deed in lieu of foreclosure when you have a second mortgage

When you have a second mortgage, deed in lieu of foreclosure seems like it should be an option. In a deed in lieu of foreclosure, you deed your house to the lender and they don't pursue things to the foreclosure sale.

If you have a second mortgage, you can do a deed in lieu to the second mortgage lender. But they won't accept it unless you have significant equity. And if you have equity, then why shouldn't you sell your house. Of course, there may be no buyers and your equity may actually be phantom equity, non-existent these days. Prices have fallen quickly in many areas.

With a deed in lieu of foreclosure, if you were to offer to transfer title of your house to the first mortgage company they would not be at all interested. Why? Because they would rather foreclose. A foreclosure wipes out the second mortgages. It wipes out all junior liens. It does not affect property taxes and certain other liens but it most definitely wipes out all junior loans and second mortgages and home equity lines of credit.

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For this reason, if you are in this situation, you may try a deed in lieu with your second mortgage lender. But don't expect them to be too interested. If they are, make sure you get everything in writing first, and that they agree to waive the right to go after you for any deficiency (financial loss they incur as a result of the foreclosure), and that they report nice things to you to the credit bureaus.

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