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I surely hope to soon finish my book,
The Texas Cash Out vs. The PROPER DANG WAY TO DO A DIVORCE BUY-OUT.
Meanwhile, I’ll just keep writing out my experiences helping divorcing folks and Divorce Lawyers get their deals taken care of.
Note: This email correspondence below is dated October 7, 2021, nearly 4 years after January 2018 before which time my response would have been different.
That’s because in early 2018, the Texas legislature “fixed” parts of Article XVI, Section 50 (Texas Constitution) that dealt with Cash-Out financing on homestead properties. Before this “fix,” once Texas homeowners cashed out on their primary residences (homesteads), all future financing of that mortgage loan had to be done as another Texas Home Equity loan, subject to all rules pertaining thereto…. whether or not the homeowner took out new cash. There is a mini primer on this within the email exchange below.
Brief Glossary…of sorts
Interchangeable terms. The following terms refer to the same type of loan and transaction governed by Article XVI, Section 50 (a)(6). With some exception by clarification.
Cash Out
Cash Out Loan
Texas Home Equity
Texas Home Equity Mortgage
Texas Cash Out Mortgage
HELOC (Home Equity Line of Credit) – different in certain respects from a “closed end” mortgage but regulated by the same rules governing the Texas Cash Out loan.
Other industry insider terms are, logically enough:
A6 and 50-A6 really (a)(6) and 50(a)(6) – for the subsection in the Texas Constitution that authorizes and constrains this “cash out” financing of primary residences in Texas.
There are other loan types designated as “cash out” loans which have more specified meanings in other states than Texas. But the fact is, those same loan types can be used in Texas so long as they do not trigger the specific provisions for the Texas Home Equity “Cash Out” mortgage. They are
Cash Out (yes but which kind?)
Limited Cash Out – Fannie Mae
Agency Cash Out – most similar to the Texas Home Equity Cash Out except cannot be used for a borrower in Texas to actually take cash out (in hand). It is triggered, in and out of Texas, when a lien which was not used to purchase the house is “rolled in” or paid off in a new loan.
Special Purpose Cash Out – Freddie Mac
FHA and VA have their own “Cash Out” loans as well
Confused yet? You should be. You’re supposed to be.
These terms and distinctions were cobbled together over several decades by politicians and government bureaucrats seeking to advance all sorts of agendas, not the least of which is the euphemism “affordable housing.” Technically Fannie Mae and Freddie Mac are not government agencies but they are officially referred to as GSE’s – Government Sponsored Entities. Don’t let the feigned distinction fool you. These are run by government bureaucrats. Read all about it in Thomas Sowell’s The Housing Boom and Bust.
THE END…of the Glossary
Let’s get started.
This is a brief correspondence I had with one of Texas’s great family law attorneys. I get questions like this from you all, nearly every day. And, I love answering them as I am able. This one deals with the subject at hand in the context of divorce.
Hey Noel,
I hope you are doing well.
I had a quick question if you have a second to answer it, I would appreciate it. I have a client that is considering a buy-out refi to pay an owelty lien, but her sister who works at a title company has told her that she believes that my client’s refi 2 years ago was a cash-out refi and as such she, ‘legally can only do a cash-out this time and not a buy-out/owelty lien.’ I have never run into this being an issue and never heard you or anyone else state this might be a problem, but I am also aware that my knowledge of banking regulations is limited at best.
Any truth to the rumor here?
Thanks,
Attorney
Board Certified - Family Law
Texas Board of Legal Specialization
Fellow American Academy of Matrimonial Lawyers
Fellow International Academy of Family Lawyers
Credentialed Collaborative Professional by Collaborative Divorce Texas
Sir (my preferred salutation for him, which is my preferred pronoun for….uh, him),
Sort of. But, as is the case many times, it's only partially true, it has caveats and a "cure." Although, the cash out extends certain limitations into the future....as in the loan she is trying to do now.
When I get to my laptop, I'll expound a little more.
Have her call me if you want. Or, tell me 2 numbers, and I'll evaluate more precisely.
1. Current market value (best guess)
2. Balance on current mortgage(s)
Later....
Noel Cookman
America’s Premier Divorce-Lending Specialist
Noel,
Thanks so much for getting back to me. Based on the crazy market and what I understand are somewhat wary lenders value is a bit of a moving target, but lets conservatively say current FMV is $500,000 and current amount owed is about $250,000.
