Jennifer purchased a home in Alexandria, Virginia using a deed of trust. She later took out a second deed of trust (home equity loan) with a different lender. Jennifer defaults on the first deed of trust, and the first lender's trustee conducts a properly noticed non-judicial foreclosure sale. The property sells for $450,000. The first loan balance is $380,000, and the second loan balance is $90,000. After paying $10,000 in foreclosure costs, how will the remaining proceeds be distributed, and what happens to the second lender's claim?
Correct Answer
D) Foreclosure costs of $10,000 are paid first; first lender receives $380,000; second lender receives $60,000; Jennifer receives nothing, and the second lender may pursue Jennifer for the remaining $30,000 deficiency
The correct distribution follows Virginia's priority order: (1) Foreclosure costs: $10,000; (2) First lender (senior lienholder): $380,000; (3) Junior lienholder (second lender): $60,000 (all remaining proceeds). Total distributed: $450,000. The second lender's lien is extinguished by the foreclosure sale, but the second lender is NOT left without recourse — the second lender may pursue Jennifer for a deficiency judgment of $30,000 ($90,000 owed - $60,000 received). Jennifer receives no surplus because the second lender's claim absorbs all remaining proceeds. This is a critical distinction: extinguishment of the lien does not eliminate the personal liability on the debt.
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Related Topics & Key Terms
Key Terms:
Related Concepts
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.
Foreclosure is the legal process by which a lender takes possession of a property when a borrower fails to make mortgage payments. It allows the lender to sell the property to recover the outstanding debt.
The loan-to-value ratio (LTV) is the percentage of a property's appraised value or purchase price (whichever is lower) that is being financed through a mortgage. LTV = Loan Amount / Property Value.
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