Texas Owelty Lien
When facing divorce, the division of real estate property, especially the marital home, can become complicated. One cannot physically divide a home into equitable sections. This leaves two options: sell the home and divide the profit or keep the home and buy out the co-owner. The good news for the spouse looking to stay in the home, Texas property statute Article XVI, Section 50(a)(3) provides a way to divide the marital home that benefit divorcing couples. The bad news is many attorneys are unaware of this benefit and neglect to incorporate this option into the final settlement decree. An owelty lien is one of these benefits.
What Is An Owelty Lien In Texas?
Owelty is equality, to give a simple definition. Owelty of partition liens, or simply called an owelty lien, is used in real estate when a split in kind is impossible. This action is commonly utilized in divorces. When a property cannot be physically shared amongst co-owners, this strategy ensures that each owner benefits equally. The term “Owelty Award” can be defined as “An Owelty lien representing a dollar sum paid by order of the court to affect an equitable partition of property (as in divorce) when such a partition in kind would be impossible, impracticable or prejudicial to one of the parties.”
An owelty lien allows divorcing couples a legal mechanism to split the equity in the marital home. In the divorce decree, an owelty lien is created to buy out the other spouse’s interest in the property based on any dollar or percentage amount upon which the parties agree. An Owelty deed is prepared, signed by both parties, which is recorded with county clerks’ records reflecting an outstanding lien against the property. The Owelty lien is removed or paid off when property is refinanced or sold.
However, the amount of equity homeowners may access is capped for properties under Texas equity laws. Due to Texas property statute Article XVI, Section 50(a)(6), often known as the “Texas Cash-out” law, parties would be limited to only cashing out equity up to 80% of the value of the property, making an owelty lien extremely valuable. Without an owelty lien, divorcing couples would not have the option to access up to 95% of the property equity value.
Cashing in on equity doesn’t have to include going through a divorce. Splitting equity in inheritance is another example in which an owelty lien can be used. Another would be when one spouse perhaps develops a penchant for gambling. They may not be divorcing yet, but by buying out their gambling partner, the other spouse may safeguard their house from being used as collateral for a loan. However, an owelty lien not incident to divorce or inheritance, would be subject to the 80% equity value limit.
How Does An Owelty Lien Work?
The party giving up their interest in the home obtains a lien on the property. A divorce order specifically designates an owelty of partition lien to them. It is one of the permitted encumbrances on a Texas property.
The value of the owelty lien is paid to the opposite party when the party retaining their interest in the house refinances or sells the property. The “out spouse” agrees to release their interest in the property in lieu of receiving a portion of the equity in cash, while the “in spouse” obtains the full interest in the home.
This “in spouse” would then refinance the property into just their name, if the other no longer wants to live there. In other words, one of you may refinance the home into the name of the person already on the contract, making that person solely responsible for the loan.
Example Scenario: Take John and Mary. Let’s assume they are splitting and are now turning their attention to their marital home. The remining balance on their mortgage is $350,000, and their home is valued at $500,000 currently.
The equity they’ve built is $150,000, and they have decided to share it evenly at 50% or $75,000 each. Their divorce decree must specify the owelty, and the owelty lien must be filed with the county court clerk to enforce it.
Mary obtains a refinance equity buy out loan for $425,000. After paying off the existing mortgage (estimated at $350,000) plus John’s owelty lien (estimated at $75,000), Mary gives John $75,000 and becomes the house’s sole owner while taking out a new $425,000 mortgage in her name. John’s name is no longer on the deed and the previous mortgage.
However, this hypothetical scenario doesn’t account for Mary’s ability to qualify for a new loan on her own. Nor does it account for other costs associated with a divorce, such as lawyer fees or child support payments. A refinance or equity buyout loan should never be ordered or decreed without consulting with a licensed mortgage professional to ensure the spouse can qualify for the loan.
The owelty allows the parties to cash out more of their home’s equity and is a great tool to utilize the proceeds to settle with the ex-spouse. But if John and Mary want to get their hands on almost all of their equity, they can only do so by selling their home. It is important to note that selling the home would typically incur selling costs ranging from 3% to 10% of the total sales price depending on real estate commissions and sales contract negotiations. For a sales price of $500,000, selling cost deductions could range from $15,000 to $50,000.
How Do I Obtain An Owelty Lien?
The owelty lien benefits the party relinquishing their interest in the house. A lawyer’s help is needed to understand Texas home equity laws and create an owelty of partition lien within the homestead section of the divorce decree. The owelty lien deed must be recorded in the public records at the county clerk’s office or courthouse.
The value of the owelty lien is paid to the other party when the party with the remaining interest in the residence refinances or sells the property. Through this arrangement, one party may buy out the other’s share of the mortgage, acquire full ownership of the residence, and compensate the outgoing party monetarily.
The owelty lien benefits the party relinquishing their interest in the house. A lawyer’s help is needed to understand Texas home equity laws and create an owelty of partition lien within the homestead section of the divorce decree. The owelty lien deed must be recorded in the public records at the county clerk’s office or courthouse.
The value of the owelty lien is paid to the other party when the party with the remaining interest in the residence refinances or sells the property. Through this arrangement, one party may buy out the other’s share of the mortgage, acquire full ownership of the residence, and compensate the outgoing party monetarily.
How Do I Get Rid Of An Owelty Lien?
There are typically two ways to get rid of an owelty lien in place: refinancing the mortgage or selling the marital property.
Refinancing is the most typical means to transfer home ownership from both partners to one. Typically, the borrowing spouse will apply for a new home loan to acquire the property in just their name. In an equity buyout refinance, the spouse buying out the other borrows enough money to cover both their current mortgage and the amount owing to pay off the Owelty lien.
If refinancing is not an option for either spouse, as neither qualify for a loan separately, the only solution is to sell the property and divide the money between the separating spouses. It is advisable to reach out to a qualified divorce mortgage specialist, who may be able to suggest an out the box solution within the settlement that would enable one of the parties to qualify for a loan.
Special Note: A common misconception among divorcing couples is an executed decree order, owelty lien deed, special warranty deed, or any other type of executed deed transferring property, releases or removes the “out spouse” from liability on the mortgage. This is not the case. These documents transfer interest or title to property, they do not release debt liability or obligation made to a 3rd party. The only way to release the vacating or “out spouse” from the mortgage debt liability is to refinance the loan, sell the property or obtain a release from the creditor.
