How to Use the Closed-End Second Lien Program for Home Equity in Texas

Unlocking Home Equity Through Second Liens in Texas

For many homeowners across Texas, the value of their property represents not only a roof over their heads but also an untapped financial resource. With interest rates fluctuating and first mortgage terms becoming increasingly favorable, refinancing to access home equity is not always the best move. This is where the Closed-End Second Lien Program offered by NQM Funding can become a powerful financing tool—particularly in Texas, where specific constitutional guidelines govern home equity lending.

A Closed-End Second Lien is a mortgage loan secured by the same property as the first mortgage but subordinate in position. Unlike HELOCs, which offer a revolving credit line, closed-end seconds deliver a lump sum of cash at a fixed interest rate over a set repayment term. These terms offer predictability and flexibility for brokers and mortgage loan officers seeking to help clients access home equity without disrupting their primary mortgage.

Advantages of Closed-End Second Liens for Texas Homeowners

One of the most attractive features of the Closed-End Second Lien Program is the ability to preserve an existing low-interest first mortgage. Homeowners with favorable first-lien terms often hesitate to refinance because it would mean losing their historically low rate. By instead opting for a second lien, borrowers can access up to $500,000 of their home’s equity with terms ranging from 15 to 30 years.

This program is available for both primary residences and second homes, making it flexible for a range of borrowers who wish to consolidate debt, finance home improvements, or pursue other financial goals. The loans are structured with fixed rates, giving borrowers predictable monthly payments—an important feature in a volatile rate environment.

NQM Funding’s Second Lien Program at a Glance

The Closed-End Second Lien Program from NQM Funding offers brokers and their clients a powerful, well-defined option for accessing equity. Here are the key features of the program:

– Minimum loan amount: $125,000 – Maximum loan amount: $500,000 – Available for primary residences and second homes – Allowed uses: purchase, rate/term refinance, and cash-out refinance – Fully amortized loans only (no interest-only) – No assumptions or exceptions permitted – Fixed terms available: 15, 20, 25, or 30 years

Why This Program is Unique in Texas

Texas has some of the most complex constitutional rules in the country regarding home equity loans. Any loan that uses the equity of a homestead property in Texas must adhere to Article XVI, Section 50(a)(6) of the Texas Constitution. A closed-end second lien must not be structured in a way that triggers a 50(a)(6) classification, which could subject it to restrictions such as a maximum 80% combined LTV, a mandatory 12-day waiting period, and strict documentation standards.

The NQM Funding program is designed specifically to avoid triggering these issues. By ensuring the second lien is not categorized under 50(a)(6) when it does not qualify, brokers can deliver compliant, efficient equity lending without unnecessary hurdles. This distinction is essential for brokers working in Texas to understand.

Texas Home Equity Legal Considerations

Location and property type play a major role in determining eligibility for a closed-end second lien in Texas. For example, Texas defines homesteads as either urban or rural, each with specific acreage limits. Urban properties cannot exceed 10 acres, while rural homesteads may extend up to 20 acres.

Title documentation is another critical requirement. NQM Funding mandates a title insurance policy written on Texas Land Title Association forms with T42 and T42.1 endorsements. Any exceptions or defects must be addressed before closing. Additionally, closing must occur in an attorney’s office or a title company office. Mobile notaries are not permitted under any circumstances, per Texas Home Equity Law.

Eligibility Criteria and Documentation Standards

Borrowers must meet several criteria to qualify. Acceptable documentation methods include:

– Full Documentation (W2s and pay stubs) – 1099 Documentation – Bank Statements (2-month minimum) – P&L Statement with supporting deposits

Borrowers must have verifiable ability-to-repay (ATR), and residual income thresholds apply if the DTI exceeds 43% or the loan is classified as HPML. No exceptions are allowed under this program, making accurate, up-front documentation essential.

Ineligible borrowers include:

– Co-signers – Non-occupant co-borrowers – Borrowers not on title – Foreign nationals – Trusts, LLCs, and corporations

All borrowers must reside in the property and be included on title.

Approved First Lien Structures When Pairing with a Second

A closed-end second lien can either stand alone behind an existing first lien or close simultaneously with a first lien. When paired simultaneously, the first mortgage must be agency-eligible and meet specific criteria:

– At least 5 years remaining term – No negative amortization – No balloon features – No call provisions – No HELOCs with open draw periods

If the second lien is closing behind an existing first, documentation such as the note, mortgage statement, or credit report must clearly reflect all applicable terms.

Stand-Alone Seconds: When to Use Them

Stand-alone second liens are ideal when a borrower has an existing low-interest first mortgage they want to retain. This setup provides a cost-effective method of accessing equity without refinancing the entire loan.

Eligible first liens must not have call provisions, future advance clauses, or be privately held. The first lien must also not permit negative amortization or balloon payments. When first lien information is limited, a credit report or mortgage statement may suffice.

