Q&A #6: Should I Release an Owelty Lien Before It’s Paid? My Client’s Lender Says She Should

Noel:

I was given your contact information from J.M., another attorney in our office. I have a question regarding VA loans and an Owelty Lien.

I represent Wife. Wife was awarded approximately $113,000 in cash by May 31, 2017. Husband was to pay this money from a cash out refinance. We are being told by the loan officer at ABC Home Lending, Inc. [not the real name] that they cannot close the loan with our owelty lien in place? If I release the owelty lien, my client is not protected. Do you have any suggestions?

Thank you,

Texas Family Law Attorney

 

Dear Attorney,

Yes, I do. Do not release it.

You are correct – this is the protection your client has. Technically, you and I know it’s called the “security” that your client has in the property. That’s the whole purpose of the Owelty lien. That’s the whole purpose of the buyout being structured AS an Owelty lien.

This lender is actually asking for something that would disallow good financing. They are asking for the opposite of what I require and desire in order to get the borrower the best (and maybe only) financing.

In other words, if the Owelty lien were not in place, the borrower would have to “cash out.” They would need equity financing. They would have to get a Texas Home Equity Cash Out loan.

As I’ve written many times – that’s the type of financing a borrower needs to avoid and can avoid in a divorce. (Cash out financing can be helpful under certain circumstances even with higher rates and worse terms; but, it’s wholly unnecessary in a divorce).

This is why I do what I do. This is what I saw 15 years ago when I began to innovate and create America’s Premier Divorce-Lending Specialty.

I can only surmise why Lender ABC is asking for the Owelty lien to be released. But, I think I can get it pretty close. They do not understand what an Owelty lien is; and, worse, they have no idea how it is financed.

Here’s what they should know:

– Owelty liens do not prevent good financing – they provide for good financing (if structured properly in the decree)
– Without an Owelty lien, homeowners can access only 80% of their home’s value (which may be already accessed or used by the existing mortgage balance); and,
– They have to do it with quasi-permanent Texas Home Equity (or “agency cash out” equity in other states) loans.
– WITH an Owelty lien, homeowners can access 95% – 97.75% – even 100% of their home’s value. (Conventional, FHA, VA, respectively, maximum LTVs).

You see, lenders have their own guidelines that “lay on top” of the widely used guidelines for Fannie Mae, Freddie Mac, HUD (for FHA) and VA. We call them “overlays.” Some are even unwritten and have a life of their own because of bad information that floats around a bank or lender. Some are assumed by the loan officer out of ignorance. I’m not being unkind. There are many things about which I am ignorant. But, when it comes to divorce-related financing, my customers (and your clients) must have someone who knows and understands.

This is why virtually every one of your divorcing clients should speak with me…sooner than later. There’s no downside to telling them – CALL NOEL. You will not have to worry about your client getting bad advice.

If you have any questions about this – please call me….NOW. Do what this attorney did – she contacted me and got accurate information.

Noel Cookman  972-724-2881

2 comments on “Q&A #6: Should I Release an Owelty Lien Before It’s Paid? My Client’s Lender Says She Should

  • My lender says I cannot get a cash out plus refinance of first lien without paying off the owelty. As structured, I am paying interest only on the owelty with no obligation to pay it off unless I sell. I cannot qualify for a loan that would pay off the owelty and also renovate the house. They say that would be two cash out loans not allowed in Texas. Any ideas?

    • Karen, my sincerest apologies for not writing earlier. I interact mostly by email and am, now, going to be diligent about interacting on my blog and other interactive (social) media.

      Your lender is sort of correct.

      When financing (i.e., refinancing) a property, all existing liens must be satisfied (paid in full, paid in part with a partial release or resubordinated to the new first lien).

      Here’s where there is some confusion. Two realms. First, the loan you are trying to get in order to home improvements does not have to be an equity loan. It’s true that there can be no more than one equity (Texas Home Equity) loan on a homesteaded property at a time. But, a home improvement loan is not a home equity loan. Now, many homeowners and their lenders do these home improvement loan AS an equity loan because it’s simpler. The bank/lender just writes a check to the homeowner and the homeowner spends the money how, when and where they choose. A home improvement loan requires plans and specs and inspections, the checks are made out to both the homeowner and the contractor, etc. It’s a big deal. That’s why – when there is enough equity in a property, the bank usually just does a home equity loan. It’s easier on everyone. But, it encumbers the property more stringently than would any other type of loans…as you see.

      Secondly, and more importantly, the Owelty lien IS NOT AN EQUITY LIEN. So the existence of an Owelty lien on your property does not take up that one-and-only-one space reserved for an equity lien. This is a gross misunderstanding of the nature of an Owelty lien. But, most banks do not understand them so they are not unique in that sense.

      I have actually employed a very unique strategy to your particular situation. But, it involves paying off (or rolling in) that Owelty lien. Often, I am able to make the numbers work to the homeowner’s advantage so that paying the Owelty off immediately (in the refinance transaction) makes sense and saves money. It would require some simple cooperation from your ex-spouse. Please call me if it’s not too late and if you’re interested.

      Thanks and, again, my deepest apologies. I really appreciate your making a comment and asking the question. I’ll do better going forward.

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