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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?

I recently completed a DIL where there was both a 1st and 2nd mortgage on the property. There was a single lender of both mortgages. There was never any mention of what would become of the 2nd mortgage I assumed, hopefully not wrongly, that the DIL would resolve both when the lender took over the property. Can you clarify what are the normal legal parameters of a situation such as this.
Posted on: 04th Apr, 2009 08:49 am
I have had my property up for sale for about 4 or 5 months. My husband is not working and all we have is my income. I am current on my payments now. My house is well worth more than what I owe, a great location and in good shape. I have a first mortgage and a second. My house should bring 100 - 200 K over what I owe with both. My problem is that I can not sell because I just found out that I have a judgement lien on the house that is more than my mortgage. What suggestions do you have? I cannot continue to keep up with the payments by myself.
Posted on: 12th Apr, 2009 06:06 pm
Hi Done In,

I think you can go for a loan modification program that will reduce your monthly payments. Since you are current the lender might not be willing to do a modification. But you will have to send them a hardship letter stating the financial difficulties you are facing at present. If a modification is not possible, the other option could be a deed in lieu to avoid a foreclosure on the property.
Posted on: 14th Apr, 2009 12:09 am
Does a foreclosure erase liens from builders, electricians, etc in a property in North Carolina?
Posted on: 27th May, 2009 12:15 pm
Hi Carlos,

As far as I know, a forecosure does not erase any of the junior liens on the property. If the house is foreclosed on and there is enough money left from the sale of the house, after satisfying the primary liens, the secondary liens are paid off. If the sales proceed is not enough to pay off the junior liens, the lien holders can place the liens on your other properties or can sue you in court for non-payment.
Posted on: 29th May, 2009 12:25 am
DIL or short sales in today's housing market are not being done, when there is a 2nd mortgage. The short sale will never cover the 2nd mortgage. Homes are worth 20-40% less than what is owed in many states. Mortgage companies will not do a DIL with 2nd mortgages. I speak from experience.
Statistics from 2008:
"All told, nearly a quarter (23%) of U.S. mortgages were underwater or were in a near-negative-equity position. Nevada (48%) and Michigan (39%) led the nation with the highest percentages of negative equity, followed by Florida (29%), Arizona (29%), California (27%), Georgia (23%), and Ohio (22%)."
If that's from 2008, what is it like now????
Posted on: 29th May, 2009 07:19 am
IF i have continuosly talked and talked to the lender and I do have 2 mortgages about I can no longer afford to keep the house and of course they have been doing there documentation. And they are already familuar with my case and my situation and I have not made any payments since 09/08 on both mortgages and when I s/w the retention team about the 1st mortgage she suggested that try the short sale & then she suggested the (DIL) but she first stated the (DIL) telling me what I would do is turn over the keys & the deed. But the she stated about the short sale now on the same lender the 2nd mortgage has written to me and stated that w/o the payments the house will go in foreclosure please elaborate and thank you so much.
Posted on: 03rd Jun, 2009 09:31 am
looking for any suggestions.
Posted on: 03rd Jun, 2009 09:32 am
My husband is out of work due to medical problems and on a leave of absence from work which I know he will not be able to go back to work at all. I work but don't make a fourth of what he made. Now we have credit card debt and a 1st and 2nd mortgage. I don't have the money to pay any of it. I've never been late on a bill in my life. Can anyone give me advice n what I need to do.
Posted on: 07th Jun, 2009 09:36 pm
hi faith,

if you are behind on your payments since 09/08, the lender can now start the foreclosure procedure against your property any time. it will affect your credit by almost 250 points or even more. a deed in lieu of foreclosure will also affect your credit, but it is slightly less damaging than a regular foreclosure. you should write a hardship letter and talk with the loss mitigation department of your lender and discuss the option of deed in lieu. if both the mortgages are with the same mortgage company, you will need only one approval from them, but if they are two different companies, you need to get approvals from both of them for the deed in lieu. you can also negotiate with your second mortgage holder and work out a settlement for it.

hi sondra,

you should try to modify the loan to reduce the monthly payments so you can stay current on your loan. they will probably reduce the interest rate for a certain amount of time or extend the term of the loan to such an extent that the monthly payments will be lowered. you need to talk with the loss mitigation department of your lender and see if they can modify your loan. you can also send them a hardship letter and explain to them your current situation and the need for a loan modification.
Posted on: 08th Jun, 2009 01:51 am
What are the steps and how long does a foreclosure take?
Posted on: 30th Jun, 2009 11:03 am

A foreclosure procedure generally gets over in about 3-4 months. However, it is often seen that the entire process of foreclosure takes more than 3-4 months to complete.

The lender first sends the borrower a notice of default (NOD), if he is behind on payments for more than 2-3 months. The notice warns the borrower of a possible foreclosure if he fails to get current on the loan. If the borrower doesn't make the payments, the lender files a lawsuit against him on his house. The borrower will have to respond to the lawsuit. Otherwise, a default judgment will be passed against him. A hearing is held, where the borrower is given an opportunity to present his case and state why he has not made the payments. If you can convince the judge, he may offer you more time to make the payments. Otherwise, he will pass judgment in favor of the foreclosure. The house, will then be sold at sheriff's auction and the mortgage will be paid off.
Posted on: 01st Jul, 2009 05:25 am
A person owes several hundred dollars in back condo fees and legal expenses to the Association. What is the status of this lien if a Deed in Lieu of foreclosure takes place? Can it be collected from the financial institution that takes back the property?
Posted on: 09th Jul, 2009 11:03 am
I am getting married in October, I have a fantastic condo that is on the market right now. No one wants it and I am struggling to make payments on it. If I pursue a deed in lieu prior to getting married, will my fiance's credit be effected by it after we are married? Is there anyway to avoid his credit from getting a "ding" if I were to pursue a Dil either before or after we get married?
Posted on: 13th Jul, 2009 07:41 pm
I'm in Georgia. I havesubmitted all they asked for a loan mod since March 09 with no luck. Actually subbmited twice at atheir request. I call and call but just a runaround. I am current on the mortage pmts but I cannot continue to pay this huge pmt and the market would probably only bring what I owe, if that. I also have a small equity loan. I can try to work with that bank on that loan but will the mortgage holder come after my corp owned rentals and it's small bank account? I also have a little personal savings and small 401K. What will happen to those with a DIL?
Thank you,
Tired of the fight.
Posted on: 22nd Jul, 2009 07:13 am
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