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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 wife and I bought a house 4 years ago, although the way the loan was done it is not on my credit report. Anyway, we have it rented right now but we cannot keep it. We have a 1st for $248,000 and a 2nd for $61,000 but the house is only worth about $200,000, at best. What is the best way for us to dump it and what do we do about the tenant? Can we still collect rent until it is a done deal either way? Thx...
Posted on: 23rd Jul, 2009 02:18 pm
I signed a warenty deed when I sold back my house and 6 yrs latter the lender is filling a forclosure on the house because the lady who purchased the house passed away. Now they are naming me on the forclosure and said that they can fix it by having me sign a deed in lieu of forclosure. Should I sign?
Posted on: 13th Aug, 2009 08:42 pm
We purchased our home for 360,00. It is now worth $113,00. We have had our house up for a short sale for a year now. We have had several potential buyers. Our 1st Lien holder has accepted offers, our second has demanded more and more money. Holding up the sales and causing us to loose several buyers. Now we are looking to do a DIL to the 1st. We were told because we had tried to sale the home that we would qualify to be able to request this action. I told them the reason the sales had fallen thru was due to the 2nd. What will happen to the 2nd if we do the DIL and the 1st accepts it. Can the 2nd still come after us?
Posted on: 13th Oct, 2009 01:24 pm
Hi sun city,

If you do the deed in lieu on your property, the first lender will take possession of the property and will sell it to satisfy their lien. But you will still be responsible for the second mortgage. The second lender will come after you if you do not pay off the second lien. They cam sue you, put liens on your other properties or can garnish your wages to recover their outstanding loan amount.

Hi puzzeled,

You signed the warranty deed and transferred the property to the lady. But did you remove your name from the loan? It seems like the mortgage on the property is still in your name. If this is what the case is, you will have to work with the lender to avoid the foreclosure. You will be required to sign the deed in lieu paperwork so the lender will not have to foreclose on the property to satisfy their lien.
Posted on: 15th Oct, 2009 12:38 am
I bought investments property and could not sell it. After 2 years I let it go. I live in another home now but I am being relocated, thus I need to get another loan when I sell my current home. How long do I have to wait until they give me a loan. Its been about a year.
Posted on: 04th Nov, 2009 12:40 pm
Hi Shelda,

"I bought investments property and could not sell it. After 2 years I let it go......Its been about a year"

You mean your investment property was foreclosed and it's been about a year since the foreclosure, am I correct? If it's just been a year after the foreclosure, you will have to wait for at least another year to qualify for a new FHA loan. If you wish to take a conventional loan, you will have to wait for another 2-3 years. Nevertheless, much depends on your credit scores. You may not have to wait for long for a loan, in case you have rebuilt your credit since the time of the foreclosure.
Posted on: 05th Nov, 2009 05:03 am
it all depends upon your credit score. for FHA, it should be min 620
Posted on: 05th Nov, 2009 08:40 am
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: 26th Nov, 2009 07:02 am
Hi ms,

Did the sale of the house satisfy both the mortgage liens? If it didn't, you will remain responsible for the deficiency from the sale of the house. If the deficiency was forgiven by your lender, you should get it in writing. Unless the lender informs you in writing that the debt has been forgiven, he may come after you to recover the outstanding loan amount in future.
Posted on: 27th Nov, 2009 02:04 am
my lender just started the foreclosure process and i asked them if they could accept a deed in lieu of foreclosure (the rep was not really nice), well he said "no because you have a 2nd lien" but, can it be possible to do a deed in lieu when the 2nd lien is being financed by the same lender?...this is my case...thanks
Posted on: 04th Dec, 2009 02:13 pm
Hi TX,

It is possible to do deed in lieu on your property even if there are 2 mortgages on it. In that case, you will have to take permission from both the first and the second lender. Both of them need to approve the deed in lieu. However, in this situation both of your mortgages are with the same lender. Thus, if your lender gives their approval, you can go forward with the deed in lieu. But it seems that since the foreclosure process has already been started, your lender is unwilling to accept the deed in lieu.
Posted on: 05th Dec, 2009 05:14 am
I OWE $445.000K DOLLARS ON MY HOME BUT IT IS ONLY WORTH ABOUT,MAYBE $310.OOOK.INTEREST ONLY IS 2800.00 A MONTH.WHAT SHOULD I DO. THERE IS JUST A FIRS MORTAGE ON THIS PROPERTY AND IM ONE MONTH LATE ON LOAN? :( :(
Posted on: 18th Jan, 2010 12:04 am
Bought my home in Aug. 2009 from an investor who owned the second. The investor paid a sum of $$ to the first (US BANK) to stop US bank from foreclosing. As soon as US bank stopped the forclosure proceedings, the investor turned around and forclosed himself. This is when I bough the property. There was an extensive title search done and the title was clear and I do have a title policy. (this is a California property). There must have been some sort of back door deal as the prior owner went to jail while the wife continued to live in the house. Now, 5 months later I get a letter from the prior owners attourney claiming there is a lien in favor of US bank. My title company said they will only defend title if challenged. I guess they dont take the attourneys letter seriously or consider it a challenge. How can something this big be overlooked in the title search and chain of title. My title company doesnt seem to worried about it. I just want the lien released or else I will have a tough time when I try to sell. Are there special laws in CA. that gives the second this power ? Was there a possible DIL to the second ? I am trying to put this puzzle together. Any feedback or questions to my post is appreciated. Could the first somehow be forgiven and the bank just hasnt had time to straiten all the paperwork out ?

Brad
Posted on: 18th Jan, 2010 03:28 pm
Hi DISH,

If you want to save the property, then you should apply for a loan modification with your lender. If your request is accepted, then you would get a modified payment plan to pay off the loan. If you do not intend to save the property and want to get rid of it, then you should go for a deed in lieu.

Hi xprider,

You will have to first check out if there's a lien on the property. If there is a lien on it, then it needs to be paid off or else you won't be able to sell off the property. Moreover, as you are the owner of the property, the lien holder may ask you to pay it off.

If there is really a lien on the property, then you should contact the previous owner of the property and negotiate with him so that he pays it off.

Thanks
Posted on: 18th Jan, 2010 10:13 pm
We have a secondary home that we can no longer afford. We are two months behind in out payments. There are no jr liens and the house is valued at mor than what is owed on the 1st. We want to quit claim the mortgage co a deed in lieu. Do they have to accept it, or do we need their approval.
Posted on: 20th Jan, 2010 04:00 pm
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