Friends,
just to close this threat, the second title company also refused to close this loan. At this time, we have given up and will sell this property next year. Here is the response from the underwriter of the title company. I hope this will be helpful for others in the same situation.
"Thanks for the additional info! We are not going to be able to insure this transaction because of homestead concerns. Since they live out of state and this is the only property they own in Texas, this property is their Texas homestead for insuring purposes although they do not live there. This is the case because they do not have any other property in TX to claim as their homestead. Because of this, even though they’ve removed the exemption, we look at the property as homestead and thus, the only way they would be able to do this transaction would be as a Home Equity and cash out of it.
Let me know if you have any questions. Have a great week!"