Legal for Life

Homestead exemption is something that every homeowner wants, but does not necessarily understand why they want it, other than, “my Realtor/lawyer/neighbor told me to do it”. I’m here to tell you what it is all about and why you want it.

First things first: What is a homestead?

A homestead, for the purposes of this statute, is defined as a dwelling with its land and buildings, occupied by the owner as a home and exempted by a homestead law from seizure or sale for debt. The exemption works in three primary ways: prevent creditors from forcing you out, protecting a surviving spouse and giving them a place to live and (drum roll please) property tax breaks! Some states you must formally designate the property as your homestead, but it is not mandatory in Texas, just recommended. For designation, you must provide a full legal description and a statement from the claimant, designating that property as their homestead.

What kinds of properties are exempt? Is my property exempt??

The Texas Property Code classifies what a homestead is and breaks it down into sub-classes. The first class, urban, is defined by the Code as property which is located within a municipality, is served by police and fire protection, and at least three municipality services (electric, gas, sewer, storm sewer, water), at the time of designation, but is limited to 10 acres. This usually covers city-folk and most of suburbia.

Some of suburbia may be covered in the second class of rural, which is the same as urban, but is limited to 200 acres. There is not a specific section where the Code defines rural, but it is assumed to mean the homes outside of the urban definition.

The third class is not technically a class at all. Texas used to provide a business homestead, but the law changed to define the urban homestead to include both home and “a place to exercise a calling or business”. Basically, it must function as both a home and a business. A great example would be running your real estate business out of your home office. No, sleeping at your cubicle won’t count for exemption. It must have other home-y touches such as a throw pillow or two, and a separate address from your boss’s TPS reports.

Who is eligible for a homestead? Do I count?

There are currently 5 classes of exempt homeowners: Family, Single Adult, Surviving Spouse, Surviving Minor Children and Unmarried Adult Children Remaining with the Family. Let’s jump right in and break those down:

• Family: Must function as a home. Family is relation by blood, marriage or adoption and must consist of independent(s) supporting dependent(s). You can break in down further, but that is a blog post for another time.
• Single Adult: At the time of designation, the claimant must be single and over the age of 18. A person who does not live with their spouse does not qualify, since they are still legally married. A divorced parent may not claim this either, since they are supporting dependents (see family above). A widow may not claim this, because they have their own class (see spouse below).
• Surviving Spouse: Upon the death of a husband or wife, the remaining spouse is entitled to a constitutional survivor’s right for life, or as long as they choose to remain in the home. For example, husband and wife live in a home and the husband passes away. The husband’s interest in the home passes to his children from a previous marriage. The children cannot force the wife out of the home, even though they have inherited a share. As long as she chooses to remain the house, she has a right to maintain it as her homestead.
• Surviving Minor Children: Upon the death of both parents, the homestead property will pass according to the parent’s will, or descent and distribution. However, just like the Surviving Spouse, the children are entitled to a constitutional survivor’s homestead until a time they choose to not live at the home.
• Unmarried Adult Children Remaining with the Family: The most recent class, as of 2005, acts much like the Surviving Minor Children one, but the unmarried, adult children must have lived with the parents at the time of death.

What are the actual benefits? What does this do for me?

The first major protection is asset protection. While a claimant is alive, a creditor may not force the sale of the home in order to pay debts. If a claimant deceases, their exemption is passed to the survivor (see above) and the creditors may not force the sale to pay the debts of the decedent. However there are nine exceptions where the creditor may collect in both cases. The nine are as follows:

• Purchase Money Liens
• Ad Valorem Taxes
• Mechanic’s/ Materialman’s Liens
• Owelty of Partition Lien
• Refinancing
• Home Equity Loan
• Reverse Mortgage
• Manufactured Home Refinancing
• Preexisting Lien

Please note: if a creditor wrongfully files against the homestead, both the creditor and the creditor’s law firm may be held liable, so be informed! Please seek legal advice from a local attorney with experience in these matters.

Another benefit is special occupancy rights. As described above, if a claimant passes away, the survivors are protected from heirs forcing them out.

The final benefit, and the benefit everyone is waiting for, is tax savings! Here is the breakdown of the amount exempt:

• $3,000 of the assessed value for single adults and families
• $15,000 of the assessed value for an adult in relation to school taxes
• $25,000 of the assessed value for disabled adults or those over the age of 65

Please consult an attorney or tax appraiser for your personal exemptions.

What if I move? Does it stay on that property?

In short, no. If you keep that property, but make another your primary residence, you lose the exemption on the first property. You do have the option do make the second property your homestead, but must do so within six months to avoid creditors coming after the second property.

If the property is abandoned, you may lose the homestead exemption. A challenger must prove that the claimant discontinued use and intended to permanently abandon the property.

What if I rent out the property?

You may keep an exemption even if you are renting out the property, unless you acquire another homestead property.

Ok, I still have questions. Can you help me?

Absolutely! If you are in the Dallas/Ft. Worth area, please use the links to contact us. If you are out of the area, please consult your local attorney, or local bar association to find an attorney in your area.

[Editor’s Note: The writing of this blog will be taken over by Carly, assistant to Kellie Stokes. Please see “About This Blog” for more information.]

Situation: You are a first time home buyer. You are looking for the home of your dreams, complete with a white picket fence, porch swing, and over-achieving garden. Before you shop around, you decide to meet with a loan officer to go over your finances and to pre-qualify for said dream home. The Loan Officer gives you a Good Faith Estimate to review.

