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Written by
Noel Cookman

Another Question About Owelty Liens

Published On 
December 13, 2016

I devote a significant portion of my time being available to family law attorneys - to answer or find out answers to their questions about how divorce affects mortgage financing. Most questions I get have to do with the Owelty. And sometimes I answer the same question in a slightly different manner. Like today....

from a family law attorney...

I have more of a general question: In a divorce, what is the benefit of doing an Owelty lien vs. just refinancing the loan and pulling money out without the Owelty Lien?

Good question – and one that I try to answer in the first part of my seminar on The Proper Use of the Owelty Agreement and Lien.

Without the Owelty, “cash to borrower” is triggered. The Owelty is payable to the grantor (who must be going off title and only AFTER dissolution of marriage). When a borrower simply gets cash – for any purpose, including paying an ex-spouse for their “interest” in a homestead property that was not properly and specifically created in the divorce decree – their loan is a “cash out” refinance.

In Texas – as in no other state – this “cash to borrower” triggers a special category of loan – The Texas Home Equity or as it is loosely called a “Texas Cash Out.” A few of the onerous provisions are:

  1. 80% max LTV ratio….borrowers cannot touch the top 20% of their home’s value.
  2. All TX Home Equity restrictions are, more or less, permanent (until the loan is paid off by the borrower in cash as in full payment or a sale of the property).
  3. Rates are generally higher.
  4. Qualifying is more stringent – only conventional financing allowed, no FHA or VA financing allowed on cash outs.

Even without the triggering of Texas Home Equity, in all states, Fannie Mae and Freddie Mac have their own categories of “cash outs” which are also restrictive and sometimes permanent similar to the Texas Home Equity cash out loan. The LTV is technically 85% (so 5% more than TX) but practically it is limited to 80% in many/most cases.

Texas Home Equity and “cash out” are virtually synonymous except of the distinction I just made for “cashing out” in other states.

Most applicably, when “cash out” provisions (TX Home Equity, Fannie/Freddie classification of “cash outs”) are NOT TRIGGERED, regular financing applies – the homeowner can borrower up to 95% of the home’s value, allowing access to many more dollars for settlements which I have used in many, many cases to resolve debts and qualify borrowers who would otherwise not qualify…not to mention the improvement to newly divorced clients’ monthly budgets.

It’s magic. 🙂

Does that address your question? Thank you so much. I really appreciate you.

Noel Cookman (noel@themortgageinstitute.com) 

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