Texas Owelty Lien
What is an Owelty lien? Owelty liens are a type of deed that allows divorcing couples to divide the existing equity in the marital home. This action is commonly utilized in divorces to “buying out” the remaining spouse’s interest in a home.
The party giving up their interest in the home obtains a lien against the property through a divorce decree, called an Owelty lien. The Owelty lien must be filed at the courthouse in the count records. When the party retaining their interest in the house refinances or sells the home, the other party is paid the value of their Owelty lien. This solution allows one person to obtain the full interest in the home while removing the existing spouse from the mortgage, while also providing the existing spouse with cash.
Warning! Both parties need to plan and pre-qualify for a refinance if they wish to retain the property. Many times one spouse can not qualify for the mortgage on their own. Without proper planning BEFORE the divorce is filed the result could be devastating for both. Both spouses credit could be ruined because the retaining spouse can not refinance and the equity can not be divided without a sale.
Owelty Liens FAQ
Here are some helpful answers to frequently asked questions (FAQs) regarding an owelty lien:
Q: Can you put this in simple terms?
A: The owners of the home can use the equity they have in the home to assist in dividing up their property. This action is commonly utilized in divorces or in “buying out” one party’s interest in a property while simultaneously removing the existing spouse from the mortgage.
Q: How would an owelty lien work?
A: Here’s an example: Joan and Mike are going through a divorce. They own a home together with a mortgage. Their home is valued at $500,000 and the couple currently owe $300,000. Let’s assume they are splitting the equity 50/50 (or $100,000 each). Their divorce decree must specify the Owelty and the Owelty lien must be recorded. Joan would then refinance the property at $400,000: the $300,000 owed on the mortgage in addition to Mike’s $100,000 Owelty lien. The end result is Mike gets his $100,000 and Joan is the full owner of the home. Mike is no longer on the mortgage nor the deed.
Q: Can’t I just do a “cash out” refinance or Texas Home Equity Loan to get the money/equity?
A: Without an Owelty lien, the parties would be limited to only cashing in on equity up to 80% of the value of the property under Texas Equity laws. The Owelty lien allows the parties to recoup their equity up to 95% of the property’s value. This also allows the refinancing spouse to obtain a regular refinance. That is very important because it affords the borrower lower rates and better terms.
Q: What is the difference between an Owelty Lien Refinance and a Texas Cashout Refinance?
A: The Owelty Refinance is the much better option than a Texas ‘Cashout’ when settling the Real Estate variables during the divorce, and there are a number of reasons why.
Texas State Law says, once a Cashout loan, always a Cashout loan. This means that once you refinance your primary residence and take cash out of it, that mortgage is “flagged” as a Texas Cashout mortgage or the legal term is, Texas a(6). There are a number of reasons why you would prefer that your mortgage not be a Texas a(6) mortgage.
1) All banks, lenders, and investors bump your interest rate a little higher when dealing with the Texas a(6)…this means that if you go to refinance your house a couple years down the road after you have gotten a Texas a(6), even if you are just refinancing to lower your rate/payment and taking no cash from the equity, you still get “hit” with a little higher rate
2) Texas law says that you can not take more than 80% of the equity in your home for cash…this means you are limited to an 80% loan to value on your mortgage. If you bought your home 5 years ago and only put down 5%, you likely do not have equity to the extent you could use a Cashout, because you have to have more than 20% equity to start taking cash out. The Owelty Lien follows regular lending guidelines and you would be able to refinance in an Owelty.
3) The transaction for a Texas a(6) is much more turbulent than an Owelty. There are waiting periods set into the a(6) and special documentation that doesn’t typically get viewed and included in other loans that are included in the a(6) that when not administered correctly can postpone the closing…better to use a loan officer with extensive Texas lending history rather than an online or TV commercialized lender where they are licensed in Texas but office in another state.
If you would like to learn more or explore how an Owelty Lien might work for you, contact us at 469-556-1185. Geni Manning and one of our ‘Certified Divorce Lending Specialist‘ will assist you.