Thank you for the great feedback on last week’s Texas Cash Out article. A few, very good questions have come out of last week's post (http://divorce-mortgage.blogspot.com/2012/08/do-you-know-facts-about-texas-cash-out.html) and I would like to address them here.
What is the difference between an EQUITY LIEN and an OWELTY LIEN?
An EQUITY LIEN means cash has been paid to someone on title to the property.
An OWELTY LIEN is payable to someone who had an interest in the property but is granting that interest for a cash payment. This is a simultaneous transaction – tit for tat- a real estate / financial quid pro quo.
An EQUITY LIEN means that somehow Texas Equity (or “Cash Out”) laws have been triggered. This happens when (any portion of) loan proceeds are paid to the borrower as on line 303 of the HUD-1 Settlement Statement that says “Cash TO Borrower.”
This situation may best be illustrated by answering the following question:
What is the difference between an EQUITY LIEN and a HOME IMPROVEMENT LIEN?
First of all, let me give you a case study, a loan that I am refinancing right now. A homeowner has a first and a second lien on her property. I asked if the 2nd lien was an EQUITY loan. She said “No, it’s a HOME IMPROVEMENT loan.” I said “very nice, may I see the closing settlement statement, the HUD-1 from that transaction.
The actual transaction did revolve around a home improvement project; and, a HOME IMPROVEMENT LIEN had been filed and was therefore paid with loan proceeds. However, the loan officer who transacted the loan did not fix the loan amount so that it covered only the Mechanic’s Lien and Contract plus applicable closing costs. Instead, he added about $500 to the needed amount so that the borrower now had “Cash TO Borrower” which, incidentally, she didn’t really need or ask for. BIG MISTAKE. But, it’s a BIG MISTAKE that loan officers for these big banks make with great frequency. Now, the refinancing of her loan requires another Texas Equity (Cash Out) loan even though she requires or desires no cash out.
The largest part of the loan proceeds went to pay a HOME IMPROVEMENT LIEN. But a small portion went directly to the borrower. Even if that portion had been only 1¢, the effect would have been the same – cash to borrower.
So, a HOME IMPROVEMENT LIEN is payable to an entity that has filed a Mechanic’s Lien and Contract (or some comparable contract) on the property for work performed (or to be performed). This entity does not have an “interest” in the property as someone who is on title necessarily has. Their interest is limited to the work performed and the dollar amount agreed and does not extend to the “entirety of the property.”
An EQUITY LIEN is triggered because cash has gone to a person who retains their interest in the property verses cash going to someone who is granting their “undivided one half interest” to a person who retains their interest and now receives the grantor’s interest . . . as in the case of a divorce which uses a Special Warranty Deed to grant that interest.
Back to the OWELTY LIEN. When that interest (being granted) involves an agreed exchange of money for the conveyed interest, the Special Warranty Deed with Encumbrance for Owelty of Partition is used. As a lending matter, this document must state a dollar amount and should be filed on or after “funding day” when this simultaneous action occurs – the granting of interest in exchange for money.
The EQUITY LIEN is also triggered when a borrower’s other consumer credit debts are paid with (any portion of) loan proceeds. These monies are being paid on behalf of the borrower on title and not to any creditor with a valid lien against the property. Thus they are considered “cash to borrower.”
Tell me more about “Once a Cash Out, Always a Cash Out;” what does that mean?
The EQUITY LIEN is also triggered when a new loan refinances (or pays off) an existing Texas Equity (Cash Out) loan. This is true whether or not the borrower receives more funds through closing or their credit cards are paid with these new funds. In fact, the borrower might actually bring money to closing in order to close their new loan. But, the underlying mortgage being paid off is a Texas Equity loan and therefore any subsequent financing of that loan is still considered a Texas Equity (Cash Out) loan.
This is the essence of “Once a Cash Out, Always a Cash Out.”
It does not mean that the property itself is always subject to Texas Equity regulations. For example, if a homeowner sells her home to a third party buyer who then obtains their own financing to purchase this property, this buyer’s new loan is not subject to Texas Equity laws. The equity lien on title remains until the loan is paid off in cash (as in “cash” or with proceeds from a buyer’s purchase). It means that all subsequent financing (or refinancing) of that equity loan triggers another equity loan, unrelated to whether or not the borrower takes out more cash.