After yesterday’s blog post from the Law Office of Bryan Fagan, we discussed just how you and your spouse might be able to pull equity out of your house to satisfy the orders of your Final Decree of Divorce. Selling the home is the easiest method to accomplish this goal. There is nothing more that has to be done than to list the house on the open market and hire a realtor to help you and your ex-spouse get the property sold. You and your ex-spouse can then work with the lenders to make sure that you are paid the portion of the equity guaranteed to each of you in the Final Decree.
There are additional methods that can be implanted, however. This is where we will be starting our discussion today. A technique often utilized in divorces is to take whatever portion of the equity you were awarded in the divorce and have an equal amount of community property awarded to you to compensate you for the property settlement.
Suppose you were awarded $75,000 in equity in exchange for leaving the family home. In that case, you may be able to negotiate for a larger share of the community estate, so you all do not have to go through the effort of pulling that money out of the house. This option is great to utilize if there is sufficient property to make this kind of trade-off. If your community estate (and separate estates as well, for that matter) are rather barren, then other options may need to be looked into to pay out the equity in the house.
Cash-out refinance as an option, post-divorce
You hear a lot about this arrangement if you watch television or listen to financial shows on AM radio. What cash-out refinance references is when your spouse is awarded the house in a divorce and then agrees to refinance the home within a few months after the divorce has concluded. As a part of that refinance, your spouse can pull equity out of the house to pay you, make repairs on the home or do any other number of activities concerning the property.
This option can run into a snag if your spouse does not qualify for a refinance. A refinance is not an adjustment or modification of your current home mortgage. On the contrary, a refinance is basically like reapplying for another mortgage that will replace your existing mortgage. You will submit your application and then sink or swim based on your income, credit score, and other factors relevant to the lending decisions being made.
Owelty liens and cashing out equity
An owelty lien is something that is tricky to say and can be tough to explain. The reason is that most people, and even many family law attorneys, are unfamiliar with what an owelty lien is and what kind of impact it can have on your case. With that said, let’s consider an example that will hopefully illustrate what an owelty lien is and how it can benefit you and your spouse when it comes to pulling equity out of your home.
An owelty lien is also referred to as an owelty partition. The partition sets up a lien against the house in favor of whichever of you or your spouse needs to pull the cash out based on the terms of your final decree of divorce. With an owelty lien in place, a lender may allow you to cash in as much as 90% of the total equity in the home.
Here is our example. Suppose that you and your spouse are getting a divorce and you own a home together as husband and wife along with a mortgage on that home. If the current value of your home is $400,000 and you own $200,000 currently, then here is how this would all work out if an owelty lien is taken out. If your spouse is awarded the house in the divorce and you own a 50% equity stake in the place when your divorce is finalized, here is a breakdown of the arrangement that you could be able to take advantage of.
First of all, your attorney will need to make sure that your final decree of divorce states specifically that the owelty lien and deed must be recorded with the county clerk in whatever county the house is located in. Your spouse could refinance the property for the amount owed on the home plus your equity stake in the property. Here, if $200,000 is owed and you are entitled to ½ of the $200,000 in equity, the new loan would be $300,000.
At the end of the day, when all of this has been done, you would get your $100,000 in equity, and your spouse would own the home free and clear of any interest that you could potentially assert. As with applying for any loan, your spouse must qualify to be loaned an amount this significant.
The owelty lien paperwork must be included in the final decree of divorce. Typically this occurs by referencing the language in the decree itself and attaching the actual paperwork to the final decree. As we saw yesterday with a Deed of Trust/Special Warranty Deed set up, you must have your attorney draft a separate Deed of Trust and Special Warranty Deed for each spouse to execute to the benefit of the other.
Refinancing a home can cost a significant amount of money.
Keep in mind that you cannot go to a lending company and ask about refinancing a mortgage and not expect to pay some money along the way. The costs associated with a refinance will typically increase the more expensive the loan is. If you are the spouse who has to go through the process of applying for the refinance, it would be wise to estimate the costs associated with the refinancing and set those aside in the final decree of divorce. Since your ex-spouse is getting a benefit from this process, then they can pay towards its accomplishment.
