After the mortgage crisis of 2008 many Americans are still finding it increasingly difficult to keep up with their mortgage payments. Lending companies, aware of these struggles, frequently try to work with borrowers to settle the terms of a loan. In some cases a loan modification agreement may be available, but in others a deed in lieu must be drawn in order to avoid foreclosure.
Deed in Lieu
Deeds in lieu of foreclosure transfer ownership of a property from the homeowners to the lender. This way, the lender can sell the home in an attempt to recover the unpaid debt.
Credit Reporting
If you choose to use a deed in lieu of foreclosure, it will be reported to creditors. In most cases, the deed in lieu will cause a decline in your credit rating. The drop can be as much as 250 points.
Time Frame
The deed in lieu will remain on your credit report for seven years. After this time, you can request the credit reporting bureaus to remove it from your history.
Considerations
Although a deed in lieu negatively affects your credit, you can rebuild it by paying off other bills and making payments on time. Within two to three years most people are able to apply for a new loan.
Deed in Lieu Versus Foreclosure
The main difference between a deed in lieu and a foreclosure is that, with a deed in lieu, the borrowers willingly sign over the home to the lender. In a foreclosure, the bank takes the home from unwilling owners. The negative effect on a homeowner's credit score is generally the same in both situations.
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