I get this once in a while. Can I secure alimony (spousal maintenance, contractual alimony, whatever) with an *Owelty lien? For family law attorneys in all states other than Texas (like California where I was just licensed to do mortgage loans), the principle and idea is the same. See footnote for explanation of the Owelty.
Yes and No.
First the “No.” The Owelty only secures a party’s (co-parcener’s) interest in a homestead property – typically, the marital residence. It does nothing else.
But, that doesn’t mean you cannot secure payment with an Owelty. The Owelty just has to forthrightly be payment for a party’s interest in the property.
There are a few ways to do this. But, they all depend upon having enough equity in the house to justify using that equity to “cover” the total amount of alimony payments. In other words, even if one could secure payment of alimony with an Owelty, it’s not really security if $100,000 total alimony payments will be due and the house which is used as the collateral to secure that payment has only $50,000 of accessible equity (for the purposes of financing or realizing cash through the sale of said property). One would have (portended to have) “secured” payment of 2X with an asset of only 1X. Not a good idea. And, certainly not financeable.
Here’s how to do it:
First of all, the method I like best. If the total amount of alimony payments equals an amount which can be reasonably financed (call me to see if it’s “reasonable”) in the house, go ahead and establish the Owelty, the homeowner (grantor of Owelty interest; grantee of spouse’s interest in property) finances with a new mortgage which includes the existing mortgage and the Owelty amount. The beneficiary of the support and Owelty funds can set up some fund to pay support in whatever fashion they wish. Or the decree – in the interest of the children – can require some annuity sort of fund to be established for payment of support.
Second way. If the support is to be paid over time (as support is typically paid) it gets a little trickier. The decree could outright state that the Owelty will be forgiven and ultimately released in increments commensurate to the timely payment of support.
It is critical at this point that the decree language still not cite the Owelty as securing payment of support. The support to be paid and the Owelty interest are two separate matters. They become related only because payment of support triggers a reduction in the Owelty balance owed. The Owelty beneficiary is gradually releasing his or her interest in the house.
Third way’s a charm. Another way of doing this is to avoid contractual alimony altogether and simply establish the Owelty and provide installment payments in the amount of the contemplated alimony payments. Again, the total payout needs to have some rational connection to equity in the property.
I do not get into tax ramifications which, I understand, are significant in how alimony and spousal maintenance are styled. Those considerations, in my mind, simply add a mathematical dimension to the calculations but they don’t effectively change whether or not any of these three methods will work.
Keep in mind that, as far as the financing part is concerned, it doesn’t matter of the support is styled as alimony, contractual alimony or spousal maintenance. In the mortgage world, they’re all pretty much the same. Documentation for loan qualifying is more important that the specific type of support being paid. It’s pay history (how far back has it been paid) and its continuance (when does it terminate) are the other key factors in loan qualifying.
If you think this is helpful, let me know. Write me at email@example.com; and, forward this email to a friend in family law practice.
*Owelty. Since family law attorneys and divorce clients from multiple states have been reading this blog, I am going to clarify frequently what Owelty is. First of all, Texas is the only state that secures a divorce buyout of a marital residence with an actual lien on property. It's called an Owelty lien and it comes from an old Scottish word as best as we can tell. It's a co-parcener's interest in a property. It needs to be expressed in a dollar amount, more or less, as a buyout because if the actual real estate (the dirt and stuff built on top of the dirt) is simply shared, then the various parties remain owners. You either retain ownership or you have Owelty interest. If you're going to retain ownership, you don't have Owelty interest. If you are going to receive dollars for your Owelty interest, you will no longer be an Owner.
This is an important concept to grasp even for folks from other states because it illustrates with a LIEN exactly how the financing of divorce buyouts operate. When states provide that a divorce buyout of a marital residence are effectively a lien or judgment against the person (rather than the property), the impetus in good mortgage financing (when helping a home owner finance a buyout to an ex spouse) is to effect the language of the divorce decree such that the buyout can FUNCTION as a lien against property, not merely against the person.