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I count about a dozen misconceptions, faulty assumptions or myths about mortgage financing in divorce in the following email exchange with a new customer. But, I realized that by sharing this with you, I could address several critical elements in divorce-financing pertaining to the buyout (specific to Texas as the Owelty lien; other states as simply a "divorce buy-out"). There is also a cool money-saving tip for your clients.
The emails are in order of the back-and-forth communication we had earlier today. (Obviously I did not include the name or email address of the inquirer; minimal editing was used for clarity, half-way decent grammar and spelling).
From: Divorcing Client
Sent: Wednesday, November 14, 2018
To: Noel Cookman
Subject: Cash Out refinance due to divorce
Noel,
I’ve read through multiple blogs you have posted and I have a question. I’m in the process of getting a divorce and will need to refinance the house to buy out my ex-spouse, in addition I want to take a little extra cash out above what I owe him and what we owe on the first mortgage.
My question is, do I still need an Owelty in the divorce decree? I talked to a mortgage broker yesterday who told me that would not qualify, that I could only get what was owed for both the note and buy out, no additional funding. That would throw this into a cash-out refinancing, the Owelty would be moot.
In addition, it appears that my husband’s attorney is trying to add additional liens on the house buy requiring the below documents on or before the date of divorce:
Special Warranty Deed with Encumbrance for Owelty of Partition (ex-spouse)
Real Estate Lien Note
Deed of Trust to Secure Assumption
Deed of trust with Owelty Lien
Seems to me that the real estate lien is not needed.
I’m able to refinance without the Owelty, because I would not be pulling out more than 80% of the value of the house.
Kind regards,
Divorcing Client
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From: Noel Cookman
To: Divorcing Client
Hi Divorcing Client,
Thanks for writing. Apply with me and I’ll get this done properly for you.
A couple of misconceptions – which are nearly 100% common amongst lenders. First is that no additional cash for your own needs can be included in the Owelty lien. It’s true that no other lender (that I know of) allows this. And, no other originator structures it this way. But we do.
It is absolutely essential that the divorce decree provide for this. I advise the attorney as to what is required in the decree, pre-underwrite the decree before it is finalized and assure that funding will take place. (Do not sign the decree until I have reviewed it).
Another misconception is the 80% rule. That applies only to cash-out financing. This should be structured as a buy-out, not a cash out. HUGE difference. Buy-outs can allow 95%, 97.75% or 100% (conventional, FHA, VA). But, again, the lender needs to know what they are doing.
Additionally, the right title company must be utilized.
We put it all together.
The one exception to these nuances which I have explained is if your current loan had been done as a Texas Home Equity (Cash Out). What is the status of your current mortgage in that regard?
Thanks.
Noel Cookman
America’s Premier Divorce-Lending Specialist
office 972-724-2881 † mobile 817-454-4555 † fax 866-295-0567
www.TheMortgageInstitute.com
601 W. NW Highway † Suite 200 † Grapevine, TX 76051
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From: Divorcing Client
Sent: Wednesday, November 14, 2018
To: Noel Cookman
Subject: Cash Out refinance due to divorce
Hi Noel,
Our current mortgage is a Texas Home Equity Security. I recall when we refinanced with did “cash-out” an amount to pay off some bills. This was back in 2003.
I’m actually the only one on the note, but he is on the deed of trust.
Can I ask what your fees are in such cases? I shouldn’t have a problem getting approved for financing, we’ve always kept a very clean credit history.
Thanks,
Divorcing Client
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From: Noel Cookman
To: Divorcing Client
Dear Divorcing Client,
It needs to “convert” to what they now call an (f)(2) (as opposed to an (a)(6)). I’m not sure they have better designations. Ha.
But, early this year the TX legislature provided that a Texas Home Equity loan would no longer have to be the same class of lien in perpetuity when it was refinanced (as was the case since about 1998 when the TX Home Equity was added to the state constitution). Rather, it could become a “non cash-out” upon refinancing so long as no new cash was taken out. The only problem is that the LTV ratio is still stuck at 80%.
