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How deed in lieu affects 2nd mortgage or junior liens

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 05th Jun, 2007 06:30pm
A deed in lieu of foreclosure is where you deed the property to the lender if you can't afford to pay the mortgage(s) any more and no alternative option has worked out between you and the lender.

However, if you have 2 mortgages on the same property, you may be concerned about "How a deed in lieu affects junior liens?". Most lenders do not agree to accept a deed in lieu of foreclosure when there are 2 loans on the same property, because the junior liens aren't released from the property. That is, if the first mortgage lender accepts a DIL, he'll take over the property with the junior lien or second mortgage still attached and won't have clear title.

What happens to the second mortgage after a DIL on the first?

When the first lender takes over the property due to a deed in lieu, it becomes their responsibility to sell the property and pay off the junior lien because no buyer will purchase the property with a lien on it.

In most cases, when the first lender accepts a deed in lieu, they include a non-merger clause into the DIL agreement. This clause prevents the second mortgage lender from taking any legal action against the first lender if they don't pay off the outstanding balance on the second mortgage. But this doesn't mean that the first lender doesn't need to pay down second loan balance. It's the first lender's responsibility to pay off the junior lien if he agrees to a DIL unless they get an agreement with the second lender.

Moreover, if the first lender knows that they won't be able to recover the entire loan balance on the first mortgage then they will not accept the deed in lieu and foreclose. This occurs even if both mortgages are held by the same lender. This is how a deed in lieu affects the second mortgage or junior liens on a property. Though lenders are reluctant to accept a deed in lieu if there is a junior lien on the property, a deed in lieu has certain advantages because it's quicker and less expensive.

Related Discussion
Posted on: 05th Jun, 2007 06:30 pm
when you do a deed in lieu with the primary mortgage what happens if there is a second mortgage held against the property? also, if the bank is not able to satisfy the amount owed against the property, will there be a judgement against me for the difference?

can the lender go after us ,and require us to pay the 2nd mortgageif the second mortgage is the same lender as the primary mortgage lender after a dil.

pls respond
Posted on: 19th Sep, 2007 08:58 pm
Hi Hemet,

After a deed-in-lieu on the first mortgage, if the lender finds that you are unable to pay off the second mortgage, he may charge off the loan and will accept the outstanding balance of the loan as a loss.
Posted on: 20th Sep, 2007 01:22 am
We own a home with my father in law. We have never made a late payment (past the 30 day mark) but our interest rate just jumped and it is becoming very difficult to make the payment prior to the 30 days late.

We have been weighing our options and are not sure what we should do. We owe $460 on our home and according to a few lenders/appraisers, our house is valued at $470 to $475. Our first and second loan are with different companies. We have listed the house but with the market the way it is, you can't get a 100% loan so whoever were to buy our home would have to come in a substantial down payment. That possibly will not happen.

Do you think a DIL is a possibility? My father in law just added my husband to the title a few weeks ago but my father in law is the only one on the loan. If a DIL is an option, who's credit will it affect?

Please respond asap.

Posted on: 05th Nov, 2007 02:10 pm
Hello Doris,

Your post has already been replied here at
Posted on: 06th Nov, 2007 03:44 am
I lost my high paying job in the homebuilding industry early August 2007. I have yet to secure new employment. As soon as I lost my job, I listed my home for sale at market value of $660K. I have since had 3 price reductions down to $550K, and still no showings. I contacted the 1st lender yesterday (Countrywide) and after evaluating my financial circumstances they agreed to a DIL knowing that another lender holds a 2nd. They offered to start the process immediately and were very sympathetic. To top it off - this home is only 1 1/2 years old and I was electrocuted in Jan. 2007 simply by unplugging a vacuum cleaner. A construction defect report indicated numerous fire, electrical and safety issues which the builder has not completely corrected. I suffered personal injury and am heading towards litigation using a PI law firm retained as soon as I was injured. The lender knows that the home has issues, which apparently they do not need to disclose and can sell the home "as is". They suggested that I start looking for a place to live and move out within the next 30-60 days. As long as I keep them informed they agreed to cooperate. I am actually starting to feel relieved however will wait and see how things progress.
Posted on: 10th Nov, 2007 09:50 am
Hello Karen,

It is unfortunate to hear of your situation but at the same time it is good to know that your lender is co-operating with you.

