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How deed in lieu affects 2nd mortgage or junior liens

Author: miller_st Post Date: 05th Jun, 2007 06:30 pm Post Subject: How deed in lieu affects 2nd mortgage or junior liens
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?

This really helps a lot. We are in a situation where the market is flooded with foreclosures and our property value has plummeted. We move from this area 2 years ago and have not had any success in the sale of the home in question. We have even tried to sell and absorb up to a $10,000 loss to no avail. Right now the payments are killing us. If you have ideas for another way out, please respond.

Thanks again for ALL of your help
Posted on: 06th Jun, 2007 07:10 am
In this situation you have to buy some more time and hope the market situation improves and then try to sell. You have moved out to some other location, so why not try to find a tenant for this house that could be of some help for you with the payments.
Posted on: 06th Jun, 2007 01:35 pm
Yes, renting the property out was an option we looked into. However, we are several states away now and it would be impossible to keep up with it. If we hire property management, between that cost and the low rental rate for the area now, it would only cover about 1/2 of the payment. Again, we are sinking under the payment. Thanks for your reply
Posted on: 06th Jun, 2007 07:02 pm
Welcome back Just us.

Did you discuss the possibility of deed-in-lieu with your lender?
Posted on: 08th Jun, 2007 05:49 am
I understand that some lenders will not do a deed in lieu of foreclosure when there is a 2nd lien on the property. What if the second lien is with the same lender.
Posted on: 26th Jun, 2007 06:42 am
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