Texas has unique requirements for ability to place liens against a homestead property.
In layman’s terms, Texas law allows mortgages on homesteads for the purposes of buying a home, refinancing a mortgage, paying property or other taxes, home improvement, or obtaining cash from the equity of the home.
An “owelty partition” (50(a)(3)) allows the owners of a home to access the equity they have in the home to assist in dividing the property. Owelty partitions (or deeds) are common in cases of divorce, but may also apply to other situations where there are multiple owners of a home, such as siblings who co-own or inherit a home, friends who buy a property together, etc., where one party wants to keep the property and the other does not.
The owelty deed establishes a lien against the property for the party wishing to cash in on their interest. Typically the owelty deed is a part of a contract or divorce decree.
The party retaining the home must then refinance the home to obtain the cash required to pay the other party their interest and to remove the other party from the mortgage. This allows the retaining party to acquire full interest in the home and the other party to receive their share of interest in cash.
When obtaining cash through a refinance, typically the amount of cash that may be received is limited to an amount that keeps the new mortgage to 80% of the value of the house (the loan-to-value or LTV). An owelty partition generally creates an exception to this rule. For a conventional loan, the LTV limit is 95% in an owelty situation; for jumbo loans, the limit may be 85% or 90%. (LTV limits vary by product, loan amount and other factors – please consult me to discuss your specific situation.)
An Example: John and Julie
John and Julie own a home together and are getting a divorce. John is going to keep the home, and Julie is owed equity from the home in the form of cash, as described in their divorce decree.
The value of the home is $400,000 and the current mortgage is $300,000; thus the equity in the home is $100,000. If John and Julie are to split the equity evenly, then they each would get $50,000. John would then need a new mortgage of $350,000 ($300,000 for the old mortgage + $50,000 representing the amount due to Julie). This leaves John with an LTV of 87.5%.
Two important consideration here are:
- The cost of the refinance
– A refinance is not free and can cost quite a bit depending upon the loan amount. The cost of the refinance should be incorporated in the division of property.
- Taxes and Insurance
– If an escrow account is in place for taxes and insurance, the funds in the account should also be considered in the division of property.
– If an escrow account is not in place, the division of property should address who is responsible for paying the upcoming taxes and insurance, and in what proportions.
If the cost of the refinance was estimated at $5000 (inclusive of all title insurance, title fees and lender fees), an option in John and Julie’s case would be for each of them to bear half the cost. If this cost were added to the mortgage amount, then the new mortgage amount would be $352,500 ($300,000 for the old mortgage, $5000 in fees, and $47,500 cash for Julie, leaving $47,500 in equity for John).
I recently encountered a refinance where the escrow account balance was over $20,000, as it was late in the year and coming up on property tax payment time. Depending upon the timing of the divorce and the refinance, it is possible that some of these funds are due to the departing party.
In cases without an escrow account, it may be fair to consider that the departing spouse owes taxes and insurance for the portion of the year prior to the divorce being finalized. If John and Jill were divorced in May and both the taxes and insurance were due in December, Jill could be considered obligated to pay half of the amount.
In either case, the amounts for taxes and insurance could be deducted from the cash out Julie was owed through the refinance, reducing the loan amount.
Other Requirements for an Owelty Loan
In order for a refinance to be considered an owelty loan, only the departing party may receive cash from the refinance. If both parties receive cash, then the loan is considered a standard cash out and the exceptions to the LTV limits are no longer applicable.
Both parties must be on the title of the property for at least 12 months prior to the date of the owelty partition.
Your lender will need copies of the title and owelty partition (i.e. divorce decree, contract, etc.) to prepare the loan. If the owelty partition is not yet in place, a letter of explanation must be provided stating the intent for an owelty partition; the title company may then prepare the partition documents for signing at closing. (Additional fees may apply for this approach.)
As you work with your clients on an owelty partition, it is important to keep in mind these details so the subsequent refinance is a smooth transaction. I am happy to answer questions and provide guidance to help ensure the desired outcome for your client, and lead the transaction once the partition is in place.
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