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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
My friend has a property close to foreclosing, I would like to by the property but he has a $10,000 IRS lien on the property, how does this affect my purchase, would it be my responsibility?

Thanks
Posted on: 26th Nov, 2008 08:20 pm
Hi Stevo,

It is always better to ask the seller to pay off the lien and get a lien release certificate and then purchase the property. A query similar to yours has been answered in this given link:
http://www.mortgagefit.com/propertytransfer/irs-lien.html

Please take a look.

Thanks,

Jerry
Posted on: 27th Nov, 2008 12:43 am
i am in a very bad situation. i bought a small home and was going to sell my main home and use some of the proceed to reduce my payment as i was about to go through a separation and the mortgage is in my name only. things did not work to plan prices dropped in my neighborhood and it was no longer viable to sell one home to pay off the other as i planned. i managed to rent the 2nd home but i was already in arrears about 4 months before i found a tennant and i could only rent it for half the mortgage. i arranged a repayment plan with the bank but it's too high they say i need to pay that amount to catch up. things were going good until nov. i did not have enough funds to pay mortgage on either homes. the terms was they can pursue foreclosure if they did not receive the payment on time. is there anything else i can do to stop foreclosure? can foreclosure be stopped was it has started? i am very concerned for the tennants in the home. i hear the bank is not so willing to help people with 2 homes, i really don't want 2 homes i was trying to do the right thing and make the payments as it my mistake i shuold not have bought another home until the first home got sold, it's a harsh lesson i have definately learned the hard way. i did try to market the home without success at that time. please what are my options right now?









i was about 4 months behind when i accepted a payment plan. i kept up to date until nov. is it too late to ask for a short sale or deed in lieu of foreclosure? can foreclosure be stopped once it has started?
Posted on: 06th Dec, 2008 03:30 am
Hi default,

"The terms was they can pursue foreclosure if they did not receive the payment on time. "
If you have signed an agreement with the lender that they will foreclosure the property if you cannot pay, then I don't think you will be able to avoid foreclosure.

As far as short sale or deed in lieu foreclosure is concerned, you can definitely apply for it but it will be the lender's discretion whether he will accept it or not. No, its not late to apply for a short sale or deed in lieu foreclosure.

Thanks,

Jerry
Posted on: 08th Dec, 2008 01:20 am
I have a property with a 1st and a 2nd mortgage with the same lender,I have recently been relocated with my work and have tried to sell the home with no success. I need to relocate in order to keep job, the appraisal amount is more then owed would a dil be a reasonable solution for both mortgages?
Posted on: 22nd Dec, 2008 07:12 pm
Welcome DWH,

You can apply for a deed in lieu with the lender but it will be the lender's discretion whether he will accept it or not. You should contact with the lender and inform him about your situation.
Posted on: 23rd Dec, 2008 12:05 am
I cannot going to be able to keep paying my mortgage and have made plans to move out to a cheaper place. (Utilities in the older home + mortgage is breaking me on top of other expenses.) My 1st lender has offered a refi that would give me a 1 month break in payment. This seems disingenuous to accept. My 2nd is with another institution (they offered no concessions when I told them I was in a tight spot earlier). I've had the place listed--so far it is $30k below mortgage owed and no buyer traffic. Agent thinks it has to drop another $40k and advises short sale. Another friend suggested calling and asking for deed in lieu. (I am not 30 days behind yet.)
The house has dropped approx $90k in value (along with the neighborhood/state). It's an older home and its strength was it's property (1.85 acre) and the great location.
Is deed and lieu feasible? Other ideas? Thank you.
Posted on: 13th Jan, 2009 03:57 pm
what do banks or other lenders do if they hold both the 1st and the 2nd (or heloc) do we have to try to refinance in order to make it one mortage before we attempt a deed in lieu? this is not our primary home although as far as the mortage is concerned it is. (mother lives there) she is moving out and we want to voluntarily give it back. the loan is equal to the assessed value but not by much. will the bank make us use our retirement or life insurance policy assets to continue paying on a property we no longer want to own?
Posted on: 13th Jan, 2009 06:00 pm
hi annie,

