Divorce Equity Buy Out Is better with an Owelty Lien and up to 95% of the home’s value.
The decision of which spouse will keep the marital house is an important one in many divorce situations. In some cases, the spouses agree to sell their home and split the equity. Other cases see one spouse keeping the home while the other must buy out the equity. The spouse who will be keeping the home will need to refinance in order to do so. The equity buyout will be possible with the refinance. This will also make sure the ex-spouse will no longer be listed on the note or title of the home. The divorce decree will usually determine the division of equity, as well as who will keep the home and take care of the mortgage. Texas is a community property state with unique equity laws that can complicate the process. Here is where the Owelty Lien comes in to play.
Owelty Lien refers to a financial sum or lien or equity that has been created and ordered to be paid by one of the parties to effect equitable property division in a case such as a divorce. It is a lien that covers all real property jointly owned by a husband/wife. (the marital home). The lien must be paid before any proceeds are distributed from a sale or refinance. Jack and Jill, for example, have a home worth $300K. They owe $240K. This gives them $60K equity. Jack wants to keep the house so he must buyout Jill’s equity share or $60,000. Jack would get the home, and Jill $30K equity. Jack would refinance his loan for $270K to pay off Jill’s current joint mortgage and her equity. Jill would be removed, and Jill paid $30K at the closing. He would then be the sole borrower of the note and title to the marital home. It sounds easy, but this is where complications can occur.
Many attorneys and borrowers agree that the best way for Jill to get her $80K is to cash out refinance. That is the wrong advice for a number of reasons. A Texas cash-out refinance in such a situation would be impossible. This is because Texas equity laws restrict borrowers from taking more than 80% of the equity. This means that the maximum loan amount may not exceed 80% of the property’s appraised worth with a cash-out refinance. So, the max loan amount in this scenario could be $240K. (80% of $300K) …. Jack needs $270K to pay his mortgage and Jill’s. He can’t pull the $30K equity out of her home. What if the decree already provided for this and the divorce was final? Jack doesn’t have $30K cash on hand to pay Mary any other way. Jill is not able to collect the equity she was awarded. This could cause contempt of the divorce decree or force Jack to sell instead. Don’t allow your divorce attorney to require this without a divorce equity buyout prequalification.
Jack can use an owelty lien to access her $30K equity in the property. This is good news, Jack and Jill must first discuss the situation with their lawyers. An owelty loan can be used to finance up to 95% the property’s actual value. Jack will be able get a $275K loan that can pay off his mortgage, Jill’s 30K, and any closing costs. His rate will not differ from any other rate/term refinance. Texas equity laws don’t affect the loan. Mary is paid the amount directly at funding of the new equity buyout mortgage. The final Closing Disclosure will show this amount. Win-Win for all!
Changes to Fannie Mae Cash Out Pricing makes Owelty Lien Buy Out Even More Important
The %’s represented below is a fee that Fannie Mae charges on all Cash-out refinances. 1% represents roughly 0.25% interest rate. So a person getting a $300,000 cash-out mortgage with a 650 credit score at 80% of a homes value can expect to pay about 0.625% higher rate than a person using an Owelty Lien equity buy out refinance.
Even if it was legal in Texas the cost to do a Cash out refinance can be much more costly than utilizing an Owelty lien. Most lenders are not familiar with Owelty liens and will tell you a cash-out is your only option. Don’t listen to them, we can offer you an equity division as high as 95% of the equity of the home and at a lower cost than a cash-out refinance. The chart below shows what Fannie Mae charges as a fee to the loan for cash-out refinance. Owelty Lien equity buyout mortgages do not have there’s fees.
I cannot stress enough how important it’s to involve our team, a Certified Divorce Lending Professional, in the early stages of the process so that everyone is informed of the specific circumstances and goals before a decree can be written. This will save you money on attorney fees and with the refinance fees. Call Richard Woodward today at (214) 945-1066 or just complete the request for information form below.