In a divorce buy-out, all the cash should STILL flow through the buyout with no “cash to borrower” (as a technicality). That is, no cash paid directly to you by the title company. Your needs for cash would be paid directly to either a debt that you were trying to pay off or to your attorney’s trust account which automatically inures to your benefit. Your spouse is effectively taking his buy-out and authorizing that a certain debts be paid with those monies.
No fees. That is, no extra fees beyond loan fees. We’re competitive – neither the cheapest game in town (don’t want to be) nor the most expensive “shop” (no need to be).
You should use this opportunity to convert that loan from a cash out to that (f)(2). The rate could be lower and, most of all, you would no longer have the Texas Home Equity lien on title.
Thanks,
Noel Cookman
America’s Premier Divorce-Lending Specialist
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From: Divorcing Client
To: Noel Cookman
Dear Noel,
Thank you for that additional information.
The additional cash isn’t going to pay off any debt or at least not all of it. I’m looking to pay of some items, but want some cash in the bank to do some upgrades around the house and no I don’t have a contractor yet. In addition have some cash in the bank for rainy days.
We currently owe ~$28k and the house per tax appraisal is at $230k. My buy out amount is $97k, so I was looking to get a new mortgage for around ~$160k-170k. This is well below the 80% rule and I can do just straight cash out loan.
I also do not have an attorney, most of this I’ve been able to handle on my own.
My rate would be lower either way. We never did refinance after 2003 and we have a rate of 6%.
So I’m confused on the cash out option – since I don’t have an attorney nor do I want to pay off debts, so from what you said below I couldn’t do a traditional mortgage with the Owelty since it does not allow for cash out?
Divorcing Client
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From: Noel Cookman
To: Divorcing Client
Dear Divorcing Client,
That’s the magic of what I do. Your cash needs are rolled through the buyout. Then your new loan is certified (insured with title insurance) as NOT a Texas Home Equity lien.
If you don’t have an attorney, it’s possible that you could have those funds sent to your husband’s attorney’s trust account for your benefit. It really doesn’t matter since it’s a trust account and monies have to be fully disbursed. There are a couple of other options but none quite as straightforward as through either attorney’s trust accounts. If neither of you are using an attorney, you would need to look at those other options I just mentioned.
I’m not trying to talk you into anything. I just want you to know that, when done properly, and during divorce, financing can be structured and obtained at much better terms WITHOUT cash-out restrictions and costs.
Noel Cookman
America’s Premier Divorce-Lending Specialist
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From: Divorcing Client
To: Noel Cookman
Noel,
Thank you. Yes my husband has an attorney but I’m not sure if she would allow that. She’s wanting to set up trust account for his payment anyway.
Is it possible to use the funds that I’m pulling out to pay the closing cost/fees with this loan? Not technically rolling them into the loan but paying for them from those funds I pull out.
I will contact his attorney and she if she is willing to allow the additional funds. If yes, I’m sure the divorce papers will have to be rewritten. As I don’t think they are correct right now.
Divorcing Client
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From: Noel Cookman
Sent: Wednesday, November 14, 2018
To: Divorcing Client
Subject: Cash Out refinance due to divorce
Dear Divorcing Client,
BTW, if I were the attorney, I would set up that the buyout comes to her trust account anyway. My Proceeds Allocation Letter allows for the attorney to use the funds for their unpaid legal fees before disbursing to the client. Good strategy. And, totally appropriate. I actually encourage it.
Noel Cookman
America’s Premier Divorce-Lending Specialist
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From: Divorcing Client
To: Noel Cookman
Hey Noel,
His attorney is [name withheld] – located in [Texas].
Bottom line I was just asking if I would have to lay out cash prior to closing and receiving funds. If recall from the last time, we had all closing costs come from the amount we were financing, and we received the rest in cash.
Makes sense for the most part. I’m not always good at asking the right question.
That’s how she has it setup. The buyout comes to her trust account.
The only problem I have with her is that she’s trying to put a real estate lien on the house in addition to an Owelty lien.
