I have committed to providing real-world, real-time, real-case answers to family law attorneys’ questions regarding home financing and divorce. It’s a labor of love. But, it’s how I “pay it forward.” Attorneys will often, then, refer their clients to me so that they can actually close their loan (for refinancing with or without buyouts and purchases).
Here is a question I received a few days ago from one of Texas's finest family law attorneys.
I have a case where we agreed to pay Wife $55,000.00 out of the equity in the marital residence via refinance. The equity is approximately $100,000.00. My client has informed me that the bank is wanting an Owelty lien to refinance. Part of our agreement was to not have an Owelty lien.
My understanding of the rules and regs relating to Cash Out was that an Owelty lien is only needed to access more than 80% of the equity. So, I’m not sure why the bank is wanting an Owelty lien. Your thoughts would be appreciated.
Family Law Attorney
Good to hear from you. Apologies for the lengthy reply but I like to be thorough.
The Owelty lien will actually help your client (or any homeowner) borrowing money to pay an ex for their interest in a homesteaded property.
Exceeding the 80% LTV (Loan To Value) limitation is merely one of the benefits of financing with an Owelty. Your client has much to gain and nothing to lose by affixing an Owelty to the property. It’s a superior type of lien (in my opinion) because it’s the same class of lien (vendor’s) which was used to purchase the house – it’s still a purchase money transaction; the interest rate is lower, it has none of the typical limitations in financing going forward (only somewhat mitigated by the new amendment to the equity laws in the Constitution), other loan types can be used in financing an Owelty (FHA, VA, not just conventional as would be the case in “cash out” financing), etc.
Moreover, the grantee of an Owelty interest would be in a superior position on the property. Without an Owelty, she has no security other than the court order to be paid money by a certain time. Numerous things could go wrong. But, if she has an Owelty in place, she has the same type of lien that the first mortgage holder has on the house. Like her ex-husband, she has nothing to lose and everything to gain by having her interest filed as an Owelty lien. (First lien holders don’t have to go back to court in order to be paid when their collateral property is sold or refinanced, etc. They hold a lien and title insurance insures that all lien holders are satisfied).
So….what to do if the settlement agreement says “no Owelty.” This is where the following statement applies; and, it’s what I say in my course on Owelties:
So, there is simple language that may already have created an Owelty (if the decree is final) or could create an Owelty without the word actually being used. Here are the three elements that clearly establish an Owelty in a decree:
However, the title company (or bank if they self-insure) will still (most likely) want to obtain and file two (really, three) “Owelty” documents:
So, there would be no way of getting around the opposing side at least not knowing that an Owelty is filed. But, the word “Owelty” could be left out of the decree.
I say all this in theory because I do not know how the bank and/or their title company would interpret the matter. I can only say what we would do.
Here’s how I would handle the situation (if the insistence from the other side was that no Owelty be created).
I use the title agent as the communicator at that point because it takes me out of the equation – it becomes very simple and seamless. Speaking of seamless, the Owelty lien is filed and released in the same nano-second, on funding day. (Some banks and lenders want the Owelty lien in place before they close. But, we have trained our title agent partners and underwriters to assume that the Owelty will be filed on funding day…).
[If there are nuances in the settlement – and this might be one of those nuances wherein an Owelty is explicitly to be avoided – I would make the adjustments. Worst case scenario, we would perform a cash out transaction for the client/customer. In fact, if the underlying first lien is a cash out, we would do what is now called an (f)(2) under Section 50 as opposed to a 50(a)(6) (which is a Texas Home Equity Cash Out). This is brand new and is basically a conversion of a Texas Equity loan to a regular loan while still requiring an 80% LTV limit on the financing. But, that’s another story.]
It’s true, we have refined the process to make it seamless like this. But, it illustrates exactly how an Owelty lien works. It is created (decree). It is perfected (the Owelty Deed of Trust). The property interest is conveyed (Special Warranty Deed). Owelty interested is financed – (i.e., satisfied in a refinance transaction). Grantee is paid. Everyone lives happily ever after.
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My divorce papers state that my ex has to pay me so much per month or in full on a certain date on the owelty lien. If not paid in full it will accumulate interest. I feel like this was not the right thing to do as I would only be sure to get the money if he happens to sell or tries to refinance correct? Can I take him back to court of not paid at the end of the promised term? How does that work?
If your ex does not fulfill the terms of that "note" - the installment plan whereby he pays monthly until paid in full - he will have defaulted on that contract AND will have violated the decree. He will be in contempt of that order. I would imagine that such default of terms would give you standing in that court to require the sale of the house. If that happens, I would highly suggest the appointment of the just right receiver so as to avert the disagreements between the two of you over terms of the contract/sale.