It really isn’t a huge deal regardless because she is really probably only looking to pull about $80,000 out, so she could do a cash-out, but she is concerned about rates and I was intrigued by the question because I feel like that is something I should know.
Thanks,
Attorney
Sir,
Thanks for the question. When you have time, this will (hopefully) thoroughly explain.
A buy-out is not a cash-out – IF it is structured properly in the decree and by the lender. Too many times, lenders and loan officers do not understand this and try to perform “cash-out” loans for divorcing folks who simply need a buyout.
There is a world of difference between the two; one (the cash-out) most often leads to an inability to finance while the other (buy-out) opens up many more opportunities and methods to close the deal and produce dollars for buyouts.
The title agent is referring to the old rule colloquially known as “once a cash out, always a cash out;” meaning that once a Texas home-owner cashed out on their [primary residence] house, any future financing of THAT cash-out loan – WHETHER OR NOT THERE WAS NEW CASH TAKEN OUT IN THE NEW LOAN – would always be considered another Texas cash-out (TX Home Equity) loan, subject to all the constitutional restrictions, limitations, etc. This meant – among many other things – that the refinance of a prior cash-out loan had the same Loan To Value (LTV) limitation as the original cash-out loan – the famous 80% LTV limit.
Well, the legislature “fixed” that “once a cash-out, always a cash-out” element in early 2018 and allowed that homeowners who had cashed out previously could refinance their mortgage to a “regular” (my word) mortgage (i.e., a purchase money transaction or the industry’s term, a “rate and term refinance.”) In other words, they would convert their mortgage to the same class of loan/lien with which most homeowners purchase their homes and refinance the mortgage on occasion in order to get a lower rate or change the term in some way. This new converted loan must not allow any cash to borrower.
This is VERY IMPORTANT – and some of my most informed attorney compadres still use the wrong terminology. (No matter, I know what they mean). They say “so and so needs to cash out and give $$$ to their ex.” But – here is the VERY IMPORTANT PART – a buyout in a divorce is NOT a cash-out. Payment to an ex within a mortgage – so long as it is structured properly in either the decree or subsequent deeding instruments AND by the lender (loan officer, processor, closer, underwriter) and their chosen title company – DOES NOT trigger a cash-out loan. I cannot over-emphasize this. It is the heart and soul of truly helping divorcing/divorced folks avoid so many traps, limitations and even loan denials.
The benefit of the 2018 change was the homeowners could take advantage of the lower rates for rate and term refinances. You see, almost all cash-out loans have higher interest rates…and, of course, those pesky Texas Home Equity provisions.
The problem with the 2018 “fix” is that the legislature left many of the prior restrictions to apply to this subsequent refinance. Even though a home-owner could find a better interest rate (compared to a cash-out rate), their financing was still subject to several of the old restrictions:
- 80% LTV limit
- Could only refinance after at least 12 months had passed from the prior refinance
I mention these two restrictions because they affect divorce settlements.
- The 80% LTV Restriction. If the couple’s prior transaction was a cash-out, they cannot touch the top 20% of their home’s value as the awarded party attempts to finance a buyout. In your current case, it probably isn’t prohibitive. But, in most cases, it is. And, why would a home-owner “cash out” when they can buy out at better rate and term?
o This is such a severe restriction, here’s how I had to fix it a couple of years ago. Divorcing couple HAD to perform financing and do one of my unique “Disbursed Buyouts” (whereby debts were rolled in to/through the buyout).
o They had two homes and wife had moved into their second home (no longer renting it out). The husband’s house needed 95% financing in order to perform the buyout and pay off the existing mortgage. But, they had formerly cashed out on that house. So, there wasn’t near enough equity to pay off the mortgage and include dollars to pay debts as well as pay the ex. Remember the 80% LTV limitation that extends to the subsequent refinance of a mortgage that was performed as a cash-out.
o Here’s the fix. Before the couple filed for divorce, we refinanced the marital residence just to “cure” that loan – *to change it to a regular loan. Then, the couple filed for divorce, established a buyout (one of my “Disbursed Buy-Outs”) in the decree, husband was able to finance more than 80% of his newly refinanced mortgage. Like I said – up to almost 95% LTV.