Divorcing Client
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From: Noel Cookman
To: Divorcing Client
Dear Divorcing Client,
If I do your loan, I will review those documents. The real estate lien note is, most likely, the same as the Owelty lien; and, does not add another lien. It is not necessary to the creation of the Owelty lien. But, it’s the way their template/software reads. I have my theory as to why; but, that’s immaterial for now. See below.
FYI, I advise that – in the case of an Owelty lien being immediately (or very soon after final divorce) financed and/or paid - that the lien note not be created or filed until after a certain number of days when it would be apparent that the borrower does not intend to follow through with the financing and payment of said Owelty. If the other party insists on receiving such a note (again, it’s not required except in the case wherein a repayment scheme is established/agreed), I recommend this strategy. The reason: The cost to prepare the document would be at least $150 (my new service probably has the best fees – we’re undercutting most everyone) and up to $250+ if someone else prepares them. Then, there is the filing fee. Not much but $16 for first page and $8 for each page thereafter…and the trouble of taking them to the courthouse and filing them – not too soon and not too late. ? Then, as soon as the financing pays the Owelty in full, that document is moot. [I am effectively arguing against my new service doing more business. But, we will do well in the long run because we attend to the needs of the borrowers/clients and make sure they are getting the best deal. Did I mention that we are undercutting everyone else’s prices? ?]
Noel Cookman
America’s Premier Divorce-Lending Specialist
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From: Divorcing Client
To: Noel Cookman
Dear Noel,
Currently she has both in the decree. And she wants me to provide those documents at the time of divorce. She real estate lien actually has 6% interest rate on it if it’s not paid within 90 days of divorce. As I said, she wants the following three documents from me and has them attached to the document right now.
Real Estate Lien Note
Deed of Trust to Secure Assumption - releases my spouse from all responsibility
Deed of Trust to Secure Owelty Lien - showing that I owe $97k to my spouse
Thank you again for all the information. I will be making a decision soon.
Divorcing Client
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Dear Divorcing Client,
I would handle communication with her.
The Deed of Trust to Secure Assumption is not necessary if your husband is NOT on the current mortgage. That document gives him foreclosure rights if you were to default on a mortgage that is in his name solely or jointly with you. It’s totally not necessary. It releases your spouse from all responsibility but, he has none (if he is not on the current loan).
You will need to receive from him a Special Warranty Deed with Encumbrance for Owelty of Partition.
Generally, the party who benefits from (beneficiary of) a document pays for it.
So, typically
Special Warranty Deed with Encumbrance for Owelty of Partition – you pay for it because it conveys his interest in the property to you
Owelty Deed of Trust – he pays because it creates a lien payable to him
Real Estate Lien Note – he pays because he is the beneficiary of that note
Noel Cookman
America’s Premier Divorce-Lending Specialist
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It’s me again Noel,
He’s not on the current mortgage, but he is listed under the borrow on the home equity lien that is against the property when we refinanced. I thought it was a second deed of trust but I’m not sure.
It’s really all so confusing.
I’m ok with paying for preparing all the documents since he’s paying for the lawyer.
What should I ask her about the trust – for the additional money that I would like to get from the house. Need to make sure she is ok with that before I proceed. Then I’ll be ready to start my loan process and let you review the file and make the necessary changes before we file.
Thanks,
Divorcing Client
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Dear Divorcing Client
It is confusing. The deed of trust lists all owners as borrowers even though one of them may not have actually signed the promissory note. It messes with people at closings because they say “I'm not going to sign this because it obligates me on the loan” when it actually does not. We have to explain this a lot. For instance, your husband would only become a default borrower or if payments were not made and he wanted to make a claim to the house. The lender simply says “fulfill the terms of the promissory note and you are free keep to the house.”
As far as what to ask the attorney you could let me do that if I'm doing your loan. If you wanted to go ahead and ask her just say “because we are not doing this as an equity loan all monies will be routed through the Owelty lien buy-out and dispersed in such a manner as to give net funds to husband per agreement; and, to disperse funds to a trust account which would inure to my benefit.” You could also mention that the Proceeds Allocation Letter which he would sign will direct HIS net funds through/to her trust account so that she could collect any unpaid portion of her outstanding fees.
Noel Cookman
America’s Premier Divorce-Lending Specialist
