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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?

Hi Christin,

Though your property is foreclosed, you will still be responsible to pay the second mortgage lender. Once the first lender forecloses the property, he will satisfy his loan first and if there is a excess amount, he will pay that to the second lender.

If you cannot pay the second lender, he will have the right to charge off the loan to a collection agency who will in turn collect the dues from you.

Posted on: 19th Feb, 2009 09:47 pm
Even if a lender holds both the 1st & 2nd mortgage, they'd most often foreclose instead of Deed in Lieu? If they go the foreclosure route, is it any different than if there are 2 different lendrs? Meaning: with the same lender are both loan lumped into 1 foreclosure or is their 2nd still "out there" on it's own to try to recoup?
Posted on: 23rd Feb, 2009 11:20 am
Hi Guest,

It will depend upon the lender whether he would accept a deed in lieu or go for a foreclosure. If both the mortgages are with the same lender, then he can either forgive the second loan or charge it off to a collection agency.

If the loans are with two different lenders, then the second lender will have full rights to recover his dues from you. If you cannot pay off the second mortgage, he will charge off the loan to a collection agency.

Posted on: 24th Feb, 2009 12:56 am
Should we file bankruptcy now? Why would the court papers say it only appraised for what the payoff on the first mortgage was? I know it appraises more than that. Will we ever be able to buy a home again? This situation was totally out of our control. Thanks!
Posted on: 25th Feb, 2009 06:13 am
Hi Christin,

If you feel that the appraisal of the property was not done properly, then you can contact a property appraiser and appraise the property once again. This will help you to know the correct value of the property.

You will definitely be able to buy home again once your credit improves. I guess you are short selling the property. Isn't it? Once you short sale the property, there will be a dip in your credit score. As you improve your credit score, you will be able to buy a home again. To know more about improving your credit score, check out the following link:

Posted on: 26th Feb, 2009 01:04 am
what happens if country wide will nto work with 2nd
Posted on: 01st Mar, 2009 07:08 pm
hi ken,

if your lender does not work with you regarding your second mortgage, you will be responsible to pay the dues according to your existing plan. if you don't pay, then the second lender may either charge off your loan or can go for a foreclosure.
Posted on: 01st Mar, 2009 10:12 pm
we put a lien against our neighbors townhouse for not paying his monthly condo fees. however he went into foreclosure and the guy who bought his place never paid us a single cent. he resold the property and the title company wants us to sign a letter that we will not sue him or anybody else in the future. we are only 7 condos and can not afford an attorney. please help[/quote]
Posted on: 15th Mar, 2009 06:15 pm
Hi anonymous,

If you had placed a lien on the property, then you are legally entitled to receive your payments from the owner of the property. I don't think you should sign the documents given to you by the title company as it will serve their interest and not yours. I can understand that it would be difficult for you to afford an attorney but it would be better if you could take an attorney's opinion on this issue.

Posted on: 15th Mar, 2009 09:49 pm
can you include your 2nd mortgage when filing bankruptcy?
Posted on: 19th Mar, 2009 03:22 pm
Hi mre,

Yes, you can include your second mortgage while filing bankruptcy. However, may I know why are filing bankruptcy? There are various ways to avoid bankruptcy. You can check it from the following page:
Posted on: 19th Mar, 2009 11:08 pm
If you have a 2nd mortgage on your home can they put a lien on your home if you stop paying it even though your 1st mortgage is current
Posted on: 23rd Mar, 2009 02:47 pm
Hi usermom!

Welcome to forums!

Yes, the second mortgage lender can place a lien on your property if you stop paying the second mortgage dues. He may even charge off the mortgage and a third party collection agency will collect the dues from you.

Posted on: 23rd Mar, 2009 10:20 pm
How does a Deed in Lieu affect an equity line? I have a first mortgage, and then an equity line, is it affected the same as a second mortgage?
Posted on: 24th Mar, 2009 04:30 pm
Hi Guest,

The home equity line of credit will be considered as your second mortgage. If you go for a deed in lieu on your first mortgage, you'll still be liable to pay off the second mortgage. If you do not pay the dues, the second lender will charge off the mortgage.

Posted on: 24th Mar, 2009 09:53 pm
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