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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?

thanks
welcome kristina,

you will be liable for paying off the irs lien and the home equity loan in full though you sell off the property with the help of a deed in lieu of foreclosure.
Posted on: 25th Jan, 2011 11:02 pm
Hi Jessica,

I have a situation, I tried to sell my home 2 yrs ago and we had 4 buyers but the mortgage co wouldn't accept the offers, we we did a deed-in-lieu and now 2 years later we are finding out that the mortgage company is trying to complete money from us. We had a 1st and 2nd mortgage on the home and received paperwork that the deed-in-lieu was approved. My question is can the mortgage company still come after us for the money if the house has been sold and the courthouse said that the house was paid for by someone from California. In need of an answer. Thanks don't understand
Posted on: 26th Jan, 2011 05:06 pm
Hi anonymous,

As you had two mortgages, the second mortgage lender will be able to come after you in order to recover the dues. The first mortgage lender will forgive the deficient balance resulting from the property sale but the second mortgage lender will have the rights to come after you in order to recover the balance amount.

Take care
Posted on: 27th Jan, 2011 02:00 am
Would a 1st lender accept a deed-in-lieu with a second mortgage on a property when the 1st lender denied the short sale and the second lender approved?

Thanks
Posted on: 27th Jan, 2011 08:17 pm
Hi anonymous,

It will be solely the discretion of the first lender as to whether or not he will agree to it. However, both the lenders should agree to the deed in lieu of foreclosure or else the deal will fail.

Thanks
Posted on: 27th Jan, 2011 11:02 pm
So, with a second mortgage, the first mortgage holder will not do a DIL if there is a second lien holder...they would rather move to foreclosure?!? My property is was set up as a 80/20 split. I was declined for a loan modification and a DIL is the next step. I am not sure what to do. What are your thoughts?

Thanks!
Melissa
Posted on: 14th Mar, 2011 06:33 pm
Hi mrose!

Welcome to forums!

You can apply for a deed in lieu if foreclosure with your first lender. If both the lenders agree to it, then you will be able to get rid of the property and the mortgage. However, you might be liable for paying the deficient balance to the second lender.

Feel free to ask if you've further queries.

Sussane
Posted on: 15th Mar, 2011 12:01 am
BoA foreclosed on my home in June 2009( I am in VA). I signed affidavit of voluntary vacany and I was given $1000 to move out. Was this Deed in lieu transaction?
If yes, should I stop paying the SOJL(sold of junior loan) to the collection agency? Because per my understranding if this was deed in lieu then BoAmerica took care of the HELOC with the second bank before they sold it off, since no buyer would like to buy the home with second lien?? right?? Please throw some light. I can then tell the collection agency (collecting the SOJL) to go fish...
Posted on: 04th Jun, 2011 07:03 pm
Hi SleeplessnVA!

Welcome to forums!

Your lender will be able to let you know whether or not it was a foreclosure or a deed in lieu of foreclosure. There is a cash for keys option in case of foreclosure and I guess your lender had offered you the same. Whether it is a deed in lieu of foreclosure or a normal foreclosure, the lender can sell off the second mortgage to a collection agency who can collect it from you.

Feel free to ask if you've further queries.

Sussane
Posted on: 05th Jun, 2011 11:53 pm
Thank you for this forum. I am overwhelmed and having knowledgeable folks to ask is just great.

Owned home since 2002. We owe 142K on 1st, 77K on HELOC. (220K total)on BOA formerly CW loan. Total monthly payment with HOA of $58 is $1770. Zillow estimates our home would sell for 212K, but we understand this is likely 15-20% more than what we could actually get in a sale.

Husband lost his upper management job 9 months ago. We run a small business from home but ourmonthly income falls some 2K short of monthly obligations. Also, we care for his grandmother age 95 with Alzheimer's at home - so putting the home on the market is problematic as she lives in the Master BR.

DIL sounds like an answer to our prayers. Is it? We would be happty as heck to simply break even at this point, and move cross-country to be with family.
Posted on: 11th Jun, 2011 07:53 pm
hi mdgirlfriend!

welcome to forums!

if you're facing hardship in paying off your mortgage payments, then you should contact your lender and apply for a deed in lieu of foreclosure. it will be the lender's discretion as to whether or not he will consider your request for a deed in lieu of foreclosure.

feel free to ask if you've further queries.

sussane
Posted on: 13th Jun, 2011 12:39 am
Thank you fror your response.
We are with BOA. All my research states that they will be more than unresponsive so I hesitate to call them at all. Di I have any 'rights' to a DIL or can they simply deny me?
I would love to hear from someone who has been through this.
Posted on: 13th Jun, 2011 05:46 am
Welcome mdgirlfriend,

I won't be able to let you know about "rights" to a deed in lieu of foreclosure. But it is true that if you have already defaulted on your mortgage payments, then there are chances that you may qualify for a deed in lieu of foreclosure. However, as Sussane states, it will remain the discretion of the lender whether or not he will consider your request.
Posted on: 13th Jun, 2011 11:30 pm
How do investors buy the junior lien at the auction and control the property?
Even walk away with title for a bargain?
Posted on: 04th Jul, 2011 05:58 pm
Hi Guest!

Welcome to forums!

Investors can pay the required sum by participating in the foreclosure auction and buy the property. Once they get the ownership of the property, they will be able to control it.

Sussane
Posted on: 04th Jul, 2011 10:19 pm
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