Follow Up Question About Financing Owelties
I love and appreciate the feedback I get from each and every one of you. One follow up question an attorney asked pertained to the following paragraph in the previous blog (http://www.themortgageinstitute.com/2016/09/finance-an-owelty-buyout-before-final-divorce-is-it-possible/):
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.
This is a situation wherein I was going through the mechanics of accomplishing the same thing as financing an Owelty before final divorce and, after final divorce, completing the actual Owelty financing, leaving the home owner with what I call a “plain vanilla” mortgage.
And here is the follow up question:
…if the $25,000.00 is just going to stay in escrow, why get it in the 1st place?
Thanks for reading. I appreciate it.
Without overt and explicit instructions to the contrary, the title company would disburse the proceeds of the [interim] “cash out” loan to the parties on title to the property. In other words, they do not automatically assume that the proceeds have to be disbursed to an attorney’s trust/escrow account just because they are divorcing.
Also, in some cases for which I have been asked to perform cash out financing, the parties and the attorneys WANT for the proceeds to be disbursed to the parties and/or to particular debts (sometimes the very reason they are financing…that is, to achieve some relief in monthly debt servicing so that they do not go bankrupt) or to legal fees (without which their divorce case cannot move forward or to trial). In those cases, there would be no order or compulsion to disburse the proceeds to any party/parties other than the owners of the homestead property.
The example I cited (as well as those above) do not contemplate that funds would go to an escrow/trust account.
Does that make sense….did I understand your question?
Here’s a little addendum to my answer:
Because the parties need the money and it will not stay in escrow/trust – it will be used to settle an agreed exchange of funds. However, this type of financing is only beneficial if the parties absolutely cannot wait until after final divorce for the contemplated grantor to receive his/her money. A typical situation is when the departing spouse (grantor) wishes to purchase a home quickly (before final divorce) and needs down payment monies for the transaction.
Not only does this type of financing have limited benefit, it has limited potential of even being possible. The temporary equity loan is subject to all the restrictions of Texas Home Equity financing including the limitation on maximum amount of loans extended to 80% of the current home value. (Remember, standard financing - which includes the financing of an Owelty - is not subject to that 80% limitation; and, can often include financing of 95%, 97.75% and even 100% [VA loans] of a home’s appraised value.]
I hope this helps you settle more cases and produce money for everyone’s needs…including your own.