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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?

Welcome cookie,

You will have to apply for a deed in lieu of foreclosure with your lender. If your lender accepts it, then you will have to surrender the property to the lender. Once the property is surrendered, the lender will sell it off at an auction and try to recover his dues. However, you should note that it's the discretion of the lender whether or not he would accept your request for a deed in lieu of foreclosure. Apart from this, once the sale is over, your credit score would get reduced by 250 points.
Posted on: 20th Jan, 2010 10:57 pm
What if both 1st and 2nd mortgages ARE with the same lender. Will they still do a deed in lieu? I owe 101,000 on the 1st with a second at $24,000. The property has been appraised by the lender for 103,000.00.
Posted on: 04th Feb, 2010 04:52 pm
Hi ali!

Welcome to forums!

It would be the lender's discretion completely whether or not he would consider your request. You need to write a hardship letter to your lender and apply for a deed in lieu. Depending upon your financial situation, he may or may not consider your request.

Feel free to ask if you've further queries.

Posted on: 04th Feb, 2010 09:07 pm
i have a mechanics lien against a property that Chase bank is forclosing on ...They (Chase) has named me as defendant along with home owner to get their I have any recourse for my $850.00 and what do I do to be included in any payments thanks for your help......
Posted on: 18th Feb, 2010 05:05 pm
Hi ollie,

You should contact an attorney in this regard and take his opinion. As you already have a mechanics lien on the property, you would definitely be able to claim your dues. Your attorney will help you know what steps you need to take in this regard.

Posted on: 18th Feb, 2010 08:09 pm
there are two junior deeds with the same primary mortgagee, lender, but each junior also has two seperate private people. could these people be a co-signer? or to they have a partial ownership of the mortgages?
Posted on: 22nd Feb, 2010 05:10 am
first 200k, 2nd 450k ,neighbors same size house listed for 300k
what can or would 2nd deed do ?
Posted on: 27th Feb, 2010 01:56 pm
hi gavin,

if two borrowers have taken the mortgage, then they would be considered as co-borrowers of the loan. thus, they would both be equally liable for the mortgage payments.

hi anonymous,

if the second mortgage lender does not receive his payments, then he has the rights to foreclose the property. if you want to save the property, then you should contact your lender and apply for a loan modification.
Posted on: 28th Feb, 2010 08:59 pm
Hello jessica, I have a rental property with two loans on it. I've been behind payments on my second but current on my first. the second has offered me a DIL but I'm not sure if I should be doing a shortsale instead.
Posted on: 16th Apr, 2010 11:00 pm
I have a second mortgage on a farm. The first is held by a Credit Union. The borrower gave the CU a DIL and Estoppel Affidavit. TheCu did not do an appraisal, did not order title work, but took over physical possession of the property and listed it for sale. The DIL had non-merger language, but also stated that that the borrower was warranting no liens against the property, which both the CU and the defaulting farmer know farm, which
may have made it a fraudulent conveyance. The DIL also stated the parties were stating the property was worth less than the first mortgage, possibly making a preferential conveyance (in preference to the CU). After listing the farm for sale for two months, the CU took it off the market, apparently intending to foreclose. In this fact pattern, what would
you suggest is my best strategic move?
Posted on: 12th May, 2010 11:28 am
hi refirichard,

in my opinion, a deed in lieu of foreclosure will be a better option to get rid of the property. unlike short sale, you won't be liable for paying the deficient balance resulting from the property sale.

hi farmer john,

while you apply for a deed in lieu of foreclosure, the lender will list the property in the market for at least 90 days. if the property doesn't sell off, then he will go ahead with the deed in lieu of foreclosure.
Posted on: 13th May, 2010 02:23 am
I guess I didn't make myself clear. I hold the second mortgage in the above fact pattern, and the borrower has defaulted. He gave DILOF to the first mortgage holder, who ignored my second mortgage, and filed sworn statements that there were no other liens on the property and that its value did not exceed the value of the first mortgage, essentially boxing me out. I am wondering if, at some level of both physical and notice possession of the property, the non-merger language of the DILOF is extinguished and my my second mortgage becomes a first mortgage, and I thus should send a letter of demand for payment from the first mortgage holder, now the owner of the property.
Posted on: 13th May, 2010 09:58 pm
You can take actions against the first lender as well as the borrower. I would suggest you to get in touch with an attorney and take his opinion in this matter. He will be the best to guide you in this matter.
Posted on: 14th May, 2010 02:39 am
what happens when 1st mortgage co foreclosed on the property there is a second loan, in addition there also is irs lien, state lien and additional 2 leins on the propoerty. Will this property clear title?
Posted on: 31st May, 2010 07:01 pm
who gets the money first, Irs. state, 1st mortgage, what happens if it does not clear title? a buyer put down 20% down on foreslosed property what happens if it does not clear title?
Posted on: 31st May, 2010 07:09 pm
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