In a recent case, the parties were stalled at the point of the house financing which was to include a sizeable buyout to husband. It seemed that husband’s attorney was insisting that his client be paid (for his agreed interest in the marital residence) on date of final divorce.
The attorney wrote [emphasis mine]:
“We can set this up for the refinance and the divorce to be done almost simultaneously and avoid all the complicated paperwork – your client processes the refinance and gets approved and they set a closing date, we finalize the divorce that day before she closes, she closes the refinance immediately thereafter and hands my client his check – the prove-up is done with the court with that caveat – it avoids detailed language needed in the decree, owelty and release documents, and there is no need for a mortgage company to be reviewing and approving the decree which adds additional time and expenses – all become unnecessary, and it greatly simplifies finalizing this.”
The client’s comment was especially humorous – “[my attorney] has a way to get this done.”
I say “humorous” because, of course, I was doing the financing; I was the one who would “get this done.”
I do not believe the attorney was acting in bad faith. He was merely acting with limited experience. And, from his experience, he had seen this scenario before and knew first-hand that he could “get it done.”
He was right and wrong at the same time.
Here’s where he was right. The wife’s refinance loan indeed could have closed the day before final divorce (although there is a legally required 3-day right of rescission period between closing and funding – but, let’s not get bogged down in that detail right now). And, assuming the day after loan funds were disbursed the divorce was finalized, wife would have indeed had the money to pay husband at time of final divorce.
Here where he was wrong. That is precisely the wrong way to finance a buyout to an ex-spouse. The loan closing described above is a Texas Home Equity Cash Out loan which severely and (quasi) permanently limits the homeowner’s financing of their property. Unless the existing mortgage was financed previously as a Texas Home Equity (a legal category of liens), there is no need to “cash out” in order to pay and ex-spouse – there is EVERY reason NOT to “cash out” with that onerous TX Home Equity mortgage loan.
This is very critical and there are negative repercussions to homeowners when TX Home Equity (Cash Out) financing is used. One of the negative consequences when homeowners “cash out” is that future financing of the property is restricted to (among other factors) an 80% LTV ratio (Loan To Value) limit and conventional financing only – no FHA or VA financing allowed. This may not appear to be important until one realizes that not all borrowers fit into the conventional financing box. And, when they do not, there will be NO buyout (with mortgage financing) in the future until the customer fits in that box.
[I have a case now wherein the divorcing borrower’s existing mortgage is a TX Home Equity Cash Out. She needs to refinance and perform a buyout. She could do it with FHA financing (because her scores and credit profile are allowable under FHA). But, since cash out financing is CONVENTIONAL ONLY and all refinancing of an existing TX Home Equity loan must be done as another TX Home Equity, she (and her husband) will have to wait for several months while she gets back in the box of conventional financing guidelines. Again, otherwise, I could have closed the loan in <30 days and husband would be paid and no longer liable on the mortgage…if only the homeowners had not “cash out” previously.]
Now, why was the finance scenario described above the wrong way (or at least inferior way) to finance a buyout?
Short answer – that’s not how an Owelty lien works or gets financed.
Explanation – the Owelty lien (and its financing) is the proper way to produce money for a divorce buyout; and, Owelty liens can be payable only to a party who is “off title” or is legally divesting himself/herself of interest in the property. The recipient of Owelty funds CANNOT be married to the one who is financing and paying those funds, else it is not an Owelty (*technically, it is not an insurable Owelty). That is, the two parties must be finally divorced before the loan can close and fund.
I have a friend – a fine and highly intelligent attorney – who will write me upon reading this to remind me that Owelties could, in fact, be (legally) created, financed and paid before the dissolution of the marriage. I agree with him – but only because he understands the law and the finer arguments thereof and has convinced me of his thesis. But, the fact is, lenders and title insurers do not see it that way. They universally hold that an Owelty cannot be paid to any person who is married to the homeowner/borrower; the argument being that a married person cannot truly give up community interest in a marital residence while still married…and if he/she did, it would only be by their spouse’s confirmation of the residence as separate property which would then nullify any future claim to an Owelty interest.
I shall leave it at that as any further comment by me will only illustrate the sad fact that I am not an attorney and haven’t the ability to stand in that circle of esteemed legal thinkers.
I can only comment on issues touching the financing of a buyout in a divorce.
So, how does the financing of an Owelty buyout work – what does the time line look like.
Well, I do it the opposite way from the way virtually all other lenders do it. Most importantly, I start as early in the divorce process as possible. Most lenders say “get your divorce final, bring me the decree and let’s see what we can do.”
Obviously, I have to be connected with the proposed grantee/borrower early in the process. That’s where you come in. But, the idea is that by the time the divorce is final, we are ready to close the loan. So, I am addressing what happens at the point of final divorce and loan closing…assuming that we’ve all done our paper work.
Since the Owelty cannot be paid until the divorce is final, the loan cannot close until the divorce is final. Here’s the time line:
- Divorce is finalized
- We already have the loan ready with the only remaining significant condition being the underwriter’s review of the decree
- *About 4-5 days after we receive a copy of conformed decree, homeowner closes the refinance
- 3-day right of rescission period passes
- loan funds and monies are disbursed
*If we could crunch several clerical and governmental regulatory tasks into a few seconds, we could close the loan the afternoon of final divorce. But, it’s not possible at this time. The point being that the loan can close – AND THE OWELTY CAN BE IN FORCE – any time after final divorce. That’s the earliest point in time that an Owelty will be effective.
- The proper way to finance a buyout is with a carefully constructed Owelty Agreement and Lien in the Final Decree of Divorce (see your friendly neighborhood Divorce-Lending Specialist)
- The Owelty is not in force until the divorce is final
- Any payment of cash before final divorce is considered “cash to borrower” and triggers the restrictive, limiting and onerous features of Texas Home Equity “Cash Out” mortgage lending.
Sometimes, there is just no other way to satisfy the other side other than to pay them on the day of final divorce. If that’s the case and if there is temporary access to funds to do this, we can work it out for those funds to be replaced. It involves directing the buyout monies (by agreement and simple mechanics) to another destination. But, if one is trying to avoid complicated paperwork, that’s probably not what you want. Remember though, it’s not really that complicated to me – I do it in my sleep sometimes…it’s part of what I’ve learned over the past 15 years about making deals work for people.