The money involved in these types of deals can be impacted by the strength of the local economy and the housing market in general. If there is insufficient equity in the house (no cash available to pull out of the refinance when it is completed), then this probably wouldn’t be the wisest option. If you only have $15,000 in equity, then you may need to re-think your strategy. Another thing to remember is that a refinance may not be possible for you or your spouse based on your income as separate persons. I know it seems like this is something that I am bringing up repeatedly, but you should not take it for granted that a refinance is possible. I would tell you to talk to whatever lender you anticipate wanting to use before you go to trial or as you enter the later stages of your case to find out if you even qualify. Suppose you do, then you know where to go from there. If not, you may need to push for the house to be sold outright and for you to take your gains (or losses) as they come.
Details regarding the sale of your family home in a Texas divorce
As with anything in a divorce, some factors will come into play that will impact the sale of a home. I usually will tell folks that the more valuable the asset, the more complex the circumstance, or the more external factors present, the more problems you should anticipate in the process. Selling a home is both tedious, essential, and valuable since it represents a massive chunk of your net worth in all likelihood.
If you and your spouse disagree about every issue under the sun, then you should expect that you will disagree with each other concerning the sale of your house. Unfortunately for both of you, there are many issues to argue about when selling the family house.
For instance, do you know ahead of time what realtor you want to use to show the house to potential buyers and work with the title company, etc., to ensure a smooth closing? If so, you should share this information with your spouse as early as possible. Your attorney may have a handful of realtors that they use to sell homes for their clients. The attorneys can always exchange the names of realtors and can work with you and your spouse to select one for future use.
From there, you will need to coordinate a significant number of issues that will need to be sorted out before the sale of your home. Unfortunately for you, that coordination will need to occur with your ex-spouse and their attorney. What price are you going to list the house as being sold for? How long will you take to decrease that offer price if you receive an offer to purchase the property? Are you paying for repairs, or will your spouse be responsible for them? If you will split the costs associated with repairs, how will you coordinate payment and the sending of receipts to one another for reimbursement purposes?
I can tell you from experience that if you have not anticipated these problems and worked out ahead of time a method to overcome them, then you will almost certainly fall prey to these hazards during your divorce.
What if the home you own is located in another state or country other than Texas?
In this day and age, where people move from place to place with relative frequency, you may find yourself in a position where you and your spouse own a home in another state other than Texas. Say that you moved to Texas from Louisiana while your spouse stayed back there to finish a job at an oil refinery. In the six months that you were here living alone, you concluded that you no longer wanted to be married to him. Once you find out that you need to have been a resident of Texas for six months to file for divorce, that is exactly what you did.
You and your spouse have almost made it out of your divorce, but you are concerned about what will happen with your marital home back in Louisiana. What you need to know regarding that house is that a Texas divorce decree cannot impact any real estate that you own outside of Texas. A Texas family court judge can order you to deed the property to your spouse or vice versa, but a Texas judge cannot call you to sell a home in Louisiana. If and when you find yourself in this situation, your best bet would be to figure out what you want to do with this property as early as possible. It may be the case that an attorney from your home state may need to get involved to see that the interests in the property are taken care of according to the laws of that state and the state of Texas.
Questions about the family home about your divorce? Contact the Law Office of Bryan Fagan
Thank you for showing an interest in today’s blog post topic. Selling a home, refinancing a home, or pulling equity out of a home after a divorce case can be stressful, so I hope you learned something that can give you some degree of peace of mind as you start on your divorce journey. If you have any questions about the material in this blog post, please do not hesitate to reach out to us here at our office.
The licensed family law attorneys with the Law Office of Bryan Fagan offer free of charge consultations six days a week here in our office. These consultations are an excellent opportunity for you to learn more about your case and receive direct feedback about your specific circumstances.