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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
If my home get floreclosure what happens to the property tax?
Posted on: 29th Feb, 2008 10:21 am
Hi pat,

Welcome to the forum.

Even after foreclosure you will have to pay your due property tax if you have any. Otherwise I think you need not to pay any thing like property tax there after.

Best of luck,
Larry
Posted on: 29th Feb, 2008 05:17 pm
Thanks for the help I was wondering if I would need to pay that tax.
Posted on: 19th Mar, 2008 10:32 am
Is it any more beneficial credit wise to do a died in lieu over a straight foreclosure?
Posted on: 04th Apr, 2008 12:38 pm
Welcome tb,

Foreclosure and deed in lieu have similar negative effects on your credit report. But if the lender approves you for DIL then he will not ask you for the deficiency judgment.

Let me know if you have any more queries.
Posted on: 05th Apr, 2008 03:31 am
my husband and i will be filing bankruptcy. we have a 1st and 2nd mortgage. the 1st is thru countrywide. the 2nd is through bofa. countrywide told us we qualify for a dil. however, what happens with the 2nd. will we just put that debt in with the bankruptcy? or do we put both 1st and 2nd mortgages in with the bankruptcy???? any help????
Posted on: 26th Jun, 2008 07:19 pm
hi serenasmom.

welcome to the forum.

if countrywide accepts the deed in lieu then why are you willing to file bankruptcy? are you filing chapter13 or chapter7? i think you should talk with the second lender and see if you can qualify for any repayment plan. even if you file bankruptcy you will be liable to pay the mortgage. is that the lender is harassing you for the second mortgage payment.

please inform us about your situation a bit more so that we can suggest you.

best of luck,
larry
Posted on: 27th Jun, 2008 01:15 am
i have a first and second with wells fargo, i own a 1 bedroom was single when purchased now am married with kid and need bigger place, i have a arm 5 year fixed will reset in a year tried to refi, appraisel came in at 1/2 of what is owed, have gone deliquent to renegotiate, or do dil? what will happen if they dont and thy forclose?
Posted on: 10th Jul, 2008 08:52 pm
hello ryan.

if the property has been appraised in half of what you owe then they may not agree for deed in lieu of foreclosure. so consult the mortgage company asap. if you face foreclosure then not only your credit will be affected but they can even come after you for the deficiency judgment.
Posted on: 11th Jul, 2008 05:35 am
We have two investment properties bought 2.5 years ago at the peak, saturated rental market in both areas, and add'l extenuating circumstances. Is there any benefit to doing DIL vs. Foreclosure (we have realized there's no way of keeping these properties).
Posted on: 01st Aug, 2008 10:03 am
Hi Jessica,

Welcome to our community forums.

Well Amber frankly speaking it's more or less the same because you lose the properties in both cases. Also, the credit effects of foreclosure and dil don't differ much. But did you have a talk with the lender? what option is he suggesting?

Regards,

Jessica
Posted on: 02nd Aug, 2008 04:30 am
We live in pennsylvania our primary home. Our second home is in Placida Florida we can not keep the florida home & would like to do a deed inliue ,but i am so afarid that i will my home plus we have a small duplex in pennsylvania which pays some of our bills,we are getting behind on things here i just had to give up life insurance policy,i am 62 my husband ia 79,we have never missed a payment for a morgtage,are you to get behind on your payments first,thank you very scared,We owe $290.00.00
Posted on: 06th Oct, 2008 08:33 pm
Hi Madeline!

Welcome to Forums!

You want to put your second home in Placida Florida for a deed in lieu foreclosure. I feel this is a good choice that you have done. A deed in lieu foreclosure will not affect your other properties. Rather the deficient amount resulting from the sale of the property will also be forgiven.

Feel free to ask if you have further queries.

Sussane
Posted on: 10th Oct, 2008 10:17 pm
can you do a fourclosre on a 2nd mortgage and keep paying on your first with the same lender
Posted on: 25th Nov, 2008 09:19 am
Hi anonymous,

As both the mortgages are with the same lender, you will have to speak to the lender first. It will be his discretion whether he will approve it or not. If the second mortgage is not yet foreclosed, then you can speak to the lender and check if he can offer you a loan modification on the second mortgage. This will help you to save your credit also. To know more about loan modification, check out the following link:
http://www.mortgagefit.com/know-how/loan-modification.html

Thanks,
Posted on: 26th Nov, 2008 02:09 am
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