It was a monumental exercise in hoop-jumping. Internally, we had to do several things. We knew that the loan would pay off early (through our intended second refi of the same property).
Most people do not know this but an early pay off means that the company and the loan officer and the branch office give back the commission they earned on that loan. So, the president of our mortgage company agreed to hold the loan (not sell it to any of our investors); we knew that I would be paid on two loans but would have to give back the commission on one of them. To my knowledge, that has not been done in Texas other than this one time. (I’ve often thought that if we could create a machine-like process, we could advertise that hoop-jumping circus and help a lot of divorcing people across the state who are “stuck” with Texas Equity restrictions on their home’s mortgage).
o Actionable Strategy: Watch out for that 80% LTV limitation when discussing the buyout. Given enough time, it’s possible to repeat the above scenario so as to get homeowners out of those severe limitations in Texas Home Equity Cash-Outs
- The 12 Month Wait. If the couple “cashed out” 4 months before they divorce, the non-awarded party may wish and want to get off the mortgage and maybe receive a buyout, but it cannot happen (through the financing) for another 8 months.
o Actionable Strategy: Watch out that you do not require refinancing in divorce decrees before at least 12 months have passed from the prior cash-out refi.
*By the way, the Texas Home Equity “cash-out” loan is called an “(a)(6)” amongst mortgage peeps because it is the legal prescription found in Section 50 subsection (a)(6) of the Constitution. The 2018 “fix” is called an “(f)(2)” from the same part of the Constitution which is the amendment (from 2018). “We’re doing an (f)(2) means we are converting a prior cash-out to a regular loan, most often in the context of a divorce.
So, the title company – whether or not they understood that the refinance of a cash-out loan is no longer NECESSARILY another cash-out loan – would typically be instructed by the lender and the loan officer (if they were “on their game”) and would take GREAT CARE to assure that the title company DID NOT treat their customer’s loan as a cash-out. Most specifically, the lender would not send a Texas Home Equity DOT instrument to the title company for signature. The issue is more often that the lender or loan officer does not understand how to avoid as well as “cure” cash-out financing in the context of divorce. Their ignorance is my bread and butter. 😊
There are other strategies we have pioneered and performed to help divorcing homeowners avoid cash-out financing and cure it when they already have in the past.
That’s my tome. Thanks for the question.
Noel Cookman
America’s Oldest Divorce-Lending Specialist
Noel,
Thank you for the incredibly detailed answer, which I will share with my client and advise her of the source.
Unless I am missing it, the crux of this, it seems, is that if she really needed a buy-out she couldn’t get one, unless she were to dismiss the divorce action, (f)(2) the loan, file for divorce again and structure a disbursed buy-out that funds in 12 months for the buy-out refi, right? Or were you able to circumvent the 12 months entirely due to the divorce being filed after (f)(2)?
Basically, it seems that she will need to cash-out to pay him his money, and then she can (f)(2) in about 12 months to perhaps get a better interest rate.
Thanks,
Attorney
Sir,
The detailed explanation runs the risk of confusing things as well.
She could refi (after final divorce), convert to an (f)(2) AND include a buyout to ex-spouse of $80,000 (or up to nearly $150,000 ($250,000 + 150,000 = $400,000 which is 80% of the value of $500,000). At the numbers you gave me, it appears she does not have to exceed the 80% LTV limitation.
The buyout of $80,000 is not “new cash” but, rather, can be included in a “rate and term” or regular refinance loan (which is accommodated by the (f)(2) provision).
Remember:
A Buy-Out is not a Cash-Out.
A Cash-Out is not a Buy-Out.
End product: she has a regular loan. She will have performed the buy-out. The title company and the lender just need to make sure that she receives no cash at closing/funding, that is, that she does not take “cash out.”
She also needs to avoid cashing out BEFORE final divorce - even if the cash of $80,000 is given to her spouse for the anticipated divorce settlement, that is, the title company makes the check to the spouse and not to your client, the borrower. If that happened, the cash would then be payable to a person who is still on title. THAT is what triggers TX Home Equity Cash-Out – dollars to borrower and/or someone still on title to property…which is why the Owelty can only be effectual after final divorce.
The 12-month rule would only apply if the prior refinance loan was a Texas Home Equity Cash-Out. It would not extend again once the loan is converted to the (f)(2).
Noel Cookman
America’s Oldest, Surviving, Divorce-Lending Specialist
