Sometimes, in spite of your best efforts, the time comes when you can no longer afford your mortgage payments. If you're facing a serious delinquency, you have a few options to deal with the situation, each involving a different level of impact on your credit rating. You may be facing a bankruptcy, a foreclosure or a short sale, and each of these impacts your credit rating differently. As an alternative to these drastic measures, you may consider a deed in lieu of foreclosure. How does a deed in lieu affect credit? Take a few moments to understand the possible repercussions before you pursue this avenue.
What is deed in lieu of foreclosure?
A deed in lieu of foreclosure is when you voluntarily surrender your deed to your lender instead of forcing your lender to foreclose on your property. Once the lender has the deed to your property, you no longer own your home. A deed in lieu is not a good choice for all families. If you don't have a place to go, voluntarily surrendering the deed to your lender may not be an option. Also, if you aren't in default on your mortgage, the lender may be unwilling to consider a deed in lieu of foreclosure. Not all lenders will accept a deed in lieu of foreclosure, so it's something you need to negotiate with the lender on an individual basis.
Look for alternate options.
A deed in lieu of foreclosure definitely impacts your credit rating. The effects of a deed in lieu of foreclosure on credit should not be underestimated. Exhaust your other options before you consider a deed in lieu. Ultimately, the best case scenario to deal with leaving your home is to sell it to a new buyer. If you can sell your home at or above your current mortgage balance, you can avoid the effects of a foreclosure or deed in lieu on your credit score. If you can't find a seller in the current real estate climate, contact your lender to negotiate a short sale. These are all good alternatives if a deed in lieu doesn't work for your family, or if your lender is unwilling to accept one.
Minimum requirements for a deed in lieu of foreclosure.
Lenders typically won't agree to a deed in lieu of foreclosure unless you meet a few specific requirements before requesting this option.
- You must exhaust your options to sell your home. Lenders
want proof that you've made a good faith effort to sell your home, so they may require that your property be listed with a real estate agent for at least 30 days before agreeing to a deed in lieu.
- Your property cannot have any other outstanding liens beyond your mortgage. If you have a second mortgage, an outstanding judgment or any other liens against your property, a lender won't accept a deed in lieu of foreclosure.
- Depending on the circumstances, your lender may require that the property be vacant before accepting a deed in lieu of foreclosure. Some lenders also require an interior appraisal of the property. If your property is significantly damaged or poorly maintained, your lender may not accept a deed in lieu of foreclosure.
- You must prove that you are unable to pay your mortgage payments. Because of this requirement, it is possible that a deed in lieu would be accepted after foreclosure proceedings have begun. Make sure you know whether foreclosure has started before you accept a deed in lieu of foreclosure. If foreclosure proceedings have already commenced, your credit report may reflect foreclosure instead of a deed in lieu. This has a different impact on your credit report.
How does a deed in lieu affect credit?
The bottom line is: no method of surrendering your house has a positive credit outcome. Foreclosure, bankruptcy or a deed in lieu of foreclosure on your credit report may lower your credit score or make it difficult to be approved for new credit in the near future. A deed in lieu of foreclosure ultimately impacts your credit report less than a foreclosure or bankruptcy, but all three options carry their own level of negative impact. Beyond that, though, there are plenty of ways a deed in lieu of foreclosure can go wrong.
Some of the most common mortgage scams involve a deed in lieu of foreclosure. The option that you thought might prevent some of the damage to your credit report could actually cost you more than you ever guessed. Don't fall victim to predatory lending practices that could turn a hard situation, losing your home, into an impossible nightmare. If you want to learn more about how to avoid deed in lieu mortgage scams or how to improve your credit quickly after accepting a deed in lieu of foreclosure, take a look at the Credit Secrets Bible or sign up for our free newsletter .