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Summary
Reverse mortgages can be used in divorce buy-outs. But, full payment to beneficiary could be delayed a full year or more if the lender doesn’t know this secret I am sharing here.
Even if an attorney does not deal with “grey divorces,” this short tutorial in divorce buy-outs with reverse mortgages will serve as further demonstration of the nature and genius of Owelty interest. Translation - you're still going to learn something extremely important.
There are some very restrictive features in cash-out financing, especially in Texas. But, I’ve said it thousands of times
A Divorce Buy-Out is NOT a Cash-Out
But still, lenders, courts, title companies, borrowers do them the wrong way and trigger those restrictive and disqualifying elements in cash-out financing.
Judges and attorneys might be forgiven for introducing language in settlements that trigger cash-out financing (when it is neither advisable nor needed). Not even the Supreme Court can command cash-out financing for a divorce settlement; so I do wish that judges would stop ordering that nonsense. When a decree reads, “party will obtain a cash out refinance loan and pay other party $X…” the court puts itself in the untenable position of ordering a particular loan type…and not even the correct loan type at that. It would be more appropriate for the order to simply cite the buyout amount and, if refinancing is necessary so as to remove the ex-spouse from the mortgage liability, the order should read "if existing mortgage liability has not been refinanced so as to relieve XYZ party by X days after final divorce, property shall be listed for sale...or placed for sale with a receiver." [I have a whole protocol for that which abides both law and mortgage guidelines.]
But lenders and loan officers not understanding? Not so much. There’s hardly a good excuse.
Cash Out Financing in *Reverse Mortgages
Reverse Mortgages are an outstanding exception to the restrictions on cash-out financing in Texas.
There are a few options that reverse mortgage borrowers have in their loan. The most common is lump sum cash-out. Here’s the catch though - the cash comes as two one-half disbursements of the total cash to be received, the second disbursement being one year after the first disbursement. Unless the maximum amount of cash needed for a divorce buy-out is half or less of the total amount that can be gotten from a reverse mortgage, then the homeowner is unable to finance (and pay) the entire buy-out until at least one year after the initial amount is disbursed from loan proceeds.
Divorce Buy-Out Financing in *Reverse Mortgages
99% of all mortgage peeps will tell their divorcing applicant that all of the funds - that they “cash out” in the reverse mortgage - must be split between those two lump sums. I didn’t actually research that 99%. But, I’ll tell you why I used that percentage.
This is exactly what
THE LARGEST REVERSE MORTGAGE LENDER IN THE COUNTRY
tells their divorcing applicants!
I know because I’ve closed divorce buy-out loans – with reverse mortgages - for folks who were told just that by this reverse mortgage lender. Most of the customers have a difficult time believing me until I finally close the loan or I just pound it over and over again into their heads and explain how and why…just like I’m about to do here.
After all, if a famous and reputable actor says that this company can be trusted, who is Noel Cookman to say that the company’s representatives don’t know what they’re talking about?
Here’s the fact: A Reverse Mortgage can be used to access dollars for a divorce buy-out. And, the homeowner can access those funds in ONE TOTAL LUMP SUM – not TWO ONE-HALF SUMS – at the first and only closing.
How is this done?
The reason this can be done is not just because of the divorce buy-out. There is no special provision for divorce in that regard. The loan must be structured by someone who knows what they’re doing. Hence, familiarity with principles of title, title insurance, liens and encumbrances – AND – lending guidelines.
Why is this so? It’s the same as the answer to this question: Why is a divorce buy-out in Texas automatically attached as an encumbrance/lien against the property rather than just a money judgment against a person?
The answer is in the question: Because it IS – in fact – an encumbrance against the property as well as a person’s obligation to convert that encumbrance into real dollars. But, the encumbrance means that the property secures the beneficiary’s interest, not only making it more likely that they will receive dollars but allowing the payer to negotiate a better and more do-able loan in order to make payment. Both sides win.
Yet, most folks do not know how this conversion to dollars takes place in terms of a mortgage loan. Neither do they know why the transaction must follow clear but simple procedures.
If the loan officer or lender knows what they’re doing (and the BIG ONES don’t), the divorce buy-out is structured in their loan as a lien against the property. This is part of the genius of the Owelty lien and why it matters to all other states as well. More on that later. For now, I’ve just given you – and anyone else who reads this – the secret sauce.
When the loan closes - forget for a moment that the homeowner is “cashing out” in a manner of speaking – all liens on property must be satisfied (i.e., paid) at the time of closing. That's the key principle. Since the divorce buy-out IS A LIEN ON PROPERTY, it gets paid in full, not one half now and the other half in a year. In other words, the borrower does not receive cash – via the “cash out” – but, rather, the lien holder is paid at the first and only closing (as all liens must be satisfied at closing). Get it?
This is another reason a Divorce Buy-Out should employ the concept of a lien against property - and not a simple money judgment against a person - in the divorce buy-out.
This becomes super important in other states that have not prescribed an owelty interest even though it is a universal concept and, more or less, automatically allowable unless there is a state that specifically prohibits owelty interest.
Order of Events / Cheat Sheet <<<But let me and my team steer this process
BAM!
Thanks for reading.
Noel Cookman...and my gang of "mortgage thugs" can be reached at 972-724-2881.
*Reverse Mortgages. For now, it’s important to know just a few things about Reverse Mortgages. At least one of the “borrowers” must be at least 62 years old. The homeowner/borrower must pay taxes and insurance. The loan is paid back when the last “borrower” leaves the home. The homeowner/borrower does not have required principal & interest payments. The amount of cash they can receive depends on metrics published by HUD/FHA and generally is a greater amount the older the homeowner is and the larger their equity is in the property; while it is a lesser amount the younger the homeowner is with the least amount of equity in the property. It DOES require a significant amount of equity in order to access those dollars. One of our reverse mortgage specialists can look up those metrics in minutes. In order to estimate, they just need to know the birthdate of the oldest borrower, the estimated value of the property and the balance on the current mortgage if any.