In case of a deed in lieu, the lender cannot seek a deficiency judgement.

Is the present price sufficient to pay off both the mortgages?
Posted on: 13th Nov, 2007 04:34 am
Hi Karen,

"As long as I keep them informed they agreed to cooperate. I am actually starting to feel relieved"
This is why we always suggest you to contact the lender as soon as possible whenever you face problem with your loan payments. You are the live example who gets help from the lender and now feeling relieved because you have informed the lender and co-operate with him. I hope people will see your post and will learn that it will be always helpful if you co-operate with your lender.

It will be helpful for us if you can update your situation. Feel free to ask if I can provide you any further information.

Posted on: 14th Nov, 2007 04:58 am
countrywide is getting pressure from investors to keep paying customers around and to get as much as they can to liquify their portfolio again.
Posted on: 14th Nov, 2007 06:11 am
"When you do a deed in Lieu with the primary mortgage what happens if there is a second mortgage held against the property? Also, If the bank is not able to satisfy the amount owed against the property, will there be a judgement against me for the difference?"

Before you can even consider an alternative, the borrower must be willing to offer a deed in lieu. There are advantages to taking a deed in lieu. It could save you time and money. You should order a preliminary title report and review it carefully to determine if there are any junior liens that would survive the deed in lieu. You then take the deed in lieu subject to a title insurance policy being issued in your favor as reflected in the preliminary report. This procedure would take a lot less time than the approximate four months of foreclosure. The main disadvantages to taking a deed in lieu of foreclosure are the junior liens will not be extinguished and that the, as a borrower, you may later have a change of heart and seek to have the courts set the deed in lieu aside.

A junior lender, should give the senior lender notice of their lien. Many lenders would like to reduce their collection efforts by having the junior lienholder advance to their loan. Send the primary lender a notice which tells them that you are willing to reinstate their loan.
Posted on: 14th Nov, 2007 05:57 pm
Hi, my first morgtage is with HSBC and my second mortgage is with HFC (a subsidiary of HSBC). I want to do a DIL with HSBC. Would they agree to do a DIL because my second mortgage is with their subsidiary HFC?
Posted on: 01st Dec, 2007 10:12 pm
Hello Kathy,

Lenders generally do not agree to accept a deed in lieu if there is a second mortgage on the property. But you may talk to your lender and see if they are willing to accept.

Are you facing a foreclosure?
Posted on: 03rd Dec, 2007 05:52 am
I have PMI and I'm having difficulty making my payments due to disability....will the PMI help? I also have a HELOC
Posted on: 31st Jan, 2008 11:50 am
Hi Lois,

Welcome to the forum.

PMI will protect a lender against loss as you are not making payments. You have a HELOC also. I suppose you do not have PMI against HELOC. IS it not so?
Posted on: 31st Jan, 2008 04:50 pm
It could have been better if you had applied for a mortgage disability insurance. PMI will no doubt help but for the first loan only. What are your plans? how do you wish to pay off the Heloc then? you can't keep it as it is. Or are you comfortable just paying off the Heloc?
Posted on: 31st Jan, 2008 11:37 pm
hi lois,

pmi insurance does only protect the lender. but you may have another option if you have good credit. you may be able to refinance into a mortgage without pmi insurance thus reducing your monthly mortgage payment. if you qualify, you can borrow up to 95% of the value of your home to pay off the old mortgage and still not have pmi insurance. it is possible to get a fixed mortgage rate in the 5's with this option.
Posted on: 02nd Feb, 2008 02:58 pm
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