Let’s talk about owelty refinances. Weird name, right? But an owelty refinance is different from a normal refinance. Think of an owelty refinance as a cash-out to pay someone off who is owed money from the equity of the home.
For example, the most common situation is a divorce. Two people get married and own a home together. Later on, for whatever reason, they decide to get divorced. When they get divorced, the spouse who is moving out is owed their half of the equity.
In this case, an owelty refinance would allow the person staying in the home to refinance to get cash out and pay it off to the leaving spouse.
Now, understand that this is not a cash-out loan. A cash-out loan is when money is taken out to use for other things. An owelty refinance is specifically for paying off someone who is owed their share of the equity.
It’s basically a “normal” loan with a few nuances from the lenders and title’s perspective.
Divorces
Divorce scenarios can be tricky, which is why we’ve dedicated an entire section to them in the Financial Advisers Mortgage Cheat Sheet. For instance, Fannie Mae and Freddie Mac require a minimum of 6 months of alimony or child support payments before they’ll consider allowing that income. This means someone could be left without support for months after a divorce.
The guidelines actually call for 12 months of receipt, but 6 months can be considered under certain circumstances. Additionally, those payments must be consistently received, otherwise, there’s no chance of using that income for mortgage qualification.
Separations & Rule 11
If someone is in the midst of a divorce, a Rule 11 separation agreement can be useful. This agreement can absolve a borrower from certain liabilities. However, if the divorce isn’t finalized by the time someone closes on a loan and they don’t have a Rule 11 agreement, the soon-to-be ex-spouse will need to sign the title documents. This usually isn’t a major issue, assuming all parties are cooperative, as the divorce decree can award the new home and loan to the rightful owner.
Ex’s Concern
A major concern with a soon-to-be ex-spouse is if they are on the loan. While a divorce decree supersedes the financial obligation of the note, the mortgage will continue to impact the ex’s credit until the loan is paid off.
This means that if the current borrower misses a mortgage payment years down the road, that derogatory credit will be reported and negatively affect the ex-spouse’s credit scores.
More often than not, you’ll need a legal document like a divorce decree or separation agreement to show that the court has ordered the leaving spouse or partner to be paid their share.
So, that’s what an owelty refinance is—it gets someone the money they are owed, which is their half of the equity. It is not necessarily just taking cash out and giving it to them because the money must go directly to them.
In Contrast
If the homeowner refinancing takes money to pay the ex-spouse as they should but also takes an extra amount to pay off credit card debt or remodel the house, that would then be considered a cash-out refinance because the extra money is coming to the homeowner who is staying in the house.
The sole purpose of an owelty refinance is to get money to pay someone else off. If you have questions or need help starting the process, feel free to reach out to us.
We can recommend professionals who might assist with separation agreements or divorce matters. Let us know what we can do to help. Have a great day and thanks for watching!
Mark Pfeiffer
Branch Manager
Loan Officer, NMLS # 729612
(972) 829-8639
MortgageMark@MortgageMark.com
We assist clients with all type of mortgage loan programs