MERITAGE CORP
MODIFICATION TO $65,000,000 LINE OF CREDIT
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>3
<FILENAME>ex10-1.txt
<DESCRIPTION>MODIFICATION TO $65,000,000 LINE OF CREDIT
<TEXT>
                                                                    Exhibit 10.1

                                  May 29, 2001



Guaranty Bank
8333 Douglas Avenue
Dallas, Texas 75225

     Re:  Modification of an existing $65,000,000.00 guidance line from Guaranty
          Bank, a federal  savings  bank  (formerly  known as "Guaranty  Federal
          Bank,  F.S.B.")  ("Lender") to Legacy/Monterey  Homes L.P., an Arizona
          corporation  ("Borrower");  such  loan and  other  indebtedness  being
          guaranteed by Meritage Corporation, a Maryland corporation,  MTH-Texas
          GP, Inc.,  an Arizona  corporation  and MTH-Texas LP, Inc., an Arizona
          corporation (collectively referred to as "Guarantor")

Gentlemen:

     Reference is made to that certain Master Loan Agreement dated as of January
31, 1993 (and all amendments  thereto,  if any) (the "Loan  Agreement ") between
Lender and Borrower governing a $65,000,000.00  loan (as decreased) (the "Loan")
for the acquisition  and/or  refinancing of residential  lots located in certain
counties in the State of Texas as described  therein,  and the  construction  of
single-family  residences  thereon.  Unless otherwise  expressly defined herein,
each term used herein with its initial letter capitalized shall have the meaning
given to such term in the Loan Agreement. As used in this letter agreement,  the
term "Loan  Instruments"  shall mean and include (i) the "Loan  Instruments"  as
defined in the Loan Agreement,  (ii) the Seventh Modification Agreement dated as
of even date  herewith,  executed by and between the parties  hereto,  and (iii)
this letter agreement and all other documents  executed in conjunction  herewith
(and all amendments thereto, if any).

     Borrower and Lender desire to amend and modify certain terms and provisions
of the Loan and the Loan Instruments as follows:

     1. The stated maturity date of the Note is hereby extended to and including
May 31, 2002,  when the entire unpaid  principal  balance of the Note,  together
with  all  accrued  and  unpaid  interest  shall be due and  payable;  provided,
however,  such  date may be  extended  as set forth in  Paragraph  9 of the Loan
Agreement (as amended hereby).

     2.  Paragraph 2 (b) of the Loan  Agreement  is hereby  modified by deleting
such paragraph in its entirety and replacing it with the following:
<PAGE>
Guaranty Bank
May 29, 2001
Page 2

          (b) With  respect  to any  Property  located  in the  State of  Texas,
     Mortgagee Title Policy Binder on Interim Construction Loan, or with respect
     to Property located in any other state, an ALTA Lender's extended policy of
     Title Insurance (either form being referred to as the "Policy"),  issued by
     a company or companies acceptable to Lender,  agreeing to insure Lender, in
     the aggregate  amount of the Loan Allocation (as  hereinafter  defined) for
     each Property  covered by such Mortgage (the "Aggregate Loan  Allocation"),
     that such Mortgage and any other liens securing the payment of the Note and
     Loan have the  priority  required by Lender.  If  required  by Lender,  the
     Policy  shall be extended to cover each and every  advance at the time such
     advance is made;  provided,  however, the maximum title insurance for title
     insurance  underwriters  must be acceptable  to Lender,  and if required by
     Lender,  from time to time,  Borrower shall cause to be issued to Lender an
     additional  Policy  or  Policies,  in such  amounts  and  from  such  title
     insurance underwriters, as are acceptable to Lender.

     3. Paragraph 2(l) of the Loan Agreement is hereby modified by deleting such
paragraph in its entirety and replacing it with the following:

          (l) Lender may require as a condition  to each  advance,  a bills-paid
     affidavit from each original contractor and subcontractor,  to be submitted
     with each draw  request,  together with any other  information  required or
     permitted,  as determined by Lender,  under  applicable law in the state in
     which the Property is located (including, without limitation,  requests for
     information,  notices of contract, notices of payments, interim waivers and
     release upon payment or lien subordination agreements).

