What happens if a lender accepts a deed in lieu of foreclosure from a defaulting mortgagor?

When a lender accepts a deed in lieu of foreclosure from a defaulting mortgagor, the lender acquires the title to the property, but this transfer can have specific implications regarding any existing encumbrances on the property. Accepting a deed in lieu means that the lender takes ownership of the property, effectively concluding the borrower's obligations under the loan, but the lender is obliged to honor any junior liens that may exist.

Therefore, if there are subordinate liens or mortgages (such as second mortgages or home equity lines of credit) attached to the property, these will remain valid. The lender takes the property "subject to" these junior liens, meaning that while they own the property, the junior lienholders still have claims against it. This situation may create complexities for the lender if they decide to sell the property, as they will need to deal with those junior liens before asserting clear title to any prospective buyer.

The other options pertain to outcomes not directly related to the acceptance of a deed in lieu of foreclosure. For example, while a deed in lieu can impact a borrower's credit, not all situations will yield favorable credit outcomes. Similarly, the implications regarding mortgage insurance or VA guarantees are not automatically resolved simply by this action, nor does it