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Written by
Noel Cookman

Exactly How An Owelty Lien Works II

Published On 
March 11, 2015
Elements in an Owelty Lien

I am going to show the basic elements that create an Owelty interest and, thus, a financeable lien on a homestead property. But first things first.

Always remember the foundational axiom - it costs you nothing for me (and my title gurus) to review your decree (or Special Warranty Deed w/ Encumbrance for Owelty) to make sure that proper language has created this enigmatic Owelty lien. If I am doing the financing for the grantee/party anyway, I have to know if this interest has been created. Otherwise, I might not be able to close the transaction – I might not be able to TURN WHITE PAPER INTO GREEN MONEY.

Watch out. It’s possible to create an Owelty interest (lien) without using the word “Owelty” in your decree. But, it’s also possible to use the word “Owelty” and still not create a valid Owelty interest (lien).

You live in a world that hinges on pronouncements and judgments from the courts. While the practical world of mortgage finance is subject to all sorts of laws, regulations and court judgments, lenders are generally not subject to a court requiring them to advance funds (except for the laws which require that they do it fairly without discrimination on account of race, color, religion, etc.). For this reason, I do not ask a judge if a decree has properly created an Owelty lien; I ask the lender. And, since the lender relies upon the title insurance company to insure the new transaction as having a valid lien, I go straight to the title insurance underwriters, all of whom are attorneys, for an answer to this question:

Do you see a valid Owelty lien in this decree/agreement; and, will you insure it as a valid lien against the homestead of the borrower (thus allowing a purchase money transaction verses a Texas Equity loan transaction)?

First, however, it is instructive to understand what factors disqualifya spouse’s (grantor’s) interest from being financed as a valid lien against the homestead. In other words, what factors derail efforts to create a financeable Owelty interest in a settlement?

1.    The existing mortgage is a Texas Equity 50(a)(6) and therefore must be refinanced as a Texas Equity 50(a)(6). [This is the common reference to a Texas “cash out” or Texas Equity loan – same thing.] Of course, the newly created Owelty lien could stand alone and separate from the existing equity lien. But, if the newly refinanced loan includes the existing equity loan – that is, if they are “rolled together” and refinanced as one loan – then the new loan must be a Texas Equity 50(a)(6) loan.

2.    As a practical matter, from the above situation when the Owelty lien is valid and is filed in addition to an existing equity lien, very few lenders will finance just the Owelty lien – that is, turn it into cash payment to the grantor. This may change. But for now, I would not recommend that a grantee, having been awarded the homestead residence, count on a lender financing just the Owelty lien behind an existing Texas Equity lien. Again, there are a few lenders that will finance this Owelty lien without Texas Equity (Cash Out) triggers but they are few in number and not so easy to find.

3.    The buyout is not created in the divorce settlement as an Owelty interest. If, for example, the decree states that husband owes wife $X for her “equity” in the house but does not award the house to husband subject to an Owelty interest in favor of the wife, the decree has created a debt in favor of the wife but not an interest in the property. This is a grey area for title underwriters. Some will see “equitable” interest as “Owelty” interest. Others may not. It depends on the language and the underwriter.

4.    The legal description is not included in the awarding of the property or is missing from the Special Warranty Deed with Encumbrance for Owelty of Partition. In some occasions, this can be corrected, generally if the Special Warranty Deed has not already been filed. The divorce decree should reference a complete and accurate lot/block or metes and bounds legal description; not merely a property address.

5.    Improper awarding/divesting. One ex-spouse should be awarded the subject property and the other ex-spouse should be divested of his/her interest in the property.

Next week - those actual “elements” that are required for the constituting of a financeable Owelty lien.


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