The legendary – although MUCH TOO YOUNG to have achieved legendary status already – Lisa Marquis asked
Can a spouse complete a refinance with an owelty lien prior to a divorce decree being signed by the judge?
My response (edited for clarity and amended with a few little goodies):
Not without triggering Texas Home Equity “Cash Out” with all its attending limitations, restrictions and negatives. And, technically, the Owelty would not be paid as it is considered by title companies to be a moot rendering of a valid encumbrance on the property (I just used a phrase that probably doesn’t pass legal muster but it just came out J) . That is to say, the Owelty Deed of Trust and Special Warranty Deed with Encumbrance for Owelty of Partition cannot be placed on the property with a grantor still married to the grantee. At the very least, it’s not finance-able as an Owelty.
Moreover, the title company would recognize the divorce petition in title search and require some status update. The lender would want to know the settlement terms (some of them anyway). Effectively, any agreements would bind the title company…in theory this means that the title company would disburse the funds according to the agreement. But, I would not count on the transaction even closing. And, it would only be in the case of a Texas Home Equity “Cash Out” loan (while the couple is still married) and not in the case of a valid Owelty lien being paid to a grantor (as in after final divorce when there IS a grantor).
As mentioned, the two parties could do an equity loan on their home to satisfy the interest that the contemplated grantor is presumed to soon have in the property. [Remember that equity loans are inferior financing and much more restrictive, placing more-or-less permanent limitations on the property’s financing.]
But, short answer, no. They cannot finance the Owelty before final divorce.
Caveat. I know there is legal debate over the partitioning of property during marriage. But, I speak only to the practical mortgage issues of actually getting the deal done – of “turning white paper into green money.”
I also realize that your question has a little more nuance than just “can they complete the refinance…before final divorce.” Rather, you were asking about the judge’s signature.
Our experience is that the loan can still not close. Title companies and lenders consider that the divorce is not final until the decree is conformed…until the judge has signed, pronouncements from the bench that “yes, you are now divorced” notwithstanding.
Hope this helps.
There is one interesting solution that almost everyone in the title and mortgage lending industry will tell you is impossible.
Just for grins, let’s go through it.
Let’s say, before divorce and during negotiations, the contemplated buyout is $25,000 and let’s say that there is enough “room” in the home’s value to obtain a Texas Home Equity “Cash Out” loan (installment or “line of credit” as in a HELOC).
Either party or the couple could finance a 2nd lien “Cash Out” loan and agree to deposit the $25,000 into the contemplated grantor’s account. This occurs during the marriage, before final divorce. Upon final divorce, the grantee – in his or her attempt to obtain good financing of the entire 1st mortgage and now the existing 2nd cash out mortgage – agrees in the decree to place an Owelty lien for $25,000 on the awarded marital residence. One or the other party withdraws $25,000 from their account (retirement, cash, investment, whatever…or they can get it from Uncle Joe) and PREPAYS IN FULL the existing “cash out” loan. The grantor (beneficiary of the buyout), having already received his/her funds for interest in the property, signs a Proceeds Allocation Letter which sends the $25,000 to the source from which he/she withdrew funds to PREPAY the existing “cash out” loan. The grantee has now financed the first mortgage and the Owelty lien (not the old, paid-off equity/cash-out loan) and is left with a plain vanilla (or “purchase money”) mortgage.
The reason I am comfortable sharing my secret sauce with you is because there’s not a snowball’s chance in hell that anyone can take this strategy to just any lender and any title company and do this. It’s almost a sure thing that the lender and the title company will say “no” – even if you use the same lender I use and the same title company I use. The deal just has to be structured properly, presented properly, explained properly, planned properly and executed properly.
In other words, DO NOT TRY THIS AT HOME.
You need a special code to get this done. And, it's a simple code:
and sometimes, Noel@TheMorgageInstitute.com works.