If a borrower cannot pay the mortgage on a piece of property, and has not been able to restructure payment plans with the lender, a deed in lieu of foreclosure is a viable option. This gives the property back to the lender, with which the lender can put the property up for sale to recover the balance of the loan.

However, if two mortgages exist for a single property, a borrower may be concerned as to how a deed in lieu affects junior liens. Many lenders may not agree with the deed in lieu of foreclosure if one piece of property has two loans. This is due to the fact that the junior liens are not erased. If the primary mortgage lender agrees to a deed in lieu, he or she takes responsibility for the property, as well as the second mortgage or junior lien. In this case, the property’s title is not clear.

When the primary lender gets the property through deed in lieu, it is now this lender’s obligation to put the property up for sale and submit payment for the junior lien. The lender has to do this, as a property with a pending lien will not sell.

Oftentimes, when the initial lender allows deed in lieu, he or she adds a non-merger section to the agreement for the deed in lieu. This part guards from any legal action the subsequent mortgage lender may take against the first one, if the primary lender does not pay the pending balance on the succeeding mortgage. This, however, does not guarantee that the initial lender is released from having to pay the other loan balance. The primary lender has to pay the junior lien if a deed in lieu is agreed upon, unless any negotiations are made with the second lender.

Also, the primary lender can withdraw the deed in lieu and instead initiate foreclose proceedings against the property if he or she observes that the entirety of the first mortgage’s loan balance will not be recovered. This also occurs if the two mortgages come from a single lender.

Moe Bedard
My name is Maurice "Moe" Bedard. I am the founder of America's #1 Mortgage Forum, LoanSafe.org. My online work has been featured in the New York Times, LA Times, Fox Business, and many other media publications.