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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
Hi caroll!

Welcome to forums!

If there is no clear title, then I don't think the buyer should go ahead and buy the property. As far as I know, the IRS and state taxes will be paid off first after the sale of the property. Then the first mortgage lender will be able to claim his dues.

Feel free to ask if you've further queries.

Sussane
Posted on: 01st Jun, 2010 01:47 am
Thank you for getting back so quickly. The property was foreclosed on last week by the 1st mortgage. When all the debts excede the value of the home what happens to the IRS, State, 2nd loan and the other 2 leins. Do they settle for less on a payoff amount? What happens when the other leins do not settle for less and this property does not clear title, does the bank who originally foreclosed on the property have to come to an agreement with the owner of the house for a new loan modification? What happens at this point? Can the bank go ahead and get a deed in lieu?
Posted on: 01st Jun, 2010 02:42 pm
Hi Caroll,

After the foreclosure, the ex-homeowner will be liable for the deficient balance resulting from the sale. He or she will be liable for the IRS and state tax dues. As far as the state and IRS are concerned, you should contact them and get a payment plan to pay off the dues. As far as the second mortgage dues and other liens are concerned, you should contact your lenders and negotiate with them. It will be their discretion whether or not they would consider your request.

Thanks
Posted on: 02nd Jun, 2010 12:08 am
I've just received a Notice of Default on my mortgage. My husband and I have already moved in with my parents seeing the hand writing on the wall. We bought the townhouse 12 years ago for about $39,500 and took out a 2nd mortgage about 6 years ago for $18,000. We got behind in payments being young and foolish, never recovered, and now are totally overwhelmed. We also have a lien on hour home for a $2,700 in regime fees. Our credit is so bad due to credit cards and medical bills that I had to have my dad co-sign to get a car. My husband and I filed bankruptcy years ago and I vowed to never do that again. Then my mom got sick, and I had to help with her care. Also, I got a cut in pay at my job last year and I had some medical bill due to my surgery last year. So, I'm trying to determine if I should consider bankruptcy or do a deed in lieu of foreclosure. Maybe I should do both the DIL and bankruptcy?
Posted on: 23rd Aug, 2010 06:23 am
Hi Davis,

If you simply want to get rid of the property, then you should apply for a deed in lieu of foreclosure. This will not only help you in selling off the property but you won't be liable for paying the balance dues resulting from the sale of the property. However, you will have to pay off the dues on your second mortgage.

In case you've other debts like medical bills, credit card debts, etc., then you can file bankruptcy in order to get your unsecured debts discharged.

Thanks,

Jerry
Posted on: 24th Aug, 2010 03:20 am
if you sued on the note on a second mtg to as no equity
does the mortgage merge into judg & you priority on lien (which could be valuable in 10 yrs)
Posted on: 03rd Sep, 2010 08:14 pm
As far as I can understand, the lien will get first preference when the property is sold off and then the first mortgage lender will receive his dues.
Posted on: 04th Sep, 2010 12:25 am
My mortgage company was inititating a dil and came up with two junior liens on my property. How do i find out who initiated these as I know of no other people I owe, much less to a degree they would have filed a 2nd mortgage.
Posted on: 08th Sep, 2010 02:36 pm
Hi gbrum!

Welcome to forums!

Didn't you receive a notice when the liens were placed on your property? You should contact the county recorder's office in order to find out who placed the liens on your property.

Feel free to ask if you've further queries.

Sussane
Posted on: 09th Sep, 2010 01:35 am
I have a first mortgage who has convinced the 2nd mortgage bank to sign off on dil. the 2nd mortgage bank said they will still persue me for their delinquency< but it will be unsecured. Should I take this offer? Or is foreclosure my best option? The 2nd wants to work out a payment arrangement with me. what options do i have?
Posted on: 23rd Sep, 2010 10:25 am
hi grubber,

if you can pay off the deficient amount resulting from the second mortgage, then you can go ahead with the deal. if the first lender forecloses the property, then you will be liable for paying the deficient balance on both the loans. as the second lender is ready to workout a payment option with you, then it would be better to go for a deed in lieu of foreclosure.

thanks,

jerry
Posted on: 24th Sep, 2010 02:45 am
How does this all effect a property that is >2.5 acres?
Posted on: 20th Oct, 2010 03:07 pm
A deed in lieu (DIL) will help you in getting rid of the property. But as you've a deficiency clause, the lender will be able to come after you to recover the dues.
Posted on: 21st Oct, 2010 03:35 am
I was a jr. lien holder and took title to the property by a "Quitclaim in Lieu of Foreclosure." I wanted to assume the 1st on the property but was told by my loan officer that the lender said "No Interested," Not Assumeable, "she must pay us in full and get a new loan." Recently I found out I DID have the legal right to assume the 1st under Garn St. Germain 1982 and want to know if I have any recourse. I was forced to get a new loan at a much higher interest rate and now stand to lose the house myself. Please advise!
Posted on: 08th Nov, 2010 05:29 am
I was a jr. lien holder and took title to the property by a "Quitclaim in Lieu of Foreclosure." I wanted to assume the 1st on the property but was told by my loan officer that the lender said "No Interested," Not Assumeable, "she must pay us in full and get a new loan." Recently I found out I DID have the legal right to assume the 1st under Garn St. Germain 1982 and want to know if I have any recourse. I was forced to get a new loan at a much higher interest rate and now stand to lose the house myself. Please advise!
Posted on: 08th Nov, 2010 05:34 am
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