Question: …what the heck is this thing and what does this have to do with my white picket fence?

Dictionary Answer: A Good Faith Estimate (GFE) is an itemized list of fees and costs associated with your loan, which must be provided by a mortgage lender or broker to a customer within three days of applying for a loan, as required by the Real Estate Settlement Procedures Act (RESPA). (Feel free to click that link – Wikipedia does an awesome job on breaking down each and every fee that might go into the GFE.)

Say what? Basically, your lender will take what you can afford to pay a month (usually an average), your down payment, any discounts, the fees the lender and title company might charge, and ta da! An estimate of what your closing costs will be. Using that estimate, you can realistically shop for that dream house. [Side note: use this to your advantage and don’t live beyond your means.]

There are several advantages to the GFE:

1. It is included in the new HUD-1. The HUD-1, commonly referred to as the settlement statement, has all the final fees from the lender, title company, etc – that is the final bill for your loan. In fact, on page 3 of the HUD-1, there are three boxes to compare the estimates to the current fees and rates. The GFE and the HUD-1 should be very close in number. Sometimes other fees can be tacked on at the end (sometimes accidentally) and comparing the two may save you and your closer some peace of mind! This updated settlement statement is designed to catch those mistakes early. The new HUD-1 will go into effect on 1-1-2010.
2. You can shop lenders. Say you just walked into to the local bank down the street. You like the people (and you don’t know any better than to like their estimates), but when you bring the GFE to your REALTOR, she sends you to her guy. Her guy happens to be $1200 less in fees. Whoopee! That is more house for you to shop for, i.e. one with two swings! Or an extra bathroom!
3. Know EXACTLY what you are getting into. Just because your mother has been pushing you to own a home doesn’t mean you are ready for it. With the current credit crisis and shady subprime mortgage dealings, it may be better to live in mom’s house for another year and afford the dream house (instead of settling for the fixer-upper you don’t know how to fix).
4. It levels the playing field for consumers. Lenders will cater to YOU instead of the other way around. Now is the time to ask what all those fees are for and to make sure they apply to you. Sometimes people don’t understand what they are paying for and this will give you an idea BEFORE you pay for it.
5. You can save money! The Department of Housing and Urban Development estimates that consumers can save around $700 in closing costs by paying attention to the GFE. Sign me up! That is enough to buy and install my own picket fence!

I spoke with a local loan officer regarding these changes to get his opinion. Martin Quiroz, of Prime Lending in Dallas (say hi Martin!), said that this is very good for the consumers, but tougher on lenders. This change encourages clients to shop around for the best rates and lowest fees. However, Martin stresses that it forces the lender to explain all fees so the borrowers won’t be surprised come closing day (which has happened). Use a lender that feels comfortable explaining each fee.

So, all you home buyers out there! While home buying is a confusing and complicated process (and what isn’t these days), educating yourself and surrounding yourself with good lenders and realtors will not only save you money, but will give you piece of mind. Ask questions! Compare lenders! And don’t brush off that GFE – it may be the difference between a picket fence and a couple of sticks. What will you do with the knowledge you’ve gained? Let us know in the comments below. We’d love to hear from you.

Michael Jackson, world renowned pop-icon, died yesterday afternoon of cardiac arrest. While the world mourns, two major questions remain regarding his estate: who will take care of his children and who will take care of his crumbling financial empire?

Jackson had three children with two women (link: CNN.com); ex-wife Debbie Rowe and an unidentified woman. Rowe may have claim to her children, but Jackson’s mother, Katherine Jackson, claims to want all three. It is not clear whether Michael Jackson had a trust or will in place, to take care of his children, in the event of his death.

The Wall Street Journal estimated that Jackson’s assets may be between $500 million and $1 billion, due to his stake in a music publishing catalog, the rights to his own songs and the memorabilia he owned at the time of his death.  However, it is also estimated that his debts may be up to $500 million. Even though his assets most likely exceed his debts, there will be many creditors looking for their due.

This should be a wake-up call to every person in America; do not leave it up to someone else to take care of your affairs after your death. Even if you trust your loved ones, they may not know, nor remember, your specific wishes. You can do something now. Speak to a local attorney about your will . Make sure there are the proper provisions to take care of your financial assets, and your children. You do not need an estate the size of Michael Jackson’s to warrant a will. If you are married or divorced, you need a will. If you own a house, you need a will. If you have children, you need a will. If you have money in the bank, you need a will. If you own a business, you need a will.

Make sure you and your loved ones are prepared.

The recent downturn of the real estate market pushed panic through many American citizens. In an attempt to calm the storm, our government put forth the American Recovery and Reinvestment Act of 2009; which can be read about at http://www.Recovery.gov. This Act includes a tax credit of up to $8,000 for first time homebuyers. Originally, a homebuyer could access this credit only after filing their 2010 tax return. HUD, the U.S. Department of Housing and Urban Development, recently announced the tax credit can be used towards closing costs and/or down payments; more information is available at http://www.hud.gov/news/release.cfm?content=pr09-072.cfm. You should be prepared for a number of additional steps to the receiving process of this credit at closing. You can visit http://www.arizonamortgageteam.com/new-home-buyer-8000-tax-credit-down-payment-answers-to-questions/ for a good review of the process.

This information is for educational purposes only and shall not be construed as legal advice.