Maximizing Borrower Benefit Without Violating Texas Law

For primary residences, refinancing under Texas law is limited. If the borrower has ever used a 50(a)(6) loan, the property remains classified as such, and future transactions must comply with that section’s requirements. However, for second homes and investment properties, cash-out refinances may be structured as closed-end seconds if no 50(a)(6) liens exist in the chain of title.

It’s also critical to respect Texas’ cap on fees. The total points and fees charged to the borrower must not exceed 2% of the loan amount, not including title insurance, survey costs, or other allowable exclusions.

Process and Best Practices for Brokers

Successfully closing a second lien in Texas requires careful attention to compliance and documentation. Here are some key steps to follow:

– Ensure borrowers sign the “Notice Concerning Extension of Credit” at least 12 calendar days before closing. – Gather title policy with appropriate endorsements. – Confirm all borrowers on title are occupying the home. – Work with attorneys approved by NQM Funding to review final documents. – Submit for approval under the NQM Funding Closed-End Second Lien program (TPOs must be approved to originate these loans).

You can quickly determine borrower eligibility by submitting a Quick Quote directly through NQM Funding’s portal.

Avoiding Common Pitfalls

There are several red flags that can disqualify an otherwise promising deal:

– Misclassifying a transaction as rate/term when cash is involved – Including non-occupant co-borrowers on a homestead – Using a first mortgage with an unacceptable feature (balloon, interest-only) – Closing outside of an attorney’s office or using a mobile notary – Failing to meet residual income requirements

Each of these can lead to loan rejection or legal issues under Texas constitutional guidelines.

Complementary Non QM Loan Solutions for Broader Scenarios

For borrowers who don’t qualify under the standard guidelines or who have more complex financial profiles, NQM Funding offers additional Non QM Loan programs that brokers can consider:

– Investor DSCR: Ideal for rental property investors focused on cash flow over traditional income qualifications. – Foreign National Loans: For borrowers residing outside the U.S. who want to invest in Texas real estate. – Bank Statement and P&L Loans: Great for self-employed borrowers who need alternative documentation.

Positioning Yourself as the Go-To Broker for Texas Equity Loans

Understanding how to navigate the unique regulations surrounding Texas home equity lending is essential for brokers who want to stay competitive. Offering the Closed-End Second Lien Program through NQM Funding not only adds a powerful tool to your lending arsenal but also helps you serve a wider range of clients.

As a trusted Non QM Lender, NQM Funding supports brokers with flexible solutions, deep experience, and a commitment to compliance in even the most complex lending environments.

Further Clarification on Residual Income Requirements

Residual income is a critical component for determining loan eligibility when debt-to-income (DTI) exceeds 43% or when a loan is classified as Higher Priced Mortgage Loan (HPML). In these cases, NQM Funding requires the borrower to meet minimum residual income thresholds:

– $1,500 for a 1-person household – $2,500 for a 2-person household – Add $150 for each additional household member

This ensures the borrower has enough discretionary income after all monthly obligations are met. For brokers, it’s important to gather full household data early in the application to determine whether residual income requirements will present any issues.

Working With TPOs: Approval Process and Expectations

Third-party originators (TPOs) must be approved by NQM Funding in order to offer the Closed-End Second Lien Program. This process includes a review of the broker’s licensing, history, and operational standards. Once approved, brokers gain access to the full suite of Non QM Loan products available through NQM Funding.

The TPO approval process is straightforward, and once completed, gives brokers access to rate sheets, scenario desk support, and access to the Quick Quote tool.

Marketing the Product to Your Borrower Base

Closed-end second liens remain underutilized, largely due to lack of borrower awareness. As a broker, one of the best ways to create demand is to position the program as a way to “access equity without touching your first mortgage.” This messaging resonates with homeowners who locked in record-low interest rates in prior years.

Some effective use cases to highlight include:

– Financing large home renovations – Consolidating high-interest credit card or personal debt – Providing liquidity for small business needs or tuition – Covering the cost of a second home or investment opportunity

What Brokers Should Avoid When Structuring a Deal

Even seasoned brokers can make missteps when originating second liens in Texas. The most common mistakes include:

– Allowing mobile closings or remote notary signings – Failing to account for required endorsements on title (T42, T42.1) – Accepting gift funds without verifying acceptable sourcing or use – Miscalculating points and fees, especially when near the 2% cap

Choosing the Right Lender Partner

The Closed-End Second Lien Program is a specialized product that requires a partner with deep knowledge of state law, thorough compliance oversight, and flexible underwriting. NQM Funding meets those criteria and goes further, offering direct broker support, scenario desk access, and an in-house underwriting team familiar with Texas lending laws.

This product is best used as part of a broader suite of options, particularly when borrowers may not qualify through traditional lending channels.

Final Thoughts

For mortgage brokers operating in Texas, the Closed-End Second Lien Program opens up a unique opportunity to help homeowners leverage equity without disturbing favorable first mortgage terms. With proper education, compliant structuring, and the right Non QM Lender, brokers can position themselves as trusted advisors and offer creative financing solutions that meet modern borrower needs.

To get started or submit a scenario for review, visit NQM Funding’s Quick Quote page today.