Elements in an Owelty Lien
Last week, we began discussing the elements in a divorce settlement that create an Owelty – a financeable Owelty lien. I took a short "rabbit trail" to point out certain factors that would derail the proper creation of an Owelty and thus make a buyout that would be severely limited or outright impossible. It’s worth a second look.
Without each of the required elements, there is no Owelty. And here’s what that means for the client/homeowner who is seeking financing of that buyout:
1. Those Texas Equity limitations will be triggered, giving the borrower access to at least 15% less of his/her home’s value. (General max Loan To Value ratio in lending is 95%; legal max for cash outs in Texas is 80%; thus the 15% differential).
2. There are no alternatives such as FHA in financing. “Cash outs” are conventional loans only; no FHA “cash out” financing allowed in Texas. This is a real problem for those who do not qualify for conventional financing. FHA accommodates a lot of borrowers who might otherwise not be able to finance a home. FHA allows lower credit scores, higher debt ratios (in many cases), slightly damaged credit, comparatively higher LTV (Loan To Value) ratios including a max LTV ratio of 96.5% (vs. the general cap of 95% in conventional). So, if the client cannot qualify for conventional financing, they are just out of luck.
3. If parties were expecting a buyout and none is forthcoming, post-divorce trauma. So what if the decree requires the refinance and buyout by a date certain (and, in my opinion, it always should)? What happens when that date threshold is crossed and the refinance/buyout hasn’t happened? The most common remedies I’ve seen are a) forced sale (which is what the agreement was obviously trying to avoid), b) assumption by the original grantor….good luck with that and c) judge hits her gavel a bit harder on the desk, slaps grantee on the wrist, and orders the grantee to abide by the order. Motions to enforce are hardly helpful unless the grantor has just been indigent and is more highly motived by an additional trip to the courthouse. But, that’s not the situation we have. No court can order a lender to advance funds…at least not in this situation. Additionally, the failure to create a proper Owelty lien can result in a demand to sell the property by the ex-spouse or the appointment of a receiver to force the sale. As title attorney Kelly Bierig says, “most likely the parties don’t get along anyways, so once you add the stress of not being able to pay off the ex-spouse, the problems between the [former] spouses will only get worse.”
There is, of course, a cure for these problems. Make sure the client calls me before final divorce. But, that’s another paragraph.
Now, it’s time for the secret sauce - the actual creation of an Owelty agreement and lien. Those specific elements must exist in order for an Owelty lien to be properly established.
1. Correct legal description (as opposed to merely the legal or common address) in the decree and in the Special Warranty Deed.
2. Clear awarding of the property to the grantee, subject only to the Owelty interest.
3. Dollar amount of the grantor’s “interest.” Yes, formulas can be used. But, generally you’re asking for confusion and ultimately the two ex-spouses will have to agree to the buyout amount as a dollar figure. Sometimes, there is no other way. But, sooner or later, the Special Warranty Deed with Encumbrance for Owelty of Partition will have to record a dollar amount.
4. Use the word “interest” – and avoid using the word “equity” - when specifying the grantor’s agreement for a buyout. It’s not an automatic disqualifier; but, the Owelty does not represent equity; it represents “interest.”
One more tip. This one is about timing. When calendar dates are established as deadlines for the refinancing and/or buyout of an ex-spouse’s interest, make sure - in advance - that these deadlines are workable. The simplest way to do that is for the client to call me and get started on a refinance loan as soon as possible. But, that’s another paragraph.
Sometimes, when a calendar date is missed, the ability of the borrower to obtain financing is put in jeopardy. The simplest way to avoid this jeopardy is for the client to call me as soon as possible. But, that’s another paragraph.
Just one more tip. Never file a Special Warranty Deed before or without an encumbrance for Owelty of Partition. Once a spouse has granted their interest (effectively at $0 when a simple SWD – without Owelty - is filed), it is nearly impossible to change that and create, in reverse, an Owelty interest. Let’s just go ahead and say it – it ain’t gonna happen. I can show you how to make sure that never happens but, that’s another paragraph.
Now, for that paragraph…We’re out of time for today’s newsletter. Please stay tuned for more next week.
Thanks for reading.