Homeowners may mistakenly believe their credit score is saved by a deed in lieu of foreclosure -- whereby the borrower simply hands the deed of the home over to the bank and the bank agrees to cancel the mortgage. Any situation that results in the borrower repaying less than he owes on a loan is bad for your credit rating.
Identification
A deed in lieu of foreclosure takes 85 to 160 points off of a borrower's credit score, according to a 2010 survey of consumer financial data performed by the Fair Isaac Corporation. This happens because consumers usually end up paying the bank less than what they borrowed. Thus, foreclosures, short sales and deeds in lieu of foreclosure all generally have the same impact as far as credit scoring.
Considerations
A deed in lieu of foreclosure may not cause any damage to your credit score if the lender reports the account as "paid as agreed" to the credit bureaus. Banks usually try to sell the home before accepting the deed and canceling the loan. If the proceeds from the sale satisfy the mortgage balance, the lender can report the account as paid and close it -- leaving it as a positive item on your credit report. Any designation other than "paid as agreed" will hurt your credit score further.
Alternatives
A deed in lieu of foreclosure may be your only option, especially when your home is worth less than the remaining principal balance of the mortgage, which can happen in a depressed housing market. Short sales can take many months, particularly when many other people are trying to do the same thing. If you cannot afford your home, you need to rid yourself of the mortgage as soon as possible. A short sale, foreclosure or deed in lieu come off your credit record in seven years, but a deed in lieu tends to take less time to complete than a short sale, and, therefore, it hastens the repair process.
Tip
Before exploring options that result in relinquishing your home, consider the federal government's Making Home Affordable program. In an effort to reduce the number of foreclosures, the government gives lenders monetary incentives to restructure mortgages of homeowners struggling to make their payments. If you enter into a federal mortgage modification program, it will not hurt your credit score if you are current on your bills when you enter the program and satisfy the requirements during the trial period of the loan modification.
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