Contributed by Houston-based Attorney Syndy Davis
On loans where one owner wants to buy out the property interest of another owner(s), you can create an owelty of partition lien to complete the transaction.
In such instances, property owners do not have to do a Texas Home Equity 50(a)(6) loan. Instead, the Texas Constitution provides an alternative means to establishing a valid lien on homestead property under Section 50(a):
50(a)(3) an owelty partition imposed against the entirety of the property by a court order or a written agreement of the parties to the partition, including a debt of one spouse in favor of the other spouse resulting from a division or award of a family homestead in a divorce proceeding.
There are two different ways to create an owelty of partition lien:
- The parties can create the owelty of partition lien prior to closing. The owelty of partition must be established by court order (for example, an owelty of partition lien created in a divorce decree) or by written agreement between the parties (an owelty of partition agreement). Once the owelty of partition is established, title is transferred by owelty of partition deed signed and recorded prior to closing. The owelty of partition lien is created in the owelty of partition deed, and the debt is then secured by an owelty note and deed of trust which is also recorded prior to closing. Lender does a rate and term refinance of the owelty note and the owelty liens; or
- The Lender is not refinancing the owelty lien, instead the lender is providing the owelty amount directly as part of the loan proceeds. Title would not transfer prior to closing. Title would transfer simultaneously with closing. In the deed of trust, the purpose paragraph would recite an Owelty of Partition as one of the purposes for the loan. The owelty of partition still must be established by court order (for example, an owelty of partition lien created in a divorce decree) or by written agreement between the parties (an owelty of partition agreement). Once the owelty of partition is established, title is transferred by owelty of partition deed signed and recorded at closing.
A lender will want to confirm with their investor which way the loan is to be structured and make sure the title company will insure the lien as created.
It is our understanding that Fannie Mae will allow an owelty of partition loan to be treated as a rate and term refinance loan since the borrower already has a title interest and equity in the property. This is our preference as well.
Some lenders, based upon the facts surrounding the transaction, may treat the loan as a purchase. For example, on loans where there is an Earnest Money Contract and the other owners are paying part of the closing costs. Please note that even if the loan is treated as a purchase loan, there is still a 3 day Right of Rescission, because the borrower is already in title.