you cannot voluntarily give back the property to the lender. you will have to apply for a short sale or a deed in lieu foreclosure. if the lender accepts any one of these, then you can deed the property back to the lender. as there is a second mortgage on the property, you will still be liable for paying the second mortgage or the lender will charge off the mortgage to a collection agency who will in turn collect the dues from you.
Posted on: 14th Jan, 2009 12:09 am
Can you foreclose on a property from second position
Posted on: 28th Jan, 2009 12:17 am
I lost my job and have been lookinng for a new position for six months without success, many educators have been laid off! I have a first mortgage at 352,000 with Citi and a second, home equitity line, of 117,000. My savings is running out and I cannot afford the payments. Nothing is selling in my neighborhood either. Two are for sale and have been for a year.
My questions; Will both banks accept a DIL?
Can the first bank take money from my savings and CDs and they are in citi-the same bank as the first mortgage
Can the second bank, Homecomings come after me legally for the money of the loan if Citi will not work with them?
Can you recommend a great attorney in San Deigo to help me with this?
Thank you kindly!
Posted on: 28th Jan, 2009 12:28 pm
Hi,

To leka,

Yes, a property can be foreclosed by a lender who is in the second position but he will have to satisfy the loan of the first lender also.

To curious,

I do not think both the lenders will accept a deed in lieu. If you are past due on your payments with both the lenders, then there are chances that the first lender will accept a deed in lieu. If the first lender accepts a deed in lieu, he will sell off the property to recover his debts and the deficient amount resulting from the sale of the property will be forgiven. So the lender will not come after your savings or CDs.

As far as the second lender is concerned, he will still have the right to collect the debts from you and if you cannot pay, then the lender may charge off the loan to a collection agency.

As far as attorney's are concerned, check out the following link:
http://lawhelp.org/ . Here you may get the contact details of some of the attorneys.

Thanks
Posted on: 28th Jan, 2009 11:47 pm
I'm being forced to forclose or short sale my home. My husband passed away in 2005 and I can no longer aford our home. :( A year before he passed we took out a loan to improve our property, so now I'm stuck with that as well. My biggest concern is this: Losing my house is going to happen no matter what I do, but I have a piece of land (1/4 acre) elsewhere and if I can't save that to sell later...I will starve and be homeless. Is it possible to file chapter 13 on my second to save this land...or transfer title to my daughter to protect it? Any other way to shelter this small piece of land from what's happening now? Please, ANY advise could really help to save the ONLY thing I have left in the world. Thank you in advance for any words of wisdom. <sigh>
Posted on: 12th Feb, 2009 02:49 pm
Hi anonymous,

If you transfer the property to your daughter, that will be considered as a fraudulent transfer and the lender may penalize you for that. If you are deficient on your payments right now, then you can apply to your lender for a deed in lieu.

Thanks
Posted on: 13th Feb, 2009 03:37 am
My husband was hurt in Iraq with Traumatic Brain Injury and Chronic Post Traumatic Stress Disorder and a few other things. The Army put him out in Dec 2007. We finally got VA compensation to go through last month. We lost our home to foreclosure because of lack of income and the interest rate jumping. The home was auctioned off in Sept. 2008 it went for $126,252. The 1st mortgage was 111,000 the 2nd was $28,000. What happens to the 2nd mortgage? The court papers said the home appraised for $111,000. The property tax papers say $150,000. It would have been listed for $180,000. We had a realtor that said he was trying to work things out with the mortgage company. I don't think he did anything. We couldn't find anyone to help us. Do I file bankruptcy now? Where did that extra money go when they auctioned the house off?
Posted on: 19th Feb, 2009 07:31 am
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