     4.  Paragraph 6 (a) of the Loan  Agreement  is hereby  modified by deleting
such paragraph in its entirety and replacing it with the following paragraph:

          (a) Prior to the  recordation  of any Mortgage,  no work (as that term
     may be defined under  applicable  law for the state in which the particular
     Property is located) of any kind  (including the  destruction or removal of
     any  existing  improvements,   site  work,  clearing,  grubbing,  draining,
     erection of temporary  utilities or fencing of the Property)  pertaining to
     the construction of any of the Residences, has been or will be commenced or
     performed  upon the  Property  and no material (as that term may be defined
     under  applicable  law for the state in which the  particular  Property  is
     located)  or  equipment  has  been  or  will be  delivered  to or upon  the
     Property,  and no construction contract for the construction of erection of
     any of the  Residences  has been or will be let (and if required by Lender,
     prior to commencement of such work or delivery of such materials,  Borrower
     shall execute and deliver to Lender any notice of commencement [in form and
     content  satisfactory  to Lender] as may be required or  permitted,  in the
     determination of Lender, under applicable law).
<PAGE>
Guaranty Bank
May 29, 2001
Page 3

     5.  Paragraph 8 of the Loan Agreement is hereby deleted in its entirety and
replaced with the following:

          8. REVOLVING LOAN. All or any portion of the principal of the Loan may
     be borrowed,  paid, prepaid,  repaid and reborrowed from time to time prior
     to maturity in accordance with the provisions of the Loan Instruments.  The
     excess of  borrowing  (advances  and  re-advances)  over  repayments  shall
     evidence  the  principal  balance  of the Loan from time to time and at any
     time.  The aggregate  amount of all advances  under the Loan may exceed the
     Loan Amount, but neither the outstanding  principal balance of the Loan nor
     the outstanding  aggregate amount of the Loan Allocations shall ever exceed
     the Loan Amount. The Loan shall not be governed by or be subject to Chapter
     15 of the Texas  Credit  Code Title 79,  Revised  Civil  Statutes of Texas,
     1925, as amended.

          The maximum  total Loan  Allocations  and Letters of Credit  under the
     Loan at any time  shall be  limited  to  $125,000,000.00,  which  sum shall
     consist of the following:

          (a) the total of all Loan Allocations for Property (Texas and Arizona)
     secured by Mortgages, plus;

          (b) the amount of any Letters of Credit (when issued, if any);

          provided, however, that the $125,000,000.00 Loan Allocation limitation
     set forth in this  sentence  shall be  increased  by an amount equal to any
     cash  deposits made by Borrower with Lender as security for the Loan and as
     a Borrower's  Deposit under  Paragraph 5 of the Loan  Agreement  (with each
     such deposit to be advanced by Lender to Borrower prior to the disbursement
     of loan proceeds upon the  satisfaction  of conditions  for advances  under
     this Loan  Agreement).  Borrower  shall  execute and deliver to Lender such
     documents as may be necessary to establish such account and to grant Lender
     a security interest in the same.

          Notwithstanding any provision in the Loan Instruments to the contrary,
     in no event shall the sum of (i) the aggregate  amounts  advanced under the
     Note,  and (ii) the amount of any Letters of Credit (when  issued,  if any)
     exceed a total of  $75,000,000.00,  notwithstanding  that the maximum total
     Loan  Allocations  and  Letters of Credit  under the Loan may  exceed  such
     $75,000,000.00 total; and consequently,  Lender shall have no obligation to
     disburse additional funds in the event the sum of (i) the aggregate amounts
     advanced or to be advanced (including all Loan Allocations) under the Note,
     and (ii) the amount of any Letters of Credit (when issued, if any) exceed a
     total of $75,000,000.00.
<PAGE>
Guaranty Bank
May 29, 2001
Page 4

          Notwithstanding   any  provisions  in  the  Loan  Instruments  to  the
     contrary,  if at anytime  the  aggregate  disbursed  and  unpaid  principal
     balance of the Loan (together  with the aggregate  amount of any Letters of
     Credit  under  the  Loan)  exceed   $75,000,000.00,   then  Borrower  shall
     immediately  (following  written demand by Lender) deliver to Lender a cash
     amount  equal to such  excess,  which cash  amount  shall be applied to the
     principal  balance of the Loan in order that such aggregate amount shall be
     reduced to $75,000,000.00.

