Texas Construction Lending Requirements

Texas Lien Law Overview

Texas mechanics lien laws are notoriously complex, with rigid procedural requirements that vary based on the claimant’s tier and the property type.

The most critical distinction exists between Residential and Commercial properties. Under Texas law, an owner-occupied residence (a “Homestead”) is fiercely protected by the Texas Constitution. To establish a valid mechanics lien on a Homestead, the contract must be in writing, signed by both spouses before work begins, include a 3-day right of rescission, be executed at the office of a lender, title company, or attorney, and a 5-day waiting period must be observed after loan application (Texas Constitution Article XVI, Section 50(a)(5)).

For commercial properties, these constitutional hurdles do not apply, but strict statutory retainage (“Reserved Funds”) and preliminary notice deadlines still heavily govern the lien landscape. Furthermore, following HB 2237 (2022), design professionals (architects, engineers, surveyors) are now on equal footing with laborers and materialmen regarding lien priority, regardless of whether they contracted directly with the owner.

Texas Mortgage Priority

Will a Texas Lien have priority over pre-existing mortgages or construction loans? Generally, no, provided the construction mortgage is recorded prior to the “inception” of the lien. Texas follows a “first-in-time” priority framework, but applies a relation-back doctrine to determine that time.

Establishing Priority

The “inception” of a mechanics lien is the date of the commencement of construction of improvements or the delivery of materials to the land (V.T.C.A. Property Code § 53.124(a)). To establish priority, a construction lender must record the deed of trust in the county real property records before inception occurs. If the mortgage is recorded before a single shovel of dirt is moved or a single lumber package is dropped, it holds priority over the land. The Affidavit of Commencement is the premier tool used to legally fix this inception date.

Texas Retainage Overview

Texas has strict, mandatory retainage requirements—now statutorily referred to as “Reserved Funds”—that apply universally across Residential (1-4 unit), Multi-Family, and Commercial properties.

Draw Disbursement Best Practice: When using a detailed line-item budget, lenders should hold 10% from each individual draw disbursement as the work progresses. Waiting to simply reserve the final 10% of the total budget at the very end of the project is a severe risk; if the general contractor defaults halfway through the project, the owner will have failed to reserve 10% of the value of the work performed up to that point, violating the statutory requirement to hold funds “during the progress of work.”

Release Timeline: These funds must be held by the owner/lender for an additional 30 days after the work under the original contract is completed (V.T.C.A. Property Code § 53.101(a)(2)).

Implication of Early Release: If the owner or lender releases these reserved funds prior to the expiration of the 30-day window, they forfeit their statutory defense against sub-tier claims and remain personally liable to unpaid subcontractors and suppliers who file valid liens during that period. This effectively creates double-payment exposure for the prematurely released amount (V.T.C.A. Property Code § 53.105).

Lender Liability & Shortfall Exposure: If the owner or lender fails to reserve this 10%, all sub-tier lien claimants who comply with the statutory notice requirements automatically have a lien against the property. However, the owner/lender’s liability is strictly limited to the difference between what was actually retained and what statutorily should have been retained. For example, if the required 10% retainage is $100,000.00, but due to mathematical rounding during draw disbursements the lender only reserved $99,999.99, the lender is only exposed to double-payment liability for the $0.01 shortfall, not the entire $100,000 (V.T.C.A. Property Code § 53.105).

Escrow: Texas does not statutorily mandate that these reserved funds be held in a separate, interest-bearing escrow account.

Texas Prompt Payment Act

The Texas Private Prompt Payment Act (V.T.C.A. Property Code Chapter 28) strictly governs payment deadlines for private construction projects, applying equally to Residential, Multi-Family, and Commercial properties.

Owner to GC: The owner must pay the original contractor the undisputed amount within 35 days after the date the owner receives a written payment request (V.T.C.A. Property Code § 28.002(a)).

Lender Delay Exception: If the owner obtained a construction loan, properly requested disbursement, and the lender fails to disburse, the owner is excused from the 35-day deadline and must pay the contractor within 5 days of receiving the loan proceeds (V.T.C.A. Property Code § 28.002(b)).

GC to Subcontractor: The prime contractor must pay subcontractors within 7 days of receiving payment from the owner (V.T.C.A. Property Code § 28.002(b)).

Penalties & Work Stoppage: Late payments accrue interest at a steep rate of 1.5% per month (18% annually) (V.T.C.A. Property Code § 28.004). Furthermore, an unpaid contractor or subcontractor may legally suspend performance after giving the owner and lender 10 days’ written notice of nonpayment (V.T.C.A. Property Code § 28.009).

Lender Impact: Lenders should aggressively manage draw turnaround times. Missing the 35-day window exposes the project to 18% interest penalties and legal work stoppages, severely jeopardizing completion.

Texas Title Practices

Under Texas law, title companies are not statutorily required to administer construction loan disbursements; therefore, lender-managed disbursements (or third-party draw administration) represent the standard industry practice.

Verifying title and monitoring for liens at each draw is the primary best practice for maintaining first lien priority. Construction lenders have three primary options to achieve this:

• Lien monitoring subscription services: Automated tracking of county real estate records.
• Title updates: Routine checks of public records by a title agent (which identify encumbrances but provide no indemnification).
• Title endorsements: Obtaining actual insurance coverage for the lender via specific endorsements.

