They said it couldn't be done - an Owelty after the....
I just closed a loan for a newly divorced customer. The other side did everything they could to keep it from happening. How we handled it makes all the difference in the world.
The facts. Divorcing couple. Husband to be awarded the house subject to a buyout of $33,550 to wife. Husband applies for loan. He could qualify for a buyout to his wife but, he has the following debts in addition to the amount due to wife:
Creditor Balance Mo. Payment
Secured Debt #1 16,116 86
Revolving Debt #2 11,037 332
Installment Debt #3 8,225 322
Car Note 5,522 213
Need for misc. expenses 5,550 *166
Total $ 46,450 $ 1,119
*(assuming same rate as revolving debt repayment)
Borrowers are qualified for mortgage loans based on monthly payments – the famous debt-to-income ratio is based on monthly income and monthly debt payments.
Husband’s total debt ratio (which includes the house payment, of course) was about 55%.
So I recommended that the Owelty be agreed at $80,000 and disbursed thusly:
Wife $ 33,550
Secured Debt #1 16,116
Revolving Debt #2 11,037
Installment Debt #3 8,225
Car Note 5,522
Need for misc expenses 5,550
Total $ 80,000
The extra $46,450 can be borrowed for $231.92/month, saving the husband $887/month (the $1,119 payment goes away).
Now, husband’s (borrower’s) debt ratios are closer to 45% - not 55%; and, he qualifies. We know – we pushed the buttons and received the automated Fannie Mae approval…just like we do many times each day. It’s what we do. So, we know when we have a loan approval and when we don’t. It’s no great mystery.
Why can’t husband just take out an equity loan for what he needs to pay off debt? That’s what wife’s attorney asked…or, really, stated; as if, we could wave a magic wand and just make an equity loan appear. Well, here’s exactly why that can’t be done.
The property appraised for 388,000. Texas Home Equity laws limit the total Loan To Value loan amount which can be borrowed against a home (when getting “cash back”) to 80%. In other words, 310,400 is the maximum amount of liens which can be placed against that property if one penny or more of cash is accessed by the borrower.
Payoff of mortgage $ 252,335.60
Buyout to Wife 33,550.00
Total Closing Costs 6,459.19
2017 taxes and escrow account cushion 10,405.21
That's $302,750.00 – that leaves room for $7,650 or $38,800 less than what husband needed to pay off debts and provide for misc. property needs.
The law and mortgage guidelines simply do not allow that much money to be lent. Remember, courts cannot order lenders to advance funds. Nor could they or would they order lenders to advance funds in excess of legal, constitutional limits to lending.
So, what did the wife’s lawyers do. They said “no.” Here’s what she actually wrote:
I will not agree to an owelty lien to refinance the note on the house. An owelty lien acts as a second mortgage and does not take my client's name off the mortgage note. Mr. Smith [not real name] should probably start looking into a "cash-out" or an actual refinance. If you need names other than Noel Cookman, please let me know.
Wife’s attorney argued that an Owelty should not be provided in the decree. She refused to include Owelty language for even her client’s $33,550. She obviously didn’t understand that the Owelty actually secures wife’s interest in the property, not to mention that it allows the one paying the money to obtain better options in financing said buyout. In other words, her client paid her to argue and prevail against her best interest.
Nothing I could say moved them. I explained it every way possible. Wife’s attorneys even said that I claimed that an Owelty lien would get the wife off the (current) mortgage. Of course, I’ve never said anything of the sort. The fact is, I tried to use the Owelty constructed at $80,000 in order to qualify the borrower-husband so that he could, in fact, finance the buyout to his ex-wife and "get her off the note."
So, the decree was entered and the only mention of the $33,550 was in property to wife with a mention of husband’s requirement to refinance; and, in the paragraph dealing with the sale of the residence at which time wife would receive the first $33,550.
Thankfully, the great Leslie Barrows (http://barrowsfirm.com/) had referred husband to us. But, it still looked as if the settlement (divorce decree) would really disallow the financing. Other lenders said “no.” The only alternative was a more expensive and permanently restrictive loan.
So, am I just telling you a sad story? Fortunately, I have been blessed with a stubborn turn of mind. When I suspect something is possible, I do not take “no” for an answer. It’s similar to that famous “can do” attitude but a little different. The only thing I know to call it is a “turn of mind.” It’s just the way I think. It’s why I started the Divorce-Lending Specialty when no one in my world had ever heard of such a thing. I thought, what if??? What if someone could help divorcing folks before they “ink the deal” and agree to terms that DISQUALIFY them from financing. Maybe I can help.
So, here’s the triumph. (I love winning. And, it’s all the better when NO ONE HAS TO LOSE – in other words, we do not have to defeat anyone in order to win. Everyone wins). [Well, wife’s attorney didn’t win because she now labors under her former client’s knowledge that she had misrepresented her client. I can only hope that the attorney will have learned something through all of this.]
Here’s how we solved the problem. Even though many people may tell you that the Owelty agreement and lien in the decree cannot be changed (without motion for new trial / modification of the decree or by nunc pro tunc), I had done enough research to know that the courts and those who rely on legal agreements and orders (like title companies and lenders) understand that two parties to an agreement can pretty much do what they want so long as they both agree to it.
Think about it – if you owe someone money, do they have to collect it or can they agree that you no longer owe it or that you owe less than what was initially agreed? Conversely, if you as the one who owes money decide that you owe the other party more money, can you agree to that different amount owed? Of course, you can. So long as you both willfully and of your own free will enter into an amendment to the agreement, no one will exercise some power to overcome your agreement.
So, I recommended to the parties that the Owelty agreement and lien be changed (really created) at $80,000 with a net buyout to wife of exactly what she had agreed and the remainder disbursed according to the schedule I had outlined. Again, such payment of debt enabled the borrower to qualify for the loan. It was the hinge features of the transaction. It was the not-without-which.
Here’s the kicker – the wife had no problem with this. Yet, it was her attorney who resisted the solution for months!!! As it turns out, the wife preferred GREEN MONEY IN HER BANK ACCOUNT to WHITE PAPER filed appropriately at the COURT HOUSE. So, this coming Monday, we will be wiring $33,550 to her bank account.
Here are the documents that we had prepared to accommodate this agreement:
The Owelty Deed of Trust ($80,000)
The Special Warranty Deed with Encumbrance for Owelty of Partition ($80,000)
The only nuance was that the title company wanted wife to appear in person to acknowledge and execute the Owelty agreement of $80,000 (by her signature on the Special Warranty Deed). Typically, it’s a little more effortless on the part of the grantee of that Owelty Deed of Trust (receiver of funds) and they only have to mail the form to the title company.
The “long and short” of it is:
- Wife’s attorney argued for something that was not in wife’s best interest and was ultimately changed to conform to what wife wanted anyway.
- In spite of what wife’s attorney said, we performed on our promise to lend according to the precise parameters I had outlined.
- Wife incurred extra time and, no doubt, expense (I measured several months of a delay) to get what she would agree to all along.
- We solved the problem. A problem that opposing didn’t even think they had.
The key to getting the deal done is simple - CALL ME.