     6. Paragraph 13 of the Loan  Agreement is hereby  modified by deleting such
paragraph in its entirety and replacing it with the following paragraph:

          13. CHOICE OF LAW. THE LOAN  INSTRUMENTS ARE EXECUTED AND DELIVERED IN
     THE STATE OF TEXAS AND THE LOAN IS PAYABLE THERE.  EXCEPT WHERE FEDERAL LAW
     IS APPLICABLE (INCLUDING,  WITHOUT LIMITATION, ANY FEDERAL USURY CEILING OR
     OTHER  FEDERAL  LAW  WHICH,  FROM  TIME  TO  TIME,  IS  APPLICABLE  TO  THE
     INDEBTEDNESS  HEREIN  AND  WHICH  PREEMPTS  STATE  USURY  LAWS),  THIS LOAN
     AGREEMENT,  THE NOTE, THE MORTGAGES AND THE OTHER LOAN INSTRUMENTS SHALL BE
     GOVERNED AND CONSTRUED IN  ACCORDANCE  WITH THE LAWS OF THE STATE OF TEXAS,
     EXCEPT TO THE EXTENT THE LAW OF THE STATE IN WHICH THE  MORTGAGED  PROPERTY
     IS LOCATED  GOVERNS THE  PERFECTION  AND  DETERMINATION  OF LIEN RIGHTS AND
     PRIORITY,  AND THE  ENFORCEMENT  OF  REMEDIES  AND THE  DISPOSITION  OF THE
     PROPERTY.

     7. Loan Agreement is hereby  modified by deleting  Paragraph 20 of the Loan
Agreement in its entirety and replacing it with the following:

          20.  LETTERS OF CREDIT:  At  Lender's  sole and  absolute  discretion,
     Lender  shall  issue  letters of credit (the  "Letters of Credit")  for the
     benefit of Borrower for the purposes set forth below; provided, that during
     the term of the Loan, the aggregate  amount of any  outstanding  Letters of
     Credit and the amount of any Letters of Credit funded by Lender shall never
     exceed the lesser of (a) a sum derived by subtracting  the total  aggregate
     sum of all Loan Allocations  from  $75,000,000.00,  or (b)  $10,000,000.00.
     Furthermore,  the amount of the  Letters of Credit  (when  issued,  if any)
     shall reduce the Borrowing  Base. In addition to any other  requirements of
     Lender,  and as a  condition  to the  issuance  of any  Letters  of Credit,
     Borrower   shall   execute  and  deliver  to  Lender  a  Letter  of  Credit
     Application,  Reimbursement  and  Loan  Agreement,  in the  same  form  and
     substance of the document  attached hereto as Exhibit D.  Concurrently with
     the issuance of, or renewal of, any Letters of Credit,  Borrower  shall pay
     to Lender a
<PAGE>
Guaranty Bank
May 29, 2001
Page 5

     fee equal to the  greater of (a)  $250.00,  or (b)  one-half of one percent
     (1/2%) of the amount of each such Letters of Credit.

     8.  Exhibit A to the Loan  Agreement  is hereby  modified by deleting  such
exhibit in its entirety and replacing it with Exhibit A attached hereto.

     9. All  Loan  Instruments  hereby  are  amended  and  modified  in a manner
consistent with the  modifications,  terms and/or  provisions  contained herein.
Except as modified hereby, all the terms,  provisions and conditions of the Loan
Instruments shall remain in full force and effect.

     10. This letter agreement constitutes the "Letter Agreement" referred to in
the Sixth  Modification  Agreement of even date herewith executed by and between
the parties hereto.

     11. The terms and provisions of this letter  agreement may not be modified,
amended,  altered or otherwise affected except by instrument in writing executed
by Lender and Borrower.

     12. Each  Guarantor by its  execution  hereof agree to the  amendments  and
modifications  to the  Loan  Instruments  set  forth  herein  and  in the  prior
amendments and  modifications to the Loan Instruments and agree that all of such
modifications do not and will not waive,  release or in any manner modify either
Guarantor's obligations and liabilities under and pursuant to the Guaranty.

