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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?

Hi Theus,

If same lender also holds the 2nd lien then he will check whether the house will get sold for an amount to recover his dues on both the mortgages. If he does not expect the house to get sold for an amount which would help him recover his full balance then he will not agree to a deed in lieu.

Posted on: 26th Jun, 2007 06:36 pm
"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."

I'd agree with Miller. Lender would only agree to accept the house through dil if he sees that amount left on both the mortgage combined could be recovered after taking over the house through a deed in lieu.
Posted on: 27th Jun, 2007 05:10 pm
What happens to the 2nd mortgage if the 1st mortgage does not do a deed in lieu and just does a foreclosure?
Posted on: 18th Sep, 2007 04:40 pm
Hi Evelyn,

The lender will have to pay off the outstanding balance of the second mortgage with the money received from the foreclosure sale of the first mortgage. After doing the foreclosure it will be his duty to pay off the second mortgage.
Posted on: 18th Sep, 2007 08:09 pm
That does not happen in a foreclosure on homes with second mortgages.

If it's a deed in lieu accepted by first lender, then it's his liability to pay off the second loan. But inr a foreclosure, if the home sale proceeds do not cover the second loan balance entirely, then the second lender demands it wither from the borrower or attends the home sale and bids such that he gets his money through the sale. or else, the second lender can go for a charge-off and forgive the debt. But he may also issue a judgment against the borrower or garnish his wages through court order.
Posted on: 19th Sep, 2007 05:57 am
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