Because Texas utilizes a strict “inception” rule where mechanics liens relate back to the commencement of construction or delivery of materials, it is highly recommended that lenders utilize title endorsements (such as the Texas T-3 Endorsement, which is the state’s equivalent to ALTA 33 for disbursements). Relying exclusively on uninsured title updates leaves the lender exposed to “gap” periods and unfiled relation-back claims. Leveraging these tools to clear encumbrances and verify public filings is crucial to mitigating risk.

Texas Lien Waivers

Lien Waiver Summary

Advance lien waivers (contractual clauses waiving lien rights before work begins or payment is made) are strictly prohibited and void as against public policy in Texas. A waiver and release of lien is only enforceable if it is executed and delivered in strict compliance with the statutory forms (V.T.C.A. Property Code § 53.281).

Lenders must ensure that only the four statutory forms are utilized. It is highly recommended that lenders enforce a draw-by-draw exchange, utilizing the Conditional Waiver for the current draw request (which becomes legally binding the moment funds clear) and requiring the Unconditional Waiver for the previously funded draw to prove payment was finalized.

Statutory Lien Forms

Yes. Texas strictly mandates the use of four specific statutory lien waiver and release forms. Any waiver that deviates from these forms is legally void and unenforceable.

• Conditional Waiver and Release on Progress Payment
• Unconditional Waiver and Release on Progress Payment
• Conditional Waiver and Release on Final Payment
• Unconditional Waiver and Release on Final Payment

Statute Citation: V.T.C.A. Property Code § 53.284.

Lien Waiver Notarization

No (for modern contracts). Following the passage of HB 2237, Texas law no longer requires statutory lien waivers to be notarized for original contracts executed on or after January 1, 2022. However, if the original contract was executed before January 1, 2022, the waivers must be notarized to be valid (V.T.C.A. Property Code § 53.284).

Texas Notices

Notice of Commencement (or similar like event)

Texas utilizes an Affidavit of Commencement.

Recognized by State?

Yes.

Who Files

The Owner and the Original Contractor (jointly executed).

When Must it be Filed

Legally optional, but highly recommended. If utilized, it must be filed no later than the 30th day after the date of actual commencement of construction or delivery of materials (V.T.C.A. Property Code § 53.124(c)).

Appoint a Designee

No.

Posted on Jobsite

No.

Effect: Filing this document provides prima facie evidence of the date of commencement. For the lender, having this recorded after the deed of trust legally fixes the inception date, decisively proving the mortgage’s first-in-time priority over all subsequent relation-back mechanics liens.

Preliminary Lien Notifications

In Texas, the original (general) contractor is not required to send preliminary notices. However, subcontractors and suppliers must send preliminary notices to the owner and original contractor to trap funds and perfect their lien rights (V.T.C.A. Property Code § 53.056).

• Commercial / Multi-Family: Subcontractors must send written notice of unpaid balances by the 15th day of the third month following each month in which labor or materials were provided.
• Residential: Subcontractors must send written notice of unpaid balances by the 15th day of the second month following each month in which labor or materials were provided.

Implication: Failure to send these notices by the statutory deadlines completely invalidates the claimant’s right to file a mechanics lien against the property.

Notice of Completion (or similar like event)

Texas utilizes an Affidavit of Completion.

• Recognized by State? Yes.
• When Must it be Filed: Legally optional, but highly recommended. If utilized, there is no statutory deadline, but it should be filed immediately after the work under the original contract is completed to formalize the timeline (V.T.C.A. Property Code § 53.106).

Effect: Filing this document serves as prima facie evidence of project completion. Most importantly, it officially starts the 30-day clock during which the owner/lender must hold the 10% Reserved Funds. It drastically limits the time lower-tier claimants have to send notices and file liens against the retainage.

Additional State-Specific Notices

Texas Constitution Homestead Requirements: As outlined in the Lien Law Overview, establishing a valid lien (and thereby a valid construction mortgage) on a primary residence requires draconian compliance with Article XVI, Section 50(a)(5). Failure to adhere to the 5-day waiting period, 3-day rescission period, and spousal signature mandates renders the mechanics lien void, leaving the lender with unsecured debt.

Texas Document References

Texas Contractor Licensing & Bond Requirements

Texas does not have a centralized, statewide licensing requirement for general contractors or residential builders. Instead, general contracting is regulated heavily at the local/municipal level. Most major cities (e.g., Austin, Dallas, Houston) require general contractors to hold local business registrations and post municipal compliance bonds.

However, specialty trades are strictly regulated at the state level. Electricians and HVAC contractors must hold active state licenses issued by the Texas Department of Licensing and Regulation (TDLR). Plumbers are regulated and licensed exclusively by the independent Texas State Board of Plumbing Examiners (TSBPE), following a failed legislative effort to move them under the TDLR umbrella.

• License Lookup: Lenders should verify electricians and HVAC contractors via the TDLR License Search Portal, verify plumbers via the TSBPE Public License Search, and verify general contractors directly with the applicable municipal building department.
• Surety Bonds: There is no statewide commercial or residential surety bond requirement for general contractors to operate, though owners/lenders may privately require payment and performance bonds.