1933).
8Texas Constitution, Article XVI, § (50)(a)(5).
9Texas Property Code, § 53.254.