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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?

We have 1st & 2nd Mortgage with BOA (formerly CountryWide). We are two months behind notice of default passed. We keep in contact with BOA and make payment before end of third month to avoid falling 90 days late. We put house on market as short sale, but no offer. This month we received first calls from Fannie Mae. (1) Does the Fannie Mae contact imply an escalation towards foreclosure? (2) If we request DIL and BOA declines are we jeopardizing them escalating foreclosure?
Posted on: 25th Aug, 2011 12:44 am
Hi Guest!

Welcome to forums!

It does not necessarily mean that when you receive a call from Fannie Mae, it will mean an escalation toward foreclosure. If you want to avoid a foreclosure, you should negotiate with your lender for a deed in lieu of foreclosure. In case the lender does not agree to your request, then they will start the foreclosure procedure.

Feel free to ask if you've further queries.

Posted on: 25th Aug, 2011 11:47 pm
If a person currently owns a home and needs to move to another state and rents that home, can they purchase another home in another state while their old home is being rented? Also if a person purchases a second home and defaults on the first home, can the bank repo both homes or just the first?
Posted on: 29th Oct, 2011 08:53 pm
Hi rabbitfood,

If that person has the required credit score and income, then he can buy a new property in the other state where that person has been transferred.

The bank will foreclose the first home in order to recover the debts. In case he is unable to recover the debts in full, the lender may then think of placing a lien on your other property.
Posted on: 30th Oct, 2011 11:21 pm
in the state of florida will a deed in lieu cancel out the first and second mortgage[/i]
Posted on: 12th Apr, 2012 09:44 am
Hi jig,

As far as I know, a deed in lieu of foreclosure will cancel only the first mortgage. You will have to deal with your second mortgage on your own.

Posted on: 12th Apr, 2012 10:05 pm
I have a house with 2 mortgages. The first one is saying they will pay for a realator to do a short sale for three months and wants fair market value while the other mortgage is sitting back and waiting just like me. The state of Indiana also took my daughter's ssi from me due to putting a 19,000 price from whereever and says in 12 months if name is not off house, my daughter wll have to reapply for benefits. I am in such a mess. Someone, anyone help!!!!!!
Posted on: 24th Jul, 2012 04:02 pm
anyone? knows a same case situation or help here?
Posted on: 24th Jul, 2012 04:04 pm
Welcome cheryl,

Unless both the lenders agree to it, the short sale will take place. As far as removing your daughter's name from the property deed is concerned, it will be better if you could ask her to sign a quitclaim deed and transfer the property to you.
Posted on: 24th Jul, 2012 11:22 pm
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