             (The balance of this page is intentionally left blank.)
<PAGE>
Guaranty Bank
May 29, 2001
Page 6

     If this letter  agreement  correctly  sets forth our  understanding  of the
subject matter contained  herein,  please indicate this by executing this letter
agreement in the space furnished below and then return a fully-executed  copy to
the undersigned.

                                        Very truly yours,


                                        BORROWER:


                                        LEGACY/MONTEREY HOMES L.P.,
                                        an Arizona limited partnership


                                        BY: MTH-TEXAS GP, INC.,
                                            an Arizona corporation,
                                            General Partner


                                        By: /s/ Rick Morgan
                                            ------------------------------------
                                            Name: Rick Morgan
                                            Title: Vice-President
<PAGE>
Guaranty Bank
May 29, 2001
Page 7



                                        GUARANTOR:


                                        MERITAGE CORPORATION,
                                        a Maryland corporation


                                        By: /s/ John R. Landon
                                            ------------------------------------
                                            Name: John R. Landon
                                            Title: Co-Chief Executive Officer



                                        MTH-TEXAS GP, INC.,
                                        an Arizona corporation,


                                        By: /s/ Rick Morgan
                                            ------------------------------------
                                            Name: Rick Morgan
                                            Title: Vice President



                                        MTH-TEXAS LP, INC.,
                                        an Arizona corporation


                                        By: /s/ Rick Morgan
                                            ------------------------------------
                                            Name: Rick Morgan
                                            Title: Vice President
<PAGE>
Guaranty Bank
May 29, 2001
Page 8

ACCEPTED AND AGREED TO:


LENDER:


GUARANTY BANK,
a federal savings bank



By: /s/ Sam A. Meade
    ----------------------------
    Name: Sam A. Meade
    Title: Senior Vice President
<PAGE>
                                    EXHIBIT A

                                TO LOAN AGREEMENT


1.   Introductory  Paragraph.  RESIDENCE AND INVENTORY LOT  LIMITATIONS.  At any
     given time,  Residences and Inventory Lots financed under the Loan shall be
     limited to the following numbers, unless modified by Lender in writing:

     Total Residences:   Nine Hundred Fifty (950).
     Specs:              One Hundred Sixty (160).
     Models:             Seventy (70).
     Inventory Lots:     One Thousand Four Hundred (1,400).

     Borrower may increase the number of Specs  allowed above by the same number
     by which Borrower is short of Models allowed above.  Borrower covenants and
     agrees not to allow, and is prohibited from allowing, any more than fifteen
     (15) Specs, four (4) Models or two hundred (200) Inventory Lots to exist in
     any Approved Subdivision (as hereinafter defined).

     The outstanding  aggregate amount of the Loan Allocations for all Specs and
     Models at any time shall never exceed $31,250,000.00.

     The outstanding  aggregate amount of the Loan Allocations for all Inventory
     Lots at any time shall never exceed $22,500,000.00.

     The term  "Specs"  means a Residence  which is not a Model and is not Under
     Contract.

     The term "Model" means a Residence  specifically  utilized for the purposes
     of marketing other residential products.

     The term "Under  Contract" shall mean Residences  under written contract to
     sell  to  bona  fide  third  parties  unrelated  to  Borrower,   having  no
     contingency or any other  conditions  not  reasonably  susceptible to being
     satisfied,  providing for earnest money deposits of at least $2,000.00, and
     for which Lender has received  preliminary  loan  approval from a bona fide
     residential permanent lender.

     The term "Inventory Residence" means any Residence which is not a Model.

2.   Introductory Paragraph.  APPROVED SUBDIVISIONS.  The following subdivisions
     and  any  additional  subdivisions  approved  in  writing  by  Lender  (the
     "Approved  Subdivisions")  are  approved by Lender for the  Residences  and
     Inventory Lots:

     Subdivision                                  County
     -----------                                  ------
     Auburn Ridge - Pinelakes                     Harris

EXHIBIT A, - PAGE 1
<PAGE>
     Bethany Ridge                                Collin
     Candle Meadow                                Dallas
     Canyon Gate at The Brazos                    Fort Bend
     Canyon Gate at Cinco Ranch                   Fort Bend
     Cypress Mills                                Harris
     Cypress Point                                Denton
     Parks at Deer Creek                          Tarrant
     El Dorado Heights                            Collin
     Forest Creek                                 Williamson
     Forest Oaks                                  Denton
     Hillcrest Estates                            Collin
     Indian Pointe Estates                        Dallas
     Lakeside Village Estates                     Dallas
     Legend Bend                                  Denton
     Legend Crest                                 Collin
     McCreary Estates                             Tarrant
     Parkwood Hills                               Tarrant
     Pine Lakes                                   Harris
     Plum Creek                                   Hays
     Ryan Ranch                                   Denton
     Springbrook Glen                             Williamson
     Spring Meadow                                Collin
     Stone Gate                                   Tarrant
     Stone Meadow                                 Tarrant
     Village at Western Oaks                      Travis
     Westchester Square                           Dallas
     Westwood Shores                              Dallas
     Wimbledon Champions                          Harris
     Winding Hollow                               Dallas
     Windy Hills Farm                             Collin

3.   Introductory  Paragraph.  APPROVED PRICE RANGE.  The Residences shall be in
     the $70,000.00 to $400,000.00 price range; provided, however, Residences in
     any Approved  Subdivision in the Austin, Texas metropolitan area may have a
     $70,000.00 to $900,000.00 price range.

4.   Paragraph  1(c).  GUARANTOR.  Guarantor  of the  Loan  shall  be:  Meritage
     Corporation,  a Maryland  corporation;  MTH-Texas  G.P.,  Inc.,  an Arizona
     corporation; and MTH-Texas L.P., Inc., an Arizona corporation.

5.   Paragraph 2(h). LOAN FINANCE CHARGE. None.

6.   Paragraph  2(k) and 6(g).  INSPECTION  FEE. An inspection fee of $30.00 per
     Residence  shall be paid to Lender on the day the  Mortgage  pertaining  to
     such Residence is recorded in the Real Property Records.

EXHIBIT A, - PAGE 2
<PAGE>
7.   Paragraph 4(c). LOAN RATIOS. With respect to Residences Under Contract, the
     Loan  Allocation  shall not exceed the  lesser of (1) one  hundred  percent
     (100%) of the direct costs of a Property,  as  determined by Lender or, (2)
     eighty  percent  (80%) of the lowest of the values as provided in Paragraph
     4(c) (i), (ii) and (iii) of this Loan Agreement.

     With respect to Specs, Models and Inventory Lots, the Loan Allocation shall
     not exceed the lesser of (1) one hundred percent (100%) of the direct costs
     of a Property,  as determined by Lender or, (2) seventy-five  percent (75%)
     of the lowest of the values as provided  in  Paragraph  4(c) (i),  (ii) and
     (iii) of this Loan Agreement.

8.   Paragraph 6(q). OTHER ENTITIES. The Mortgages shall additionally secure all
     other  indebtedness  now or  hereafter  owed by the  following  entities to
     Lender: None.

9.   Paragraph  6(s).  REQUIRED  RELEASES.  Borrower shall cause:  (a) Inventory
     Residences to be released from a Mortgage nine (9) months from the day such
     Mortgage  is  recorded  in the Real  Property  Records,  (b)  Models  to be
     released from a Mortgage twenty-four (24) months from the day such Mortgage
     is recorded in the Real  Property  Records,  and (c)  Inventory  Lots to be
     released  from a Mortgage  twelve (12) months from the day such Mortgage is
     recorded in the Real Property  Records;  provided,  however,  if no default
     then exists under any Loan Instruments,  Lender may, at its option,  extend
     the  Required  Release  Date for periods of six (6) months  (the  "Extended
     Release Date");  provided,  such Extended Release Date shall in no event go
     beyond the Stated  Maturity Date (as  hereinafter  defined) or the Extended
     Maturity Date (as hereinafter defined), if applicable.

10.  Paragraph 7. REQUIRED PRINCIPAL  REDUCTIONS.  Prior to the date that Lender
     gives Borrower the notice  described in Paragraph 4(f) above, the following
     shall apply:  in the event a Property has been granted an Extended  Release
     Date (as provided in Paragraph 9 of this Exhibit A) and a Mortgage  remains
     covering  such  Property  beyond the  following  periods from the date such
     Mortgage is recorded,  then Borrower shall make a principal  payment of the
     Note in an amount equal to ten percent  (10%) of the Loan  Allocation  with
     respect to such Property (and the Loan  Allocation  for such Property shall
     be reduced by the same amount), as determined by Lender:

     Inventory Residences:    Fifteen (15) months.
     Models:                  Twenty-four (24) months.
     Inventory Lots:          Twelve (12) months.

     From and after the date that Lender gives Borrower the notice  described in
     Paragraph 4(f) of the Loan  Agreement,  the following  shall apply:  in the
     event a Property has been granted an Extended  Release Date, as provided in
     Paragraph 9 of this Exhibit A, Borrower  shall make a principal  payment on
     the Note of ten  percent  (10%) of that  portion  of the Loan  advanced  by
     Lender for such  Property,  within the  following  periods  from the date a
     Mortgage covering such Property is recorded in the Real Property Records:

EXHIBIT A, - PAGE 3
<PAGE>
     Inventory Residences:    Fifteen (15) months.
     Models:                  Twenty-four (24) months.
     Inventory Lots:          Twelve (12) months.

11.  Paragraph 9. MATURITY AND EXTENSION. The maturity date of the Note shall be
     the later of the maturity  date as provided in the Note (May 31, 2002) (the
     "Stated Maturity Date"), or nine (9) months after the recording in the Real
     Property  Records  of the last  Mortgage  (the  "Extended  Maturity  Date")
     approved  by Lender  and  recorded  prior to the  expiration  of the Stated
     Maturity Date. After the Stated Maturity Date, no additional Mortgage shall
     be recorded.

12.  Paragraph  10.  ADDITIONAL  DEFAULTS.  In addition to the events of default
     stipulated in the Loan  Instruments,  it shall be a default under this Loan
     Agreement if Borrower fails to comply with any of the following: None.

13.  Paragraph 11.  ADDITIONAL LOAN COVENANTS.  Borrower shall fully perform and
     satisfy the following "Additional Loan Covenants":

     (a)  The aggregate  net worth of Borrower  (determined  in accordance  with
          generally accepted accounting principles,  consistently applied) shall
          not fall below $40,000,000.00.

     (b)  The ratio of total  liabilities  to equity (as  determined  by Lender)
          shall not exceed 3.0 to 1.0.

     (c)  John Landon shall at all times retain management control of Borrower.

     (d)  In no event shall Meritage Corporation, a Maryland corporation,  be in
          default under any secured indebtedness.

     If Borrower or Guarantor (if  applicable to Guarantor)  breaches any of the
     Additional  Loan  Covenants  then,  at  Lender's  election,  no  additional
     Mortgages  shall  be  recorded  in the  Real  Property  Records;  provided,
     however,  that a breach  of any  Additional  Loan  Covenants  shall  not be
     considered a default under the Loan Instruments.

14.  Paragraph  16(d).  RELEASE PRICE. The partial release price shall be a cash
     amount  equal to the Loan  Allocation  for the Property  multiplied  by the
     Stage  (expressed  as a percentage)  of the Property,  all as determined by
     Lender;  provided,  however, if Lender shall have given Borrower the notice
     described in Paragraph 4(f) of the Loan Agreement, then the partial release
     price  shall be an  amount in cash  equal to one  hundred  and one  hundred
     percent  (100%) of the  outstanding  balance of the Loan advanced by Lender
     for the Property.

15.  Paragraph  16(e).  EXTENSION  FEE. If Lender  extends the Required  Release
     Date, as provided in Paragraph 9 of this Exhibit A,  Borrower  shall pay to
     Lender an  extension  fee of one percent  (1%) of that  portion of the Loan
     advanced by Lender for each such

EXHIBIT A, - PAGE 4
<PAGE>
     Property times a fraction, the numerator of which is the number of days the
     Required Release Date is extended and the denominator of which is 365.

EXHIBIT A, - PAGE 5

</TEXT>